Bitcoin has already advanced global privacy and financial autonomy

If Bitcoin and other cryptocurrencies were to disappear tomorrow, what legacy would they leave behind?

I can think of three main impacts:

First, Bitcoin raised awareness of the flaws in fiat money, the superiority of sound money, and the potential of people to trade with each other without third-party intermediaries.

Second, Bitcoin has provided a life raft to millions of people under regimes suffering hyperinflation (like Venezuela), confiscation (like India), or currency export controls (like China). These people have been able to safeguard and use their savings.

Third, Bitcoin has advanced the state of cryptography, from a plaything of spy agencies and banks to a ubiquitous privacy layer securing the information of the entire world.

While each of these points could be an essay, I want to focus on the third impact today, starting with the state of cryptography before the invention of Bitcoin.

In his 1988 “Crypto Anarchist Manifesto“, Timothy C. May introduced the concept of crypto-anarchism, the idea that ubiquitous encryption would allow total freedom of trade by blocking the ability of governments to spy on and thus interfere with markets.

Inspired by his essay, thousands of aspiring “crypto-anarchists” (like me) installed software like PGP/GPG and tried to bring about the revolution. Then we ran into a few problems:

First, the software was way too complex for laypeople to use. Only dedicated hackers have the ability and patience to encrypt our communications. As long as only a few cooky radicals used cryptography, there was no incentive for merchants to adopt it. Likewise, email and messaging platforms were not encrypted, and using encryption branded you as a radical, and maybe even a criminal.

Second, the public did not believe in the potential of encryption. This was for two reasons: First, cryptography was seen as something for the NSA and CIA, not the public. Until 1992, cryptographic algorithms were on the U.S. Munitions List as Auxiliary Military Equipment. While using encryption within the U.S. was protected by the first amendment, it was illegal to export strong encryption outside the U.S., which crippled the commercial cryptography market. Second, it was believed that hackers could break cryptographic algorithms — it was simply a matter of applying sufficient computational power. To some extent, until the adoption of AES in 2001, this was true.

The third problem we ran into was conducting an anonymous exchange. There was no way to transmit value without eventually involving the legacy financial systems, which were becoming less and less anonymous. Efforts to create a digital proxy for gold such as e-gold and e-Bullion survived for a time, but were shut down by the U.S. government around 2009. The Foreign Bank Account Report of 2010 was part of a wave of global regulations which ended banking secrecy worldwide.

This context is important to understand the import of Bitcoin’s invention in 2008:

Until Bitcoin, the entire field of cryptography lacked strong real-world validation. While the banking industry used things such as RSA tokens and browsers used SSL for decades, their security was unproven. Because it is generally possible to reverse or void legacy financial transactions, the financial industry does not face a strong motivation to ensure the integrity of its cryptography.

This skepticism was validated when the National Security Agency was proven to have secretly weakened the RSA standard, and that vulnerability was exploited against major U.S. corporations in 2011. Additionally, documents leaked by Edward Snowden showed that the NSA had aimed to subvert cryptography standards.

As Bitcoin’s market cap grew from $0 to over $1 trillion today, larger and larger sums were protected by cryptography. For the first time, there was actual value behind cryptographic algorithms, and the entire field of cryptography began a rapid evolution. A $1 trillion prize is available to anyone who can subvert the security behind Bitcoin. This is an enormous incentive to advance the entire system of cryptography, from better algorithms to the ecosystem of software and hardware devices.

In 2021, the entire world has moved online. 67% of the world’s population has a mobile device – nearly all adults, and quite a few children. Within a decade, nearly all of those users will use a smartphone, which facilitates not only voice conversations but embedding all aspects of one’s life – business, shopping, education, romance into the global Internet. Thanks to advances in cryptography, we’ve seen the vast majority of that communication moved from plain-text to encrypted networks. With the notable exception of Chinese platforms, the most popular apps now use P2P encryption. WhatsApp, Telegram, and Signal are end-to-end encrypted, so no individual or government can spy on them. (Apple iMessage is E2E encrypted when iCloud iMessage backups are turned off). VPN networks have gone from corporate and esoteric to cheap and ubiquitous. In 2011, I struggled to set up my VPN while living in China to evade censorship. In 2021, in the U.S. I use my home VPN like millions of other Americans to enhance my privacy. It’s fast, invisible, and costs under $2/month.

