bitcoin

How to keep my money safe

| roger nunn

We all want, I think, to keep our money safe. After all, what’s the point of going to work and finding that the money you have been working for is not worth what it was. Even if you keep your money safe from theft or loss, there is a nasty and constant drain on your value.

Inflation.

Inflation is so much part of our financial world that it seems to be inevitable and we just get used to the idea that our hard-earned money is worth a bit less this year than last. This loss of value is what happens in good times, it is so insidious that most of us just put up with it.

I read an interesting comparison where it seems that in Roman times, I full suit of clothes for a soldier cost around 1oz of Gold. As far as I can see, it is still the case. This shows that inflation is only the result of the usefulness of inflation to decision makers. I am not going to write about how central banks work, it tends to be technical and doesn’t really add to the point I am making.

In the current climate of zero interest rates for savers and massive “quantitative easing” I can not see any easy way to avoid the likely inflation that is on the horizon. Gold is a store of wealth but it has quite high storage costs.

I believe that this uncertainty is the reason for the current increase in interest in buying Bitcoin. No one, at least so far, is able to take it away from you. When you link this to the big profits that can be made in trading in “ALT coins”, it is not surprising that so many people are getting into crypto.

Bitcoin is designed to be immune to inflation. Let’s hope it stays that way.

Earning interest on cryptocurrency.

| roger nunn

I remember when I could deposit my money into a savings account at a bank and earn interest. It is a fascinating idea that has always been central to banking.

What happens is that you put your money into the bank for an agreed period of time and the bank uses the money to lend to someone else who needs it. The bank charges the borrower interest for using the money and pays you interest for depositing it. The bank earns its own profit by charging the borrower more than they pay you.

This whole thing is great when it works (worked). Those who had spare money could earn interest (compound interest, of course) simply by leaving it in the bank and those who needed it could use it for a cost.

Unfortunately for that simple model the financial markets have completely changed in recent years. Now interest rates are so low that putting cash into the bank is no longer beneficial. In fact it’s likely to cost you both in terms of lost purchasing power through inflation and through what is euphemistically called negative interest. Negative interest simply means that banks now do (or shortly will) charge you to look after your money, while still using it to earn interest.

Please note that this is a very simplified model of the way banking works and the recent changes. I simply want to demonstrate the point that the nature of money is changing.

Now it is possible to deposit your cryptocurrency and earn interest on it. At the moment I am earning around 7% pa on my deposited bitcoin while also gaining the benefit of not being affected by inflation. I am not addressing the fluctuations on the value of Bitcoin, though I expect that to be an added bonus.

For those who want to borrow, they can deposit Bitcoin and borrow the equivalent the currency of their choice. This deposit requirement means that debt defaults can’t happen as the Bitcoin can be simply used to replace the loaned amount.

I am still experimenting with this aspect of Bitcoin and have deliberately avoided the more risky ways of earning much higher interest.

Overall, I feel comfortable with this model as I can both HODL my bitcoin and earn interest on my savings. I also have instant access to my capital. I will say more as I learn more…..

HODL or not to HODL?

| roger nunn

From the first days of crypto currencies they have been subject to ridicule as being just a game for computer nerds, cyber punks, etc. This lack of belief coupled with the “Wild West” nature of the new developments meant that they were volatile from the beginning.

Volatility in the crypto world is like volatility in financial markets multiplied by a factor of 10. At least.

This volatility makes for exciting times allowing people to make profits (or losses) very quickly just by trading in and out of various coins. I believe that the word HODL was coined in 2013 by a trader who mistyped that he was going to hold some coins even though they were dropping. It has also be renamed as “hold on for dear life”, which represents the difficult choices in crypto trading.

If you HODL you could get a massive gain (100X or more) or you risk losing virtually all the value. This is why one of the common trading practices is to invest, sell at a profit while the price is rising and then HODL the rest. This way you are able to get your capital back while still keeping some for the big rise.

Don’t forget that HODLING alone may bring you an increase in value but it doesn’t give you any profits along the way.

The volatility is still with us, something that can easily be seen through today’s drop in the value of Bitcoin by over 20%. Just imagine any other form of money that could drop 20% in a day and then bounce back soon afterwards. Obviously I don’t know what’s going to happen, but I feel confident that there will be a rebound.

So, should I sell now and make some profit, or should I HODL in the hope of a rise?

What does FOMO mean?

| roger nunn

FOMO is Fear Of Missing Out. It refers to the feeling that everyone else is getting something and you are missing it.

Fomo creates a need to take action to join in. Fomo has always been part of life but the immediacy of social media and the strong snowballing effect on anything shared has accentuated its effects.

Fashion has always been affected by Fomo but it’s a much slower effect that sharing of ideas online. The strength of online Fomo is because of the geometric effects of its growth, hence the phrase “going viral”.

Once you link the speed of online trading of crypto currencies with Fomo you get fascinating results, where a single news item can create a movement in a coin’s value which then escalates because of Fomo.

When you add 24 hr trading to the mix you add huge volatility to the price. It gets exaggerated because the professional traders has automatic trading setup to take advantage of price changes far faster than a human can.

So there are lots of people getting richer just by hooking into the power of Fomo.

I’m now looking for the best way to use AI with a trading bot. When I find it I will start it off and watch it earn my living for me.

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.

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.