The wild swings in the value of Bitcoin and other cryptocurrencies lately should reinforce the idea that they are not sound long-term investments—and is Bitcoin Safe? investors should only buy as much as they can afford to lose. If this sounds overly cautious, consider the recent insights of someone who you might otherwise assume is a true believer in cryptocurrencies: Vitalik Buterin, the co-founder of the cryptocurrency Ethereum.
Don’t put in more money than you can afford to lose. If you’re trying to figure out where to store your life savings, traditional assets are still your safest bet. Reminder: cryptocurrencies are still a new and hyper-volatile asset class, and could drop to near-zero at any time. Essentially, Buterin’s message urging caution isn’t all that different from those issued by cryptocurrency skeptics such as Yale economist Robert Shiller, who has frequently spoken about how unpredictable the cryptocurrency markets are. As for a prudent strategy to investing in cryptocurrencies, Buterin’s approach is similar to that of Mark Cuban, the billionaire star of Shark Tank and owner of the NBA’s Dallas Mavericks. Cuban told MONEY last December, when asked specifically about Bitcoin. 15,000 or zero and maybe both on the same day.
Like Buterin, Cuban said that Bitcoin and other cryptocurrencies are very risky—and that no one should gambling their life savings on them. If you have money you can gamble with, then it’s worth taking a shot. Money may receive compensation for some links to products and services on this website. Offers may be subject to change without notice. Quotes delayed at least 15 minutes. Market data provided by Interactive Data.
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Achieving Truly Useful Proof of Work: Toby Simpson of Fetch. Bitcoin is the first practical solution to a longstanding problem in computer science, Marc Andreessen writes in Another View. Marc Andreessen, a co-founder of the venture capital firm Andreessen Horowitz. The firm is actively searching for more Bitcoin-based investment opportunities. He does not personally own more than a de minimis amount of Bitcoin. A mysterious new technology emerges, seemingly out of nowhere, but actually the result of two decades of intense research and development by nearly anonymous researchers. They see within it enormous potential and spend their nights and weekends tinkering with it.
While regulators debate the pros and cons of bitcoins, this volatile digital currency inspires the question: What makes money, money? What technology am I talking about? One can hardly accuse Bitcoin of being an uncovered topic, yet the gulf between what the press and many regular people believe Bitcoin is, and what a growing critical mass of technologists believe Bitcoin is, remains enormous. In this post, I will explain why Bitcoin has so many Silicon Valley programmers and entrepreneurs all lathered up, and what I think Bitcoin’s future potential is. 20 years of research into cryptographic currency, and 40 years of research in cryptography, by thousands of researchers around the world.
Bitcoin is the first practical solution to a longstanding problem in computer science called the Byzantine Generals Problem. To quote from the original paper defining the B. Byzantine army camped with their troops around an enemy city. Communicating only by messenger, the generals must agree upon a common battle plan. However, one or more of them may be traitors who will try to confuse the others.
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The practical consequence of solving this problem is that Bitcoin gives us, for the first time, a way for one Internet user to transfer a unique piece of digital property to another Internet user, such that the transfer is guaranteed to be safe and secure, everyone knows that the transfer has taken place, and nobody can challenge the legitimacy of the transfer. The consequences of this breakthrough are hard to overstate. What kinds of digital property might be transferred in this way? All these are exchanged through a distributed network of trust that does not require or rely upon a central intermediary like a bank or broker.
And all in a way where only the owner of an asset can send it, only the intended recipient can receive it, the asset can only exist in one place at a time, and everyone can validate transactions and ownership of all assets anytime they want. Bitcoin is an Internet-wide distributed ledger. You buy into the ledger by purchasing one of a fixed number of slots, either with cash or by selling a product and service for Bitcoin. You sell out of the ledger by trading your Bitcoin to someone else who wants to buy into the ledger.
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The Bitcoin ledger is a new kind of payment system. Anyone in the world can pay anyone else in the world any amount of value of Bitcoin by simply transferring ownership of the corresponding slot in the ledger. Put value in, transfer it, the recipient gets value out, no authorization required, and in many cases, no fees. That last part is enormously important.
In lots of other places, there either are no modern payment systems or the rates are significantly higher. Bitcoin is a digital bearer instrument. It is a way to exchange money or assets between parties with no pre-existing trust: A string of numbers is sent over email or text message in the simplest case. The sender doesn’t need to know or trust the receiver or vice versa. This is one part that is confusing people.
It is perhaps true right at this moment that the value of Bitcoin currency is based more on speculation than actual payment volume, but it is equally true that that speculation is establishing a sufficiently high price for the currency that payments have become practically possible. The Bitcoin currency had to be worth something before it could bear any amount of real-world payment volume. Critics of Bitcoin point to limited usage by ordinary consumers and merchants, but that same criticism was leveled against PCs and the Internet at the same stage. Every day, more and more consumers and merchants are buying, using and selling Bitcoin, all around the world. The overall numbers are still small, but they are growing quickly.