Today, all my computers and backups are encrypted, and they come with hardware-level encryption so that there is no impact on performance. I secure my access to Google, Facebook, and other popular services with U2F hardware tokens. My Bitcoin is secured by hardware wallets that incorporate plausible deniability and multiple cryptographic signatures.

While we can’t simply give Bitcoin credit for all these achievements, embedding value in communication networks has been the single most powerful incentive for the world to step up its security game.

Observe that after the NSA paid RSA $10 million to backdoor the security tools used by the world’s largest corporations, it took from 2006 to 2013 for the world to exploit the flaws in RSA. By contrast, cryptocurrency exchanges and custodians are a much more lucrative target, and thus face much stronger pressure to keep evolving their security practices. When Northrop Grumman was hacked with the RSA exploit, some Chinese or Russian agent received a promotion, whereas the hackers of Mt Gox, Binance, and dozens of other exchanges were set for life, with little fear of repercussions.

Today, I am a lot more skeptical that ubiquitous encryption will bring about Timothy May’s dream of a crypto-anarchist utopia. However, I think there is a very good case that the invention and adoption of Bitcoin has dramatically advanced global privacy and financial autonomy.

Why GameStop is not the new Bitcoin

When Robinhood disabled customers from buying GameStop, some people in the WallStreetBets subreddit suggested a need for a “decentralized brokerage.” Others said that “GameStop is the new Bitcoin.” Yet others decided to target the Dogecoin cryptocurrency, which spiked over 500% before it failed to process transactions due to overload.

The premise behind these ideas is hilariously wrong, but it’s worth exploring why.

It’s not surprising that young people growing up in the age of decentralized and censorship-resistant cryptocurrency exchange expect stock exchanges to be decentralized and censorship-resistant too.

Stock exchanges do exist to make business ownership accessible to everyone. Unfortunately, while trading stocks has become much cheaper and easier thanks to technology, the value of owning stocks has fallen dramatically.

To be listed on a stock market, a company has to pass many very expensive regulatory hurdles. But by the time a company goes public, much of the risk (and therefore profit) has been taken by venture capitalists and private equity investors.

The 2001 and 2008 financial crises led to the 2002 Sarbanes-Oxley and 2010 Dodd-Frank Act. These regulations made it much more expensive to go public, which has led to an over 50% decline in the number of publicly-traded companies. There are now just 3,530 publicly traded companies in the US. Anyone can buy a stock on their phone today, but by the time the government lets the company sell you shares, most of the profit potential has already been captured by wealthy venture capitalists and private equity investors. It’s no wonder people are looking at cryptocurrencies for more risk and return.

Back to the idea of a “decentralized exchange.” We think we own the stocks we buy, but that is not legally true. Cede and Co. legally owns all publicly issued stock in the United States – over 50 trillion dollars worth. It processes over $500 trillion and 325 million trades in these stocks on behalf of individual investors. New York State appointed Cede as the central securities depository in 1973, and all stock exchanges settle their transactions there.

You might think that when you buy a stock, Cede enters your name in a ledger somewhere, but that’s not true either. Cede only records the “street name” — the name of the brokerage which holds the security. The brokerage (ETrade, Robinhood, etc) is responsible for tracking who has rights to shares. You can request to get paper share certificates issued on your name (like investors used to get), but no one does this anymore.

This is a very simplified version of how stock ownership works, but I hope you can see why the idea of a “decentralized brokerage” is absurd.

On the surface, a centralized cryptocurrency exchange work in a similar way. When you buy Bitcoin on an exchange, you get a right to some amount of cryptocurrency. Until you withdraw it to your wallet, you only have a claim to your assets.

The big difference between a share of Gamestop and Bitcoin is that you can take purchase and take possession of Bitcoin without any intermediary. Whether you use a decentralized exchange, buy from a friend, or mine it yourself, no approval is needed for the transaction, and no authority can block the trade or take it away. It’s also impossible for anyone to devalue your Bitcoin by issuing more of it beyond the set mining rate.

These are the real reason why Bitcoin has value. Eventually, the GameStop share price will fall back down to reflect its fundamental nature as an outdated and failing business model, while the Bitcoin price will keep rising as users validate its fundamental nature as an alternative to the failing system of central banking.

