Bitcoins, Ethereum and blockchain to change the world?

July 8th, 2017

Should you buy some bitcoins or Ethereum etc? (and how?) and will they change the world?

Bitcoin, Ethereum, other crytocurrencies and blockchain seem to attract and increasing amount of press. Given that bitcoin has jumped in value from under $700 last year (when I bought some, via Coinbase) to over $2,500 and more fairly recently, this has helped it garner attention. Indeed, someone paid over $25m for a few pizzas- they paid in bitcoin in 2010 that is now worth over $25m! Stories like these boost the interest in this space.

A reasonably easy book to read on Bitcoin and electronic money (and ICOs Initial Coin Offerings) is “The Bitcoin Big Bang” by Brian Kelly. This gives some good background and explains why the price of bitcoin could rise substantially over the coming years, not least due to the limited supply (there can only be 21 million bitcoins.)

The biggest problems facing the widespread adoption of bitcoin (or other electronic currency) include:

1) Small number of retailers that accept them- how can you spend your coins? But this could change quickly.

2) Lack of a store of value / volatility- money needs to serve as a medium of exchange as well as a store of value. The huge volatility of bitcoin makes it hard to keep it as a store of value, even though many claim it is a store of value. One needs almost instant conversion of your bitcoins to another currency, or a low volatility;

3) Risk of loss / hacking: Exchanges seem to regularly get hacked/ robbed. One can have a wallet on your computer, but that too could get stolen/ hacked, or maybe you forget your password....

4) Government outlawing the currency: Governments want to be able to control currency used in their country to manipulate / manage the economy, so could outlaw it overnight.

5) Conversion / trading costs: The friction in the system can cost a lot;

6) Image issues: Much is in the press about the use of anonymous cash ie bitcoin, to pay for illegal products and services, like drugs etc, over the dark web (accessed via TOR etc). Some businesses and people will not wish to be associated with such negative noise.

Over time most of these could be addressed.

M-Pesa, a currency that is smartphone resident, is widely used in Kenya, showing how the adoption of an electronic currency for wide use in commerce is very practical and works.

Bitcoins are available in down to 8 decimal places.

So you might want to consider buying a few coins to better understand them, but then wait until more stores accept them. I used the Coinbase exchange, as some leading venture capitalists were backers (I was hoping that would provide a measure of added safety), and had to wire money to Estonia, but once set up, it all seemed to go pretty smoothly. The Coinbase app is easy to use. I also have the app CEX which list the prices for bitcoin, Ethereum and Litecoin across multiple exchanges.

If interest in bitcoin (or another cryptocurrency) picks up, then its price may go to the stars, as there are a limited number of coins (21 million) so increased demand and limited supply could drive up the price substantially.

I looked briefly at setting up a bitcoin miner (one USA based company was making $8m a month in 2015, but broke the following year), but the key success factor is the lowest possible cost of electricity, as mining for the coins requires huge amounts of power hungry computing power. The Chinese started offering local "Miners" extremely cheap electricity eg under 3 cents a kilowatt hour, which was under half of what a USA miner could source electricity for, so consequently over half of the bitcoin mining is done in China. It is claimed that the electricity expended on bitcoin mining exceeds the electricity consumption for a small country, so one can wonder about how "green" bitcoin is, especially if much of the electricity comes from things like burning coal (much of Chinas electricity supply).

So there could well be huge growth in this space, and it is something you should seek to better understand, and possibly invest / speculate in..