Bitcoins May 2013
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Bitcoins May 2013

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I write a monthly newsletter for my clients. It seemed obvious to me at the time that a new era had dawned with the advent of crypto currencies. A way to maintain a store of value minus the meddling ...

I write a monthly newsletter for my clients. It seemed obvious to me at the time that a new era had dawned with the advent of crypto currencies. A way to maintain a store of value minus the meddling and interference of fallible human beings.

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Bitcoins May 2013 Bitcoins May 2013 Document Transcript

  • MAY 2013 NEWSLETTER BITCOINS Decentralized Banking! What is that? Spring has sprung, for most of us. It was very easy to complain about the long drawn out winter this year considering I had such a fresh memory of last year‟s weather where we were warm and cozy in March! Not surprisingly I guess that‟s where people get the moniker, “changes like the weather.” I find myself using that saying in so many different scenarios, like Real Estate sentiment in the City, or Michelle‟s wardrobe or even my own eating habits. One place I never would have thought of using that statement is in Central Banking. I mean on the U.S. Dollar itself it says the words, “In God We Trust.” We know God is strong and stable and forever which would imply that the dollar bill in our pockets is also strong and stable and forever? This misplaced personification blurs the fact that the dollar bill itself is in fact not regulated by God, but instead a few fallible men. We know these men control the value of the dollar by creating more or less of them through the regulation of the money supply based on political, social and economic conditions. To that I would say, “My God!” For hundreds of years mankind has relied on a stable currency that allows for the trading of goods and services. The stability of the currency was of the utmost importance so people and businesses could plan for the future. Academia allowed a select few individuals to hypothesize methodologies to be employed towards the management of the value of the dollar in order to maintain confidence in using it as a vehicle for trade. Some would say it is a noble idea for the better of the many. Unfortunately using history as a judge these methodologies of capitalism have enslaved much of the human race. We grow strawberries in Mexico and ship them even though they are in our back yard. We produce clothing on the other side of the planet, build boats and extract oil to power these boats, to ship the clothing to us, even though we have local markets that are seemingly invisible in our own towns. We manufacture cars here but instead prefer to buy cars made on the other side of the World. There is one very simple reason for this behaviour. It is because the dollar is regulated such that its proof-of-work value in terms of human labour is different for everyone. Although “we are all equal under God,” we can easily understand why that also was not written on the dollar bill. In fact none of us are equal when it comes to measuring our work efforts in terms of dollars. I can assure you in reality however that the human effort required to dig a hole in Zimbabwe is exactly the same as the effort required to accomplish the same task in Canada. The inherent belief that one‟s efforts are exactly the same yet the financial results that indicate they are in practice different, has caused much anger and resentment towards the individuals who maintain this
  • disparity. In modern day we call these individuals Central Bankers. Since the beginning of time people have sought out ways to circumvent the control of the money supply, from painting Gold yellow, to selling pyrite as bullion to counterfeiting, yes counterfeiting! Over time the money supply‟s integrity was attacked and overtime the sophistication with respect to maintaining its integrity grew. In its most basic form the money supply itself, since the beginning of time, is still a trust based model. Hence the term, “In God We Trust.” I am going to make a suggestion that is well documented from Socrates to Freud to Shakespeare. It is inherent to human behavior that men in positions of power, more often than not, cannot be trusted. Through implication, how then can the integrity of the money supply be maintained while its supervisors, beneficiaries and users are less than perfect? The answer is simple. It cannot. However that has not dissuaded regulators from trying to jail people who refused to use paper money in the 1800‟s instead of Gold, to current travel rules that prevent individuals from carrying more than $10,000, to legislation that outlines the legal uses and actions that must be followed to maintain the money supply‟s integrity. Again some would say it is a noble idea for the better of the many. Conventional wisdom suggests that a stable money supply cannot be maintained without the use of Financial Institutions and Central Banks acting as an intermediary for all transactions. Their purpose is to be mediator of the trust through oversight of Gold to maintaining legitimate paper currency. But what if they cannot be trusted themselves as evidenced through bail-outs, inflation and stimulus spending, reducing our proof-of-work value on efforts made past? This is the thought process that has given rise to the Bitcoin. An evolutionary currency created out