What about Dogecoin? If the whim of the members of an investing community drives cryptocurrency prices, can Bitcoin achieve any kind of long-term stability? The Dogecoin outage is a clue.

The Doge network does not have enough nodes to process transactions. The reason Bitcoin has been able to hold a dominant market share since 2009 is that it has the biggest ecosystem of miners, users, and service providers. Unless another cryptocurrency obtains a compelling technical advantage, and the Bitcoin network is unable or unwilling to match it, Bitcoin will keep its lead.

Don’t panic: why Tether won’t destroy crypto

This article by “Crypto Anonymous” claims that Tether will bring a crypto “doomsday.” The author makes many good points in building his case, yet the overall conclusion is less than the sum of its parts.
Here’s the short version of why he’s wrong: Yes, Tether creates systemic risk for Bitcoin. But the key claim that new Tethers are fraudulently created without dollars to back them is pure speculation. Furthermore, the impact of a Tether collapse decreases as the ecosystem grows, so there’s no need to be “frantic” about a “crypto doomsday.” Finally, stablecoins like Tether should not be confused with true cryptocurrencies like Bitcoin, which do not fall in the same category of risk.
Speculation about whether Tether is backed by dollars has been going on almost since the currency was created in 2014. Tether is the primary onramp to buying cryptocurrencies on many exchanges, so during Bitcoin bull markets, Tether issuance does too. This fuels speculation about whether Tether is backed by dollars. It’s a fair question to ask. But note that Tether honored withdrawals from 2017 to 2018, when the price of Bitcoin fell from 20K to $3.2K. Total market capitalization decreased from $821 billion to $105 billion, and Tether’s market cap fell from 2.8 to 1.6 billion. I question the accuracy of all of these numbers, but it’s clear that Tether weathered a major selloff.
At this point, everyone in the know has accepted that Tether is less than 100% backed by dollars, but as long as the crypto selloff is not too severe, it has enough reserve to weather most storms. Even if Tether comes up short and becomes unable to honor all withdrawals, a partial devaluation will result in a haircut for Tether holders, not a doomsday for a market that is used to huge day to day swings.
Let’s speculate on a key question: if Tether isn’t a fraud, why don’t they perform an audit and come clean about their books? The answer is that crypto occupies a legal gray area, and exposing all their accounts would put Tether’s banking relationships at risk. Until about a year or so ago, banks categorically avoided any crypto business. They would close accounts of consumers who wired money to crypto exchanges and scan peer to peer payments for any mention of crypto. Legitimate crypto entrepreneurs had to stash vast amounts of cash like drug dealers cash because they couldn’t maintain any bank accounts for long. My partners and I were very fortunate to have relationships to open a bank account for our hedge fund in 2017.
Now imagine how difficult it would be for Tether to store billions of dollars in a fully disclosed manner. It’s clear now that Tether decided to obscure their banking relationships and use less-legitimate partners, and lost some of their funds as a result. Today, fully audited stablecoins such as USDC and USDG compete with Tether, but their market share is still a minority.
Regulated stablecoins are a great solution for many, but not all. For a stablecoin to be audited, their banking partners require strict KYC, and exchange partners that redeem those coins must obtain government licenses. This means that there is an ongoing demand for stablecoins that can be redeemed in a less-regulated environment. This is one of the reasons why Tether is so popular: it helps crypto traders work around currency controls in various Asian countries, especially a big one that starts with C. The other reason is that Tether allows less-regulated exchanges to exchange in leverage, market manipulation, and other practices that regulated exchanges can’t get away with. Still, the bottom line is that stablecoin competition is great and lowers the overall systemic risk posed by Tether.
Finally, a stablecoin like Tether should not be confused with Bitcoin. There’s no doubt that market manipulation, massive leverage, and fake trading numbers dramatically inflate the demand for crypto and market cap numbers during each bull run. However, unlike a Ponzi scheme, Bitcoin recovers after each crash, even as most other cryptocurrencies falter. Bitcoin serves a practical purpose and that in turn, drives legitimate long-term investors and institutions to Bitcoin.
Tether may collapse one day. But with ever-growing competition from audited stablecoins, there’s no reason to think that it will take the entire crypto market with it, that it will happen soon, nor that Tether holders will be left with nothing.

