According to Wikipedia, a cryptocurrency is a digital asset designed to work as a medium of exchange using cryptography to secure the transactions and to control the creation of additional units of the currency.
Well, there are a lot of mixed reactions on whether bitcoins and other alternative cryptocurrencies are scams. This came about after an official communication from the Uganda Central Bank stating whoever deals with them is taking a risk in the financial space. Before i dig into that, i would like to take you through cryptocurrencies with a basis on Bitcoins which takes over the largest share.
BOU Offical Statement
DIGITAL MONEY” is not licenced by the BoU under the Financial Institutions Act, 2004 and is therefore conducting business outside the regulatory purview of the BoU.
Bank of Uganda warns the general public that whoever wishes to invest their hard earned savings in Cryptocurrency forms such as One-coin, Bitcoin, Ripple, Peercoin, Namecoin, Dogecoin, Litecoin, Bytecoin, Primecoin, Blackcoin or any other forms of Digital Currency is taking a risk in the financial space where there is neither investor protection nor regulatory purview. The public is hereby warned that whoever deals with “ONE COIN DIGITAL MONEY” does so at his or her own risk.
Bitcoin became the first decentralised cryptocurrency in 2009. Since then, numerous cryptocurrencies have been created. These are frequently called altcoins, as a blend of bitcoin alternative. Bitcoin and its derivatives use decentralised control as opposed to centralised electronic money/centralised banking systems. The decentralised control is related to the use of bitcoin’s blockchain transaction database in the role of a distributed ledger.
Decentralised cryptocurrency is produced by the entire cryptocurrency system collectively, at a rate which is defined when the system is created and which is publicly known. In centralised banking and economic systems, corporate boards or governments control the supply of currency by printing units of fiat money or demanding additions to digital banking ledgers. In case of decentralised cryptocurrency, companies or governments cannot produce new units, and have not so far provided backing for other firms, banks or corporate entities which hold asset value measured in it. The underlying technical system upon which decentralised cryptocurrencies are based was created by the group or individual known as
The underlying technical system upon which decentralised cryptocurrencies are based was created by the group or individual known as Satoshi Nakamoto.
Cryptocurrencies are used primarily outside existing banking and governmental institutions and exchanged over the Internet. While these alternative, decentralized modes of exchange are in the early stages of development, they have the unique potential to challenge existing systems of currency and payments. As of June 2017 total market capitalization of cryptocurrencies is bigger than 100 billion USD and record high daily volume is larger than 6 billion USD.
Table of Contents
- 1 What is Bitcoin:
- 2 Mixed Reactions On Bitcoins
- 3 Interesting Facts About Bitcoins
- 3.0.1 1. Bitcoin creator, Satoshi Nakamoto, is still a mystery figure
- 3.0.2 2. Bitcoins are limited in number
- 3.0.3 3. It’s impossible to know the sender/receiver details
- 3.0.4 4. Pizza was the first thing (good) purchased using bitcoin
- 3.0.5 5. Bitcoin network is much powerful than supercomputers
- 3.0.6 6. Bitcoin has been sent into outer space
- 3.0.7 7. A bitcoin transfer is irreversible
- 3.0.8 8. The FBI has one of the world’s largest bitcoin wallets
- 3.0.9 9. Losing a bitcoin wallet means losing those bitcoins
- 3.0.10 10. Bitcoin is highly volatile
- 4 Advantages of Bitcoin
- 5 Differences from PayPal:
What is Bitcoin:
- Bitcoin is open source software.
- Bitcoin is a protocol for online payments, similar to PayPal but has several advantages over legacy payment systems for online transactions.
- Bitcoin tokens have currency-like properties, but Bitcoin is not a “currency”. It’s something new. Calling Bitcoin a currency is like calling a PayPal account a “merchant account” simply because you can use it to receive credit card payments. They are conceptually similar because they are used for the same purpose, but they differ significantly in the details.
The vast majority of criticisms against Bitcoin attack the differences between Bitcoin and existing payment systems. However, it is exactly these differences which are driving Bitcoin adoption.
Mixed Reactions On Bitcoins
Of course, there have always been mixed reactions all over the internet. Reading one of the biggest forums, Quora, I came across a number where people exchanged thoughts on cryptocurrencies. Here is what i managed to scrape for you.
According to Adam Cohen in his post in 2011, he stated that Bitcoin is a ludicrously bad idea. It is a scam. It is not a currency. The economic assumptions underpinning the Bitcoin ecosystem are laughable, and ignore hundreds of years of accumulated understanding of how currencies work with each other.
Fortunately, it’s such an obviously flawed system that it will probably never grow to a point where it causes any ill-effects, or even impact, to world economies.
In his other words, he stated the following;
Bitcoin, described most generously, is a system that makes digital transactions more like cash transactions. That’s…fine. The problem is it does this not by offering dollar-denominated digital cash-transfers, but by bootstrapping an entirely new currency. The question to ask is why this would be at all desirable. Maybe you hate the US government or all governments. Maybe you want to avoid bank interchange fees, or perhaps avoid tracking altogether because your payment is for something illegal, or because you’re a particular private person. Or perhaps you just think that the world currency regime is going to collapse and you see Bitcoin as a technological salvation.
No matter what your reasoning, Bitcoin is a ridiculous idea that will not accomplish what you want.
Severe Problem Number 1: Seeding Initial Wealth
When the federal reserve “prints money”, it doesn’t just mail million-dollar checks to random Americans. It does one of two things. It either (a) purchases some other asset [generally US treasury bonds] on the free market, thereby injecting more cash into the system than there had been before, or (b), loans money to a bank, who will then loan it to other people who will then spend it.
Importantly, the people on the other end of those transactions did not just get free money. They either sold an asset for cash, or they borrowed cash that they will eventually repay (with interest).
Bitcoin does not have a central bank capable of printing and lending bitcoins; it has an “algorithm” which through some convoluted mechanism allows bitcoins to be “mined”. Essentially it randomly allocates bitcoins to early adopters. This is a very good system for early adopters (free money!) It is a nonsensical system for a real currency, not to mention being obviously unscalable (what happens when everyone tries to mine bitcoins all day long?). To solve this second problem, the supply of bitcoins is algorithmically limited, which is again good for early adopters. But that brings us to…
Severe Problem Number 2: Built in Deflation
Econ lesson time! Deflation is the phenomenon where cash grows in value relative to everything around it (that is, prices go down). More specifically, deflation occurs when people expect the value of cash to grow in relative value to everything around it, and prices trend down consistently.
Question: if your money is getting predictably more valuable, why would you want to spend it? Answer: marginally speaking, you wouldn’t.
The supply of bitcoins is programmed to grow at a known but decreasing rate over time, topping out relatively quickly at about 21M. The graph looks like this:
Known rate — OK, I’m with you, predictable inflation, not necessarily desirable from an economic standpoint, but I’ll go with it — but decreasing rate? If you were designing a currency that was going to topple the world order, wouldn’t you want it to look like this?
Or at least have constant rate of growth? Yes, of course you would, because that’s the only way to actually accommodate more people using it.
But Bitcoin is not designed to be a functioning currency, it’s designed to enrich early adopters. Again, that is why it is a scam. Period.
As a quick thought experiment, let’s say demand for bitcoins grew as more people found out about them. Well, you’d expect the price of Bitcoin in dollars to grow rapidly. Now assume I own one bitcoin. I also have a dollar bill. I would like to purchase a Pepsi. Which one of those will I spend? Obviously the devaluing dollar gets spent before the skyrocketing bitcoin.
In the best case scenario [the one where it becomes popular] the limited supply of bitcoins will cause crippling deflation, