The Bitcoin prophets may be lost

Money functions as a measure of price, a medium of exchange and a store of value. Money evolves all the time. From seashells to electronic cards, money has taken many forms.

To measure, store and act as a medium of exchange there is a huge amount of trust required. Trust is the main criteria for something to be accepted as payment. We may not think much of the rand today, but we trade with it and we measure our home’s value in it, and sometimes we save in rands.

Trust is a something that is difficult to define, but it generally means that others accept the value of the money you hand over.

Bitcoin is the new currency,  praise-singers say. It is the new investment for the new century. The prophet quickly shares another passage from the Internet Bible of Bitcoin on her Facebook pulpit.

One measurement of trust is volatility, and at present, the Bitcoin dollar is 7,5 times more volatile than the rand. Trust in the rand is therefore far better. For the euro / dollar, it is 12 times less volatile than Bitcoin. Therefore trust is higher for the rand and dollar.

Value is very important, and central banks work hard at keeping trust in the value of the currencies they manage. They have oversight of the banks and card issuers. They also ask banks to keep money in reserve and they, too, keep money or value in reserve – often in the form of gold and other currencies. The value is also in the back-up they have in reserves.

Myths of sacred scarcity

Bitcoin is a new technology, the crypto choir sings. It does away with the need for central banks, and only 21 million full bitcoins can be created. It is scarce, it is sacred, it is blessed as it keeps giving. Bitcoins and the people in the know are blessed, the message says!

But if 50% of ‘miners’ (defined below) favour it, then Bitcoin can be split – as happened with Bitcoin Cash and will happen again. More for us, say the prophets! Manna from heaven, sing the choir!

So scarcity is no longer a valid issue in the valuation of Bitcoin. Today there are 872 crypto currencies, up from 774 in July 2017. Yes, nearly 100 new ones in about two months – another religious sign for the Bitcoin prophets!

Crypto currencies can be created at a push of a button. Each new currency is looking for merchants and interchangeability with older cryptocurrencies. Prophets and praise-singers tell you the wonders of the next one. Scarce they are not.

Mining the conflict of transactions

Bitcoin frees us from transaction fees, gives people an income and it takes away from the banks; it giveth to the poor and those blessed with knowledge and insight.

The validators of transactions are called miners. Miners, of course, get paid both in new Bitcoins and in transaction fees. The closer Bitcoin gets to the fixed limit, the more the miner will be paid from the transaction, and the less from new Bitcoins.

Keeping each transaction in the Bitcoin’s validation is ideal for trust, but after a while the number of transactions in each Bitcoin go from thousands, to millions, to trillions and more. Simply put, the log gets bigger to keep the decentralised trust.

See the difficulty chart, and the fast growth in the number of validations that need to be done:

Therefore, every new transaction in the chain takes more processing power and electricity. That raises the cost of transacting, and miners need ever-more-powerful graphic processors.

Each Bitcoin transaction uses over 180 kWh – enough electricity to power an average SA house for a week.

So, as every transaction uses more power, while the ability to pay in new coins becomes less per miner, more of these ever-higher costs will become part of the transaction costs. That triple whammy, says the mining choir, is nothing compared to what the banks make.

Er, no.  Banks also make money from other things, and it costs them far less per everyday transaction. In fact, many a Bitcoin prophet proudly takes out his Visa card, which is Bitcoin enabled. The miner and banker both smile – double collection time.

So the miners benefit from both a number of transactions and the complexity, but their costs such as electricity also go up with that larger blockchain. China has cheap electricity, which is why China has 80% of the world’s Bitcoin miners.

Miners also want more work and therefore they love more Bitcoins, and therefore there are more splits. It’s a no-brainer that they will vote for more splits. More work = more income!

Miners are therefore conflicted, but the prophet praises them for keeping the devil government from the house.

New currencies require less power at first, but they build ever-larger logs. Miners need to stay busy to make money, so expect more currencies.

Central banks from India, China, Germany and Australian have warned people of the risks, but our Bitcoin high priestess frowns on unbelievers.

Converts see Bitcoin as the future, and there are training courses and lifestyle mentors around Bitcoin. Bitcoin prophets slam people like Warren Buffet and Robert Shiller, who say it is a bubble.

Every straw is picked up, in the hope just one will change someone’s mind. Every payment done with Bitcoin is announced on social media, and success stories are shared quickly. The hype is unbelievable – everyone from grannies to students is cheering on the cryptocurrencies.

When a merchant such as Pick’nPay runs a trial, the prophets rush to post the news on social media. The trial is over, and quickly we are informed that we can buy airline tickets in Japan (with Bitcoins). When you work out that the R4 000 item costs 12,5% more via Bitcoin than in Rands – that still does not stop them. It’s just “growing pains of the future” and like a church collection plate for the Bitcoin God.

Yes, money is evolving, and crypto currencies may be part of it.

But for now, I will stay in the good old rands using cards and ETFs (electronic transfers of funds).  They are more widely accepted, cost less, store value and I use them daily. Even Bitcoin’s value is measured in rand!

Mike Schussler originally wrote this piece in Afrikaans.  It deserves a wider audience, and he has given permission for The Cape Messenger to run it.  

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