How to safely store Bitcoin and other cryptocurrencies

I’ve seen people lose their Bitcoin in every way imaginable, and I want to help you avoid the most common mistakes. Are you thinking long-term? Will your storage medium last 10 years? Will your family be able to access it in the event of your death? Have you considered that the same events that will cause Bitcoin to go up in value may cause you to lose control of it?

What is the best way to store Bitcoin?

In 2019, a hardware wallet is unquestionably the best way to store Bitcoin. There are three good options: Trezor, Ledger, and KeepKey. I prefer the Trezor, but pick any of them, then write down your seed on paper, and put that paper in a safe.

What’s your excuse for not using a hardware wallet?

Most of you are not using a hardware wallet. You keep Bitcoin with an exchange like Coinbase, or an app running on your phone or desktop. But these come with major risks:

Will your Bitcoins survive the shift to a Bitcoin economy?   

Bitcoin is an extremely risky investment. If Bitcoin goes up tenfold or a hundredfold, what will come down? It could be the dollar’s value. It could be the banking sector. It could be the entire global economic regime. We have no idea how governments will react: will they try to ban Bitcoin, confiscate it, or embrace it?  If you are relying on someone else to keep your Bitcoin safe, will they survive that change?

Don’t trust exchanges and other third-party custodians

Mt Gox logoWhen you buy cryptocurrencies, you are betting that our economy will experience a dramatic shift to digital money. We have no idea which businesses or apps will survive that shift or how long it will take. Imagine if you had to pick just one company to bet on the future of the Internet during the dot com boom. Are you smart enough to pick Amazon.com rather than AOL or Pets.com? The only thing that you can trust to survive almost any economic upheaval is a backup stored on paper (or even better, metal) under your control. 

Don’t trust desktop or mobile wallets

Most people who decided to keep their Bitcoin in an app came to regret it. Bitcoin Core took a few hours to sync in 2013 but now can take weeks -if your Internet is fast enough. Multibit was a great wallet in 2015 but now doesn’t work on many computers.  Many people who you got Bitcoin in 2010 forgot the password they used by 2019.  Modern computers are notoriously insecure.  Key loggers and remote access trojans can record your keystrokes and copy all your files. At one point in the lifetime of Windows XP, it only took a few minutes for the average computer to become infected once exposed to the Internet. Operating systems today are much more secure but are you willing to bet that someone won’t find a catastrophic Windows zero-day exploit when the Bitcoin market cap is $1 trillion?

Don’t trust file backups

Did you know that DVDR’s can fail in as little as five years?  Flash drives might fail after 10 years – we really have no idea how stable flash memory is over the long term. Hard drives last 3-5 years when used, and we don’t really know how long they last in storage, but the oils will dry up and the motor bearings will eventually fail. Archival grade gold DVDR’s are supposed to last 100 years, but will you still have access to a DVD reader in 2030? In short, we have no idea which digital storage mediums are safe for the long term, so all your Bitcoin wallet backups might get corrupted.

Don’t trust paper wallets

Photo by Steve Johnson on Unsplash

Paper wallets and brain wallets were good for their time, but I know many people who misplaced their paper wallet or forgot the exact phrase they used for their brain wallet. Some people who used a paper wallet found out that it could only be decrypted using the exact browser used to make it. Paper wallets and brain wallets also compromise your privacy by forcing you to keep all your Bitcoin in a single address.

What about my altcoins?

Trezor and Ledger now both support many coins and hundreds of tokens, so you have no excuse not to use them for your entire portfolio.  Both Shapeshift and Exodus now work with hardware wallets to let you visualize and manage your entire portfolio.

A BIP-39 seed is the way to go

Hardware wallets today use a BIP-39 mnemonic code for generating deterministic keys. A BIP-39 seed phrase is a list of words (usually 24 for a hardware wallet) which generates an infinite number of addresses.

BIP39 codes are supported by many different coins besides Bitcoin. While something better than BIP39 may come along, it’s very likely that as long as Bitcoin is around, there will be some implementation of the BIP39 algorithm to restore your wallet. You’ll be able to get your Bitcoin back even if the company that made your hardware wallet is long gone.