And ease of use for all participants is rapidly increasing as Bitcoin tools and technologies are improved. The criticism that merchants will not accept Bitcoin because of its volatility is also incorrect. Bitcoin currency or be exposed to Bitcoin volatility at any time. Any consumer or merchant can trade in and out of Bitcoin and other currencies any time they want. Bitcoin as payment, given the currently small number of consumers who want to pay with it? Let’s say you sell electronics online.
Profit margins in those businesses are usually under 5 percent, which means conventional 2. 5 percent payment fees consume half the margin. That’s money that could be reinvested in the business, passed back to consumers or taxed by the government. Of all of those choices, handing 2.
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5 percent to banks to move bits around the Internet is the worst possible choice. In addition, merchants are highly attracted to Bitcoin because it eliminates the risk of credit card fraud. This is the form of fraud that motivates so many criminals to put so much work into stealing personal customer information and credit card numbers. Since Bitcoin is a digital bearer instrument, the receiver of a payment does not get any information from the sender that can be used to steal money from the sender in the future, either by that merchant or by a criminal who steals that information from the merchant. Credit card fraud is such a big deal for merchants, credit card processors and banks that online fraud detection systems are hair-trigger wired to stop transactions that look even slightly suspicious, whether or not they are actually fraudulent.
Bitcoin’s antifraud properties even extend into the physical world of retail stores and shoppers. For example, with Bitcoin, the huge hack that recently stole 70 million consumers’ credit card information from the Target department store chain would not have been possible. You fill your cart and go to the checkout station like you do now. But instead of handing over your credit card to pay, you pull out your smartphone and take a snapshot of a QR code displayed by the cash register. The QR code contains all the information required for you to send Bitcoin to Target, including the amount. Well, maybe criminals are still happy: They can try to steal money directly from poorly-secured merchant computer systems. This is a myth, fostered mostly by sensationalistic press coverage and an incomplete understanding of the technology.
Much like email, which is quite traceable, Bitcoin is pseudonymous, not anonymous. Bitcoin is a classic network effect, a positive feedback loop. The more people who use Bitcoin, the more valuable Bitcoin is for everyone who uses it, and the higher the incentive for the next user to start using the technology. In fact, Bitcoin is a four-sided network effect. There are four constituencies that participate in expanding the value of Bitcoin as a consequence of their own self-interested participation. All four sides of the network effect are playing a valuable part in expanding the value of the overall system, but the fourth is particularly important.
All over Silicon Valley and around the world, many thousands of programmers are using Bitcoin as a building block for a kaleidoscope of new product and service ideas that were not possible before. For this reason alone, new challengers to Bitcoin face a hard uphill battle. If something is to displace Bitcoin now, it will have to have sizable improvements and it will have to happen quickly. Otherwise, this network effect will carry Bitcoin to dominance. One immediately obvious and enormous area for Bitcoin-based innovation is international remittance. 400 billion in total annually, according to the World Bank. Switching to Bitcoin, which charges no or very low fees, for these remittance payments will therefore raise the quality of life of migrant workers and their families significantly.
In fact, it is hard to think of any one thing that would have a faster and more positive effect on so many people in the world’s poorest countries. Moreover, Bitcoin generally can be a powerful force to bring a much larger number of people around the world into the modern economic system. 175 have a long way to go. As a result, many people in many countries are excluded from products and services that we in the West take for granted. Bitcoin can be used to go straight at that problem, by making it easy to offer extremely low-fee services to people outside of the traditional financial system.
A third fascinating use case for Bitcoin is micropayments, or ultrasmall payments. The fee structure of those systems makes that nonviable. All of a sudden, with Bitcoin, that’s trivially easy. Bitcoins have the nifty property of infinite divisibility: currently down to eight decimal places after the dot, but more in the future. So you can specify an arbitrarily small amount of money, like a thousandth of a penny, and send it to anyone in the world for free or near-free. Think about content monetization, for example. Another potential use of Bitcoin micropayments is to fight spam.
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Finally, a fourth interesting use case is public payments. This idea first came to my attention in a news article a few months ago. 25,000 in Bitcoin in the first 24 hours, all from people he had never met. Think about the implications for protest movements. Today protesters want to get on TV so people learn about their cause. Tomorrow they’ll want to get on TV because that’s how they’ll raise money, by literally holding up signs that let people anywhere in the world who sympathize with them send them money on the spot. Bitcoin is a financial technology dream come true for even the most hardened anticapitalist political organizer.
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The coming years will be a period of great drama and excitement revolving around this new technology. For example, some prominent economists are deeply skeptical of Bitcoin, even though Ben S. Economists who attack Bitcoin today might be correct, but I’m with Ben and Milton. Further, there is no shortage of regulatory topics and issues that will have to be addressed, since almost no country’s regulatory framework for banking and payments anticipated a technology like Bitcoin. But I hope that I have given you a sense of the enormous promise of Bitcoin. Far from a mere libertarian fairy tale or a simple Silicon Valley exercise in hype, Bitcoin offers a sweeping vista of opportunity to reimagine how the financial system can and should work in the Internet era, and a catalyst to reshape that system in ways that are more powerful for individuals and businesses alike.