of the need to neutralize the imbalances of fiat money and the disparity of proof-of-work value. Its goal is to remove the regulatory decisions of the money supply from men and give them to a computer. A Bitcoin is a new form of digital cryptographic currency whose money supply is the first money supply in human history to not have a trust based model behind its regulation but a cryptographic proof instead, allowing any two willing parties to transact directly with each other without the need for a trusted third party to verify the transaction. In application the money supply of the new digital currency cannot be manipulated, it cannot be created or destroyed. Bail outs cannot occur, printing money cannot occur and no man can alter the value of the currency in any way. Its value is directly derived from its use in commerce and trust in its‟ integrity which are both maintained through a network of computing power that now exceeds a magnitude never before measured in human history. The value of one Bitcoin now equals $125 Canadian dollars! Bitcoins maintain their integrity by using the same technology that is used to download movies or music on the internet by using a peer –to-peer network. A peer to peer network is a distributed application architecture that allows workloads to be partitioned between peers, or friends. In other words when you download a movie which is a large file, you obtain small bits of that file from thousands of users who have the same file on their computers. Each peer sends you small bits of the movie file. When thousands of peers start sending you small bits of that file, you are quickly and efficiently able to reconstruct that whole file on your computer using the computing power of all the people on the peer-to-peer network as opposed to the transfer of a file between two parties which would employ only two computers and take much, much longer to do.
  • Peer to peer networking has been used since 1993 and CERN, The European Organization for Nuclear Research has been a big proponent. Their laboratories smash atoms together and their computers analyze the results. The problem with the experiment is that when atoms are smashed together and the results are recorded on to their systems, the computational power required to solve the mathematical particle collisions would take a single large computer thousands of years to accomplish. CERN solved this problem by soliciting academics and people enthused about particle physics to allow for use of their computers to solve these complex equations through a peer to peer network. The large file of data would be partitioned and distributed amongst all of their computing power combined and the results could be achieved in approximately two years. CERN‟s peer to peer network is rated at a speed of 1 Gigabyte per second.1 Although CERN‟s Super Computer grid is staggering in size and rightly so considering they are solving mankind‟s most complicated riddles of nature, I found the second sentence in the referenced footnote quite notable. “Such a development could see financial firms dealing with gigabytes of data per second within the next five years.” I only ask if someone solicited you to use your computer while you slept to submit it to the particle research center to solve complex mathematical equations to better the human race would you do it? You would have to pay your hydro bills of course and tie up your internet connection and you would receive satisfaction in knowing you have contributed to the understanding of science. Equally what if someone asked you to submit your computer to solving complex mathematical equations to maintain the integrity of the Bitcoin Network? You would of course have to pay your hydro bills and tie up your internet connections but in return you would receive cold hard cash for doing so every single day. Whose network do you think is more powerful? CERN‟s or Bitcoins? The Bitcoin Network now operates at a speed of approximately 73,000 Gigabytes per second or 73,000 times bigger than the largest computer network on the planet.2 In fact the Bitcoin network has now surpassed a speed test called an exaflop. That term has never before been used in computing practice, it is 1x1018 calculations per second. The scale of this achievement is what has given rise to the “awakening” of the Bitcoin for its achilles heel lied in the fact that its integrity could be compromised if the computing power of the wrong do‟ers exceeded that of the do good „ers. Early on the Bitcoin‟s network integrity was compromised because of this fact but now a group could not find enough computers on the planet to overcome the computing power of the Bitcoin supporters and it is growing larger every day. They say the truth wins in the end. The reason that such a network has come into existence is very simple. It is greed, much like how all other currencies came into existence. People around the World who submit their computers to solving the Bitcoin transaction equations are compensated to the tune of 25 Bitcoins every 10 minutes, divided amongst all participants. One might expect a fraction of that reward every 10 minutes. When the Genesis Code, or first Bitcoin transaction took place in 2009, the rate of Bitcoin creation was 50 Bitcoins every 10 minutes. Every four years or there-abouts, the money supply creation is cut in half such that in the year 2017 there will only be 12.5 Bitcoins created out of thin air every 10 minutes, in the year 2021 there will be 6.25 Bitcoins created every 10 minutes until the maximum limit of 21,000,000 Bitcoins is achieved in the year 2041. The theory is that if Bitcoins are adopted by mankind for trade and their integrity is maintained instead of destroyed in the way http://www.computerweekly.com/news/2240084940/Cern-builds-largest-computer-grid-to-studyorigins-of-the-universe 2 http://bitcoincharts.com/bitcoin/ 1