Keep your recovery seed safe

You can generate the seed completely offline and without usinTrezor with Cryptosteelg a computer – just plug in your hardware wallet directly to a power source.  Instead of paper, use a Billfodl or CryptoSteel to keep your recovery words protected against fire or flood.

Because they are universal, a BIP-39 seed is also the best way to secure your legacy for your family, so consider adding instructions to locate your recovery seed in your will.

If you are concerned about the security of your seed words, you can cut the list of 24 words in half and keep them in two places.

Never type your seed directly into your computer — even just to print it on paper because your handwriting is bad.   Remember that hardware wallets will never ask you to type your seed directly into your computer.  When restoring your seed, they all use some kind of indirect entry method (such as entering the words out of order) to protect against keyloggers.

So, what’s your excuse for not using a hardware wallet for your Bitcoin?

 

Originally posted at WalletRecovery.info

Facebook Libra’s cold reception from Congress validates the need for Bitcoin

The hostile reception that Facebook’s Libra coin received from Congress should be viewed as a validation of the need for Bitcoin.

As a fiat currency pegged stablecoin, Libra offers little threat to the U.S. dollar’s monopoly. To Libra users, it would be little different from PayPal, Alipay, Apple Pay, Google Pay, WeChat, Zelle, or the dozens of other peer to peer payment platforms around the world.

Yet Libra threw the powers that be in such a panic that President Trump was pressured into tweeting a condemnation of Libra and a Congressional hearing was swiftly organized. Rep Brad Sherman compared Libra to the 9/11 attacks, which in case you forgot, killed several thousand Americans.

I certainly have my reserves about both Facebook and Libra, but a “blockchain-enhanced” payment network that competes with Paypal is hardly the terrorist event of the century.  It is highly unlikely that President Trump wrote his rant against Libra himself – his tweets were likely scripted for him as the party line against potential dollar competitors.

What’s crystal clear from this episode is that anything which is remotely a threat to the U.S. dollar’s dominance as the world’s reserve currency will be swiftly neutralized.

This is precisely why a peer to peer, decentralized network like Bitcoin is needed: any centralized challenge to the dollar’s dominance, by a company or nation-state, is likely to face swift retribution from the United States government. The U.S. economy relies on the dollar’s status as the world’s reserve currency to keep issuing new debt to sustain our unsustainable budget deficits.

Libra is currently little more than a vague white paper and a few lines of open source code, yet legislators like Rep. Carolyn Maloney and Maxine Waters are demanding that the project be shut down before the concept has even been fully flushed out.

It is clear that when U.S. dollar regime inevitably collapses – be it next year or decades from now, the U.S. government will not allow any organization within its reach to develop an alternative that can safeguard American’s assets. The government relies on its ability to collect (dollar-denominated) taxes to pay interest on its enormous debt and fund its unsustainable fiscal commitments.

This makes it all the more essential (for those of us who wish to safeguard our life savings and ensure an economic recovery based on sound money) to support decentralized, borderless, and censorship-resistant alternatives like Bitcoin. While Bitcoin is certainly not entirely immune from legislation, it is substantially more control as can be seen in countries such as VenezuelaChina, and India, where it is still widely used despite being banned.

Don’t dismiss Bitcoin just because of its wild price swings

There are valid reasons to criticize Bitcoin, but price volatility is not one of them. 

Why does the price of Bitcoin change so much from day to day? The answer is simple: the value of Bitcoin derives almost entirely from speculation on future adoption of Bitcoin rather than practical use. Bitcoin speculators are betting on the likelihood that Bitcoin will become offers a credible alternative to fiat paper money or commodities like gold.

No one knows the future, so many individual market participants speculate about the future using the information available to them. They will naturally disagree and change their opinions over time as new knowledge becomes available.  Good and bad news such as statements by governments, thefts from exchanges, or new startup ventures provide new information about the future and so influence the price.  Traders also react to the predictions of other traders. This is how price discovery works in any market. Those who make successful predictions earlier and more often will accumulate more Bitcoin, thus rewarding those with the best judgment. 

If you think that the Bitcoin trading is driven by too much hype, consider that the world’s economy currently hangs on the rants of President Trump’s reactions to the latest Fox News broadcast, and how the Federal Reserve reads the tea leaves of the market this week.

By contrast, crypto traders are ultimately responding to the long term success or failure of the Bitcoin ecosystem. This process of information discovery is always messy, but it is not any more arbitrary than the fake drama of the political news cycle.

