Month: January 2021

The internet begat Bitcoin

| roger nunn

The power of Bitcoin comes from belief in its value which stems from its immunity from inflation, its immunity from government interference, its inherent rarity and its ease of transfer around the world.

When I say Bitcoin I include some other parts of the Blockchain that share its inherent stability whose parts are listed above.

Bitcoin’s transactions are registered and verified by computer calculations, thousands and thousands of them all across the world. There are groups of computers that work together, called mining pools, that have a lot of the required computing power (hash rate) to complete verification. As these mining pools are located in different countries, they are not easily susceptible to being corrupted or controlled.

In recent years some countries have banned Bitcoin and there have been many attempts to regulate its activities. Attempts to monitor the use of Bitcoin are ongoing and are usually accompanied by comments that Bitcoin is used for crime or tax evasion. These can only be excuses, as a lot of crime relies on cash, something that is far less traceable than Bitcoin.

The real power of Bitcoin relies on the internet and the ability to transfer data around the world constantly. There are many cases where access to the internet from within a country is controlled by government. Control of this kind unfortunately stifles trade and certainly has not had a negative effect on Bitcoin.

The internet is constantly evolving with a steadily increasing proportion of the population having access to it. As the development of commerce, international trade and development relies on the internet it is unlikely to disappear soon.

I am especially interested in the effect of Bitcoin on countries with high inflation and the unabnked population, something I will talk about another time.

Understanding money

| roger nunn

I can’t understand crypto without getting my head around what money is, especially as it relates to inflation. Humans invented money because it was the most efficient way of avoiding the difficulties of barter. Money is a token that represents an agreed value that can be transferred in exchange for anything else of value. That part is easy, the problem is what to use as a token. Humans have tried beads, shells, gold and silver among others.

Gold has been used for ages, probably because it doesn’t tarnish and is difficult to mine. Then humans found out that they could issue paper token representing the gold. This was clever, making it easy to transfer value until it was found that the bank could issue more money than it had gold stored, and then to issue notes that had no gold at all to back them up.

That was my attempt to simplify the issue of currency and to show that it is based on nothing other than the belief that it has value. The real problem comes with the fact that the people who issue the currency can keep on issuing it without having anything of value to back it up.

The printing of new currency creates inflation because the amount of production available is the same and the excess money creates increased prices. Increased prices = inflation.

Bitcoin has a limited supply, with a computer program keeping the new coin production at a fixed level. The inability to increase Bitcoin’s supply means that it is immune to inflation and as such is a store of value.

From my point of view, fiat currencies (from governments or central banks) are obsolete. Today 1 Bitcoin is worth over $42,000.

DEFI, a name that builds on crypto

| roger nunn

When I first saw the word DEFI, I thought it was some kind of computer game. It sounds as though you are Defying someone or breaking some rules.

DEFI comes from Decentralised Finance, and is a way of giving and getting access to finance without having to go to a financial institution (a bank). So perhaps DEFY is a good explanation of the message that the crypto community is sending to the current fiat based financial system.

Bitcoin is well known as a store of value, currently valued at around $40,000 each. However, it is too slow to be used for small payments and does not earn any interest. Other coins, such as ethereum based tokens are more suitable for small payments but do not themselves earn interest either.

DEFI is a development (there are many) that uses existing coins as collateral to make loans, meaning that the owner can use the value in the coins without having to sell them first. It is an extra layer that builds borrowing and lending into crypto currencies.

I am writing this to be as simple as possible, just to make sure that I understand what crypto is and how it works.

The crypto market has many other facets that will be covered separately, such as trading on exchanges, the use of stablecoins, the development of new coins through ICOs and Decentralised exchanges. There are coins and tokens that are single purpose, there are a multitude of scams and thieves trying to get your coins and the all important question of your wallets and how they work.

Coin trading is becoming a sophisticated profession that requires constant work even to follow and there are developments in autotrading programs that buy and sell on your behalf (known as bots).

The more I look at this the more complicated layers that I see, the good point being that as things are changing so fast anyone can get involved.