  • that traditional currencies are, then the theoretical value of a single Bitcoin could be $100,000 per coin or possible $1,000,000. This eventuality has been solved by allowing the decimalization of the currency to 8 decimal places so that someone could buy a coffee. So if and when we reach complete adoptability of a Bitcoin in the year 2041 there will be 21,000,000.00000000 Bitcoins in existence. More than enough to satisfy the planet and its trading needs. A Bitcoin cannot be created nor destroyed and the money supply is constant and mathematical not to the whims of politicians and economists. No one controls Bitcoin. It is controlled by the participation of the people who submit their computers to the maintenance of the integrity of the network and they are compensated for doing so at a rate of, as of today, $18,750 per hour, paid out at 150 Bitcoins per hour. That may seem like a lot but that amount is divided by millions of people who are participating. As the creation of Bitcoins dwindle and the end approaches of the creation of the money supply at 21 million Bitcoins, it is hoped that people will be trading and purchasing goods and services in Bitcoins whereby the transactions that occur, require a small fee to be verified by the network. Currently that fee is .0005 Bitcoins or roughly 7 cents. Much cheaper than Mastercard or Visa charge that is for sure! These fees, if they occur millions of times per day, should continue to compensate the Bitcoin Miners for plugging in their computers and maintaining the network‟s integrity. Now that you have a rough idea of what a Bitcoin is and why it has come into existence it is not hard to quickly realize that Governments and people in positions of power are afraid of this new phenomenon. Mankind now has developed a monetary system that can transfer money around the World for free, anonymously, and the currency is valued the same wherever you are and whoever you may be. Its processing power now exceeds that of the United States Government and CERN and just about everything else on the planet combined. That is a very threatening concept to the order of things. Proof-of-work is now the same for everyone who trades in Bitcoins, without any fear of meddling or devaluing the currency. It is set, it is static, it is irreversible. It is the human races first decentralized currency, a product of technology and human necessity. In our letters I like to provide a realization and then the solution for how we can profit from the situation and Bitcoins are no different. There are some people who have vilified a Bitcoin by stating that it operates like a pyramid scheme and that the people who started early with Bitcoins will profit more than the people who start later. I say non-sense. Just as a people who have purchased a stock that goes higher, the ones that bought early profit more than the ones who bought later. Bitcoins are inherently designed to become more valuable “if” they are adopted as a trustable trading currency over time. Since they are now worth over $125 per coin I would conclude to say they are definitely trusted. How do we profit from this? That is the easiest question in the dissertation. We buy them before anyone else even realizes what they are and if you asked one hundred people on the street what a Bitcoin was, I would guess about one hundred of them would not be able to tell you. It is very easy to visualize a headline in the not too distant future that reads, “Bitcoin price surpasses Gold.” In short I would say it is the oldest lesson in the book, never be resistant to change. Always keep your eyes open for early opportunities and seize them when they appear. It has been well documented that there is in fact enough food to feed everyone on the planet yet millions of human beings starve every day. There is also
  • proof as to why this occurs. The misnomer is that there is not enough food but the actual fact of matter is that there is not enough money or US Dollars to buy that food because of currency imbalances! Bitcoins could change that more than any other force we have seen and if it turns out that they can redefine currency itself than traditional markets would probably collapse under their own weight. Lucky for us, our Bitcoins would rise in lock-step so trade and commerce could safely continue on into the 22 nd century. I could not wait to write this Newsletter and to bring this new concept to your attention. Google Bitcoins or go to bitcoin.org to read more on the subject. If you would like to know more about how you can buy bitcoins and how you can store them and keep them safe email me and I can walk you through the exercise. Once you start down the rabbit hole it is a stimulating exercise to bring about the realization that we are beginning a new era of banking and currency. The legacy banking system is not going to go without a fight. Where it will go is anyone‟s guess, but I know the direction will be forward. Do enjoy the wonderful weather that has arrived for us all and stay healthy we will buy the rest! Sincerely, Wesley Weber Wesweber.nyse@gmail.com