Many critics of Bitcoin consider the fact that Bitcoin is a speculative asset as sufficient reason to dismiss it. But all entrepreneurial initiatives are speculative at the start. Bitcoin is like any early-stage startup. One investor claims a 10% stake for $1 million for a valuation $10 million, while a later round might value a $10% stake at $100 million. As a startup proves that its technology and businesses model is sound, and begins to make profits, it’s market cap grows. As profit transitions from potentiality to an actuality, the market capitalization becomes more stable. We are seeing a similar process with Bitcoin, except its ambition and potential is far larger than a startup, so the process takes far longer.   

Bitcoin will achieve price stability when a large portion of Bitcoin’s market cap is used for practical purposes rather than speculation. The practical value of Bitcoin is as a means of exchange and store of value.  

Can we track the adoption of Bitcoin as practical money? Yes. When Bitcoin was invented, only a few highly technical users had the skill to make Bitcoin transactions. Over the last 10 years, the cryptocurrency ecosystem has grown and evolved. Bitcoin is now easier to use, safer to store, and the number of businesses who accept it is in the tens of thousands.

Still, in all but a few narrow use cases, it is still more convenient to use more traditional payment networks. That’s normal — monopolies are broken not by assaulting their business model head-on, but within narrow edge cases where it is easier to build a superior alternative. In the case of Bitcoin, it is already a viable option for cross-border money transfers from nations with currency controls, trade in black and grey market goods, funding of politically incorrect institutions, and of course, criminal operations. In developed countries with robust financial networks, Bitcoin is only used by its most devoted followers, as the traditional financial system is still far easier to use.

That doesn’t mean that we will not see a sudden and unpredictable shift in which Bitcoin suddenly overtakes traditional financial networks. The Western banking system suffers from major and intractable structural faults and is ripe for disruption.  By contrast, here is a single Bitcoin transaction worth $670 million dollars with a total fee of $7.82.  Imagine how much more effort and due diligence a banking transaction of this size would take. A transaction to buy your morning coffee with Bitcoin comes with the same level of security.

We’ve seen how countries like China evolved from a cash-only society to one entirely dominated by mobile payment apps for practically all applications in just a few years.  With Whole Foods, Home Depot, and other major stores now accepting Bitcoin, virtually all millennials using smartphones, and growing instability in the global fiat money regime, the currency marketplace could be ready for disruption. Or not. The “flippening” between the dollar and Bitcoin could be decades away. The point is that there is nothing fundamentally wrong with speculating on the possibility of a Bitcoin-based economy and global monetary standard if you believe (as I do) that the technology is fundamentally sound and capable of evolving to handle the business of 7 billion people.

Why does the price of Bitcoin change so much from day to day? The answer is simple: the value of Bitcoin derives almost entirely from speculation on future adoption of Bitcoin rather than practical use. Bitcoin speculators are betting on the likelihood that Bitcoin will become offers a credible alternative to fiat paper money or commodities like gold.

No one knows the future, so many individual market participants speculate about the future using the information available to them. They will naturally disagree and change their opinions over time as new knowledge becomes available.  Good and bad news such as statements by governments, thefts from exchanges, or new startup ventures provide new information about the future and so influence the price.  Traders also react to the predictions of other traders. This is how price discovery works in any market. Those who make successful predictions earlier and more often will accumulate more Bitcoin, thus rewarding those with the best judgment.

If you think that the Bitcoin trading is driven by too much hype, consider that the world’s economy currently hangs on the rants of President Trump’s reactions to the latest Fox News broadcast, and how the Federal Reserve reads the tea leaves of the market this week.

By contrast, crypto traders are ultimately responding to the long term success or failure of the Bitcoin ecosystem. This process of information discovery is always messy, but it is not any more arbitrary than the fake drama of the political news cycle.

Many critics of Bitcoin consider the fact that Bitcoin is a speculative asset as sufficient reason to dismiss it. But all entrepreneurial initiatives are speculative at the start. Bitcoin is like any early-stage startup. One investor claims a 10% stake for $1 million for a valuation $10 million, while a later round might value a $10% stake at $100 million. As a startup proves that its technology and businesses model is sound, and begins to make profits, it’s market cap grows. As profit transitions from potentiality to an actuality, the market capitalization becomes more stable. We are seeing a similar process with Bitcoin, except its ambition and potential is far larger than a startup, so the process takes far longer.