Who is in charge of Bitcoin?

| roger nunn

Please note that I’m writing this as a way of making sense of the world of cryptography and blockchains. I may write something that is incorrect, and when I do, please feel free to tell me that I have misunderstood the way it works.

I am using Bitcoin here as an example as it was the first successful attempt to create virtual money without a central authority. Before I started buying Bitcoin, I wanted to know who was in charge and who would I complain to if there was a problem.

It’s a question that many people ask.

The answer is, of course, not as simple as giving the name of an organisation. The code that is used to run Bitcoin is published and available to all. The way Bitcoin works is not important to understanding why there is no one organisation “in charge” of it.

Bitcoin relies on the feedback between multiple (thousands) of computers to verify the correctness of transactions that are put onto the blockchain. Once there is sufficient verification (called mining) measured by computing power, a block of transactions is added to the blockchain. The need for verification is the reason why transfers of Bitcoin are not immediate. Any transactions added to the chain that are not verified are subsequently ignored by the blockchain.

The use of computing power (proof of work) to verify transactions and to create new Bitcoin is why no one person is in charge of Bitcoin. It is possible to change the code and modify the way Bitcoin works but it would only be effective if accepted by more that 50% of the available computing power. There have been a number of cases where a group of miners wanted to change the way the code worked and started using the new code. This actually creates a second blockchain that duplicates the first one up to the point of the split.

It is called a hard fork, and it means that there are two blockchains. The reality of course is that the value of any coin depends on its acceptance and its use, something that is measured by the number of people who get involved in it. Anyone can take the code and create a clone of Bitcoin but if there are no users it is just code that runs on the maker’s computer.

So the person in charge of Bitcoin is both the persons who use it and the persons who mine it. The more people who use it, the more who believe in it and will pay for it. The higher the price the higher the rewards for the miners, meaning that’s it’s value is based on your belief in it (like fiat currencies).

Is there more than one Bitcoin?

| roger nunn

Most people have heard of Bitcoin and maybe that it was created in the wake of the financial crisis that started around 2007.

Bitcoin is now 12 years old, but it didn’t get much visibility (perhaps notoriety) until after 2013. The name Bitcoin is unfortunate as it gives the idea that there is a physical manifestation of the technology. However, as no better name was found everyone uses coins.

In the meantime the idea of basing value on the security of the blockchain spawned a multitude of other coins, like Etherium and Ripple. Bitcoin was seen to be insufficiently flexible to be used for contracts, so Etherium includes a form of programming that allows for “smart contracts”.

The existence of smart contracts has in turn spawned a large number of Tokens, which are payment transfers built on the Etherium blockchain using smart contract possibilites.

The number of new tokens expanded dramatically since the first bitcoin frenzy in 2017 and there are now over 5,000 of them. As the transfer of value on the blockchain requires keeping track of large numbers, there are now a multitude of software wallets make it easy to store and transfer crypto currencies. At the same time, there are a number of exchanges that are used as market-places to trade crypto.

Each of the paragraphs above gives just an idea of the subject matter, something that needs to be studied in depth just to get a feel of what crypto really is.

I often get asked how it can be real if it is just a string of numbers stored on a computer. Answering the question means studying the history of non-crypto currencies first and realising that even the “normal” currency that you have in your account is also only a string of numbers. The hardest point to understand is often that there is no central authority for Bitcoin, it is controlled by many thousands of computers around the world, all competing to maintain the system.

The real strength of Bitcoin is that there is no central authority and therefore no one to create inflation or to simply take money from your account.

Crypto use cases

| roger nunn

I like that we live in times of change, financial change I mean.

Throughout history we have had large changes, things that caused great upheaval in society and industry. Major changes include the invention of the steam engine and all the industrialisation it brought, the the invention of the internal combustion engine and airplanes. These brought huge changes in wealth and working practices. The biggest change was the development of computers and most recently the proliferation of the internet to the current stage of being in everyone’s pocket.

Now we are on the cusp of the biggest and most disruptive change of all, being the replacement of paper money issued by governments with a store of wealth that is independent of national borders and specific currencies.

I am fascinated and look forward to the developments that are on the way, disruptive as they will certainly be.