Bitcoin will achieve price stability when a large portion of Bitcoin’s market cap is used for practical purposes rather than speculation. The practical value if Bitcoin’s is as a means of exchange and store of value.

Can we track the adoption of Bitcoin as practical money? Yes. When Bitcoin was invented, only a few highly technical users had the skill to make Bitcoin transactions. Over the last 10 years, the cryptocurrency ecosystem has grown and evolved. Bitcoin is now easier to use, safer to store, and the number of businesses who accept it is in the tens of thousands.

Still, in all but a few narrow use cases, it is still more convenient to use more traditional payment networks. That’s normal — monopolies are broken not by assaulting their business model head-on, but within narrow edge cases where it is easier to build a superior alternative. In the case of Bitcoin, it is already a viable option for cross-border money transfers from nations with currency controls, trade in black and grey market goods, funding of politically incorrect institutions, and of course, criminal operations. In developed countries with robust financial networks, Bitcoin is only used by its most devoted followers, as the traditional financial system is still far easier to use.

That doesn’t mean that we will not see a sudden and unpredictable shift in which Bitcoin suddenly overtakes traditional financial networks. The Western banking system suffers from major and intractable structural faults and is ripe for disruption.  Here is a single Bitcoin transaction worth $670 million dollars with a total fee of $7.82.

Imagine how much more effort and due diligence a banking transaction of this size would take. A transaction to buy your morning coffee with Bitcoin comes with the same level of security.

We’ve seen how countries like China evolved from a cash-only society to one entirely dominated by mobile payment apps for practically all applications in just a few years.

With Whole Foods, Home Depot, and other major stores now accepting Bitcoin, virtually all millennial using smartphones, and growing instability in the global fiat money regime, and the currency marketplace could be ready for disruption. Or not. The “flippening” between the dollar and Bitcoin could be decades away. The point is that there is nothing fundamentally wrong with speculating on the possibility of a Bitcoin-based economy and global monetary standard if you believe (as I do) that the technology is fundamentally sound and capable of evolving to handle the business of 7 billion people.

Three Key Differences Between Traditional and Crypto Markets

What is the real market value of cryptocurrencies like Bitcoin?

The numbers used to explain the performance of Bitcoin and other cryptocurrencies are less meaningful than most assume.

Cryptocurrencies are not exactly like stocks, and cryptocurrency exchanges do not work like traditional securities markets. As a result, many crypto-asset investment strategies based on conventional definitions of market share, capitalization, volatility, and trading volume are deeply flawed. Misleading numbers mean that cryptocurrency valuation and adoption is poorly understood, which creates a false perception by the media and investors about cryptocurrencies such as Bitcoin.  One implication of this analysis is that Bitcoin has captured the vast majority of the long-term upside in the cryptocurrency market despite having about half the nominal market share.

Most cryptocurrencies and crypto exchanges manipulate numbers in ways that publicly traded companies and traditional exchanges like NASDAQ and NYSE wouldn’t dream of.  As a result, “market capitalization” and “trading volume” are at best rough and relative measures of cryptocurrency adoption. Even when intentional manipulation is not involved, crypto-asset markets fundamentally just do not function like securities markets. It’s important to understand these differences to asses the state of cryptocurrency and crypto asset adoption.

Let’s look at three important differences between how cryptocurrencies and traditional securities markets work:

Will Bitcoin burn the planet to ashes? Not so fast.

Environmentalists have recently become concerned about the impact Bitcoin mining has on global warming. Headlines such as “Bitcoin Will Burn the Planet Down. The Question: How Fast?” and “Bitcoin Mining Alone Could Raise Global Temperatures Above Critical Limit By 2033” suggest that Bitcoin is an unfolding environmental disaster.

However, those panicking about crypto make three fundamental errors. First, they do not understand how Bitcoin works, second, they do not understand what mass adoption would look like, and third, they do not understand the problem Bitcoin is intended to solve.

Regardless of your opinion on the danger of global warming, Bitcoin does not use nearly as much energy as claimed, will become far more efficient as it grows, and most importantly, solves one of the greatest causes of resource inefficiency, corruption, and human suffering.