The blockchain based coins and tokens are the first wave of change. Already, I find that the transfer of money (fiat money) through banks feels as though it should be abandoned for being so slow, expensive and inefficient.

Already there are financial instruments based on Bitcoin, Etherium and other coins. I can transfer value between different organisations in a matter of minutes and start earning interest that is paid in a cryptocurrency.

At the time of writing, Jan 2021, banks are now planning to pay negative interest rates. In normal language that means that you have to pay a fee to keep your money in the bank. My crypto coins pay me interest (daily) and are currently increasing in value.

In the long run I expect the coins to more or less stabilise in value, something the official currencies have never been able to do. Bitcoin has been constructed so that there is no potential for inflation, something that is so good at the moment that even large organisations have started to buy it to avoid the inevitable inflation that will follow the current huge increases in liquidity.

So, my thought for today is that simply by buying some bitcoin I have stopped inflation from eroding the buying power of my money. It is called Hodling, a work coined by a typo.

This is one use of crypto, there are many more that I will talk about, there are others that I know little about and others still being developed. Exciting times!

What is crypto?

| roger nunn

Cryptocurrencies and token are a way of keeping a permanent record of transactions. Sounds boring and gives rise to the comment, ok, so what!

This explanation sounds as though it could have been written to put you off the idea. A better explanation is that it is a new technology that uses mathematical certainties to ensure that all transactions cannot be altered and that passes via the internet.

There are so many parts to crypto that is it difficult to know where to begin, especially as it’s uses and new developments are taking place at an ever increasing rate. A simple example is Bitcoin. Most people have now heard of it (currently trading at over US $ 34,000 each) but they are completely unaware that there are actually thousands of other coins or tokens being traded, with new ones and new uses coming online every day.

Transferring money seems to be the best known use of the blockchain (the name of the tech behind crypto currencies), and often vilified because it can be used for nefarious purposes. Oh Dear! I believe that cash is used in nefarious purposes all the time. The real benefit is that you can transfer money virtually instantly, anywhere in the world and at almost no cost. I remember going to the bank and filling in paper forms to send money abroad, money that would only get there a few days later, after paying transfer and currency conversion costs.

If I want to pay in a crypto currency, the person i’m paying needs to have only a phone and internet access. Nothing else.

Money transfer is only scratching the surface for crypto, it has a myriad of uses, I will talk about some of them another time.

Share and Crypto trading

| roger nunn

Buying shares has got much easier than it used to be.

It works like this. First you pick a suitable trading site and set up an account. The setup is very easy but you have to spend some time with the infamous KYC procedures. It actually means that you have to have a utility bill handy as well as your passport. The Site will also insist on a selfie. I find that usually it is very quick and that you are ready to trade quickly. There are a number of online trading sites and I am not here to do your research for you. The choice depends on which countries you want to trade in as well as your nationality and country of residence. I have accounts with several but tend to use degiro.

So far so good. You have setup the trading account and now have to add money to it. This is the moment of truth as share trading ties up your money and is not guaranteed. First you have to start with an amount of money that you are willing to risk in the aim of increasing your overall wealth. The first time that you transfer money to a trading account feels (and is) dangerous. I tend to console myself with the idea that there is no easy way to get good returns without increased risk. So you choose a small amount and transfer it, either through your bank or a bank card.

Next you have to choose what to invest it. This is the hard part, something that people devote years of their lives to trying to master. No one knows what will happen next.

However, you can find ways to try out the investing game. I call it a game deliberately because you have to always be aware that you might not win. Right now you need to go and learn about investing, I would start with one simple idea, like share ownership, just to test the waters.

You have to build a strategy, shares go up and down in value, and if you buy and sell based on your emotions from watching the changing prices, you will be very likely to lose money.

I have bought and sold various different shares, always starting with small sums. I usually choose an industry, read about different companies and then buy some shares. At the time of buying I decide at what price I want to sell them and sell when they reach the price. It is a boring technique that brings small but steady returns. If I like the share, I will sell enough to cover the initial investment and keep the rest, hoping for bigger profits if they continue to rise.

These were just my initial thoughts, there is a lot more to come and Crypto trading is for another day.