Bitcoin mining is a market-based process that taps underutilized energy sources

When Bitcoin critics focus on the raw energy usage of Bitcoin mining, they miss the bigger picture: cryptocurrency production is a competitive market process.

Because the cost of Bitcoin mining comes mostly from electricity consumption, Bitcoin mining is concentrated in places with cheap or surplus energy. Industrial-scale mining facilities are located in far-flung locations with cheap hydro-electric, nuclear, geothermal power, or undeveloped industrial regions with excess production. Energy costs money, and miners will always look for the world’s best sources of cheap and efficient energy. Cryptocurrency mining is a means to tap underutilized energy resources for a valuable purpose—the maintenance of a monetary system. No other industry can rapidly move into an industrial ghost town and create value the way Bitcoin mining firms do.

Furthermore, the total energy usage of Bitcoin is limited by economics: crypto-miners will only keep mining when their profit is higher than the cost of electricity. The Bitcoin network automatically adjusts the difficulty of mining new blocks in response to the “hash rate” or the net mining capacity of the network. This means that Bitcoin has a built-in cap on energy use, and can dynamically adjust in response to energy prices and innovation in computational hardware.  Currently, humanity consumes around 17.7 Terawatts per year. The Economist estimates that Bitcoin uses 2.55 gigawatts or .014% of that. Some estimate the total use of cryptocurrencies at 7.7 gigawatts, but it’s likely that a single cryptocurrency will dominate after the current shakeout period.

How I Built a Bitcoin Exchange: Design Principles & Risk Management

In 2013, I designed and built a cryptocurrency exchange for the China market.  The basic concept & architecture only took a few days, but the full implementation required several years.   I shared the basic architecture in 2013, and with the recent spike in interest in Bitcoin and Ethereum, I thought I would share additional details on the concept.

I wrote the trading engine for the exchange over a long weekend in Shanghai.  It turns out that building a large-scale cryptocurrency exchange is quite complex, and it finally (and successfully) launched in 2016.  The notes below describe my design vision from 2013 – the implementation followed this specification fairly closely.  There is a lot of detail and documentation to many of the sections below – some of which I will elaborate in future posts.  If you want more detail on something specific, comment below or find me on LinkedIn.

Happy 10th birthday to Bitcoin!

Happy birthday to Bitcoin! 10 years ago, Satoshi Nakamoto published a white paper for “a Peer-to-Peer Electronic Cash System” which would “allow online payments to be sent directly from one party to another without going through a financial institution.” Just a few short months later, the Bitcoin network launched on 3 January 2009.

Bitcoin is the culmination of thousands of years in the evolution in money. It is durable, portable, divisible, uniform, and limited by design. Over the span of human history, money has taken the form of shells, salt, coins, banknotes, and fiat bills. While money serves a crucial role in facilitating trade and wealth creation in society, it has often suffered from hidden inflation, outright confiscation, or the exclusion of unpopular groups from the economy. In the 100 years, the inherent flaws in fiat paper money have been used by governments to fund wars, corruption, and cronyism through the hidden tax of inflation.

Bitcoin is the first credible alternative to fiat currency and offers real, sound money made for the information age. The decentralized nature of Bitcoin has revolutionary potential for both the global economic order and billions of people who suffer from lack of access to financial institutions and corrupt governments and corporations. The concept of a distributed ledger stored on the blockchain has applications well beyond money, with the promise of creating a durable and credible record of property ownership, which has the potential to transform how we record property deeds, corporate shares, insurance claims, business contracts, and many more applications.

After the basic concepts of Bitcoin and the blockchain were discovered in 2009-2013, Bitcoin and the blockchain space entered the infrastructure stage. We are now building the ecosystem of tools, vendors, and relationships to make Bitcoin as easy or easier to use than products of legacy financial institutions. Once a mature infrastructure is in place for cryptocurrencies, the stage will be set mass adoption. Billions of people will have the devices, services, and vendor networks to use Bitcoin for everyday transactions, meeting the final requirement for money: widespread acceptability.

The mass adoption of cryptocurrencies will not create a utopia – it is more likely to be hugely disruptive to the economic-political order. However, genuine sound money is what humanity desperately needs to build a harmonious, robust, and integrated global digital economy on the backbone of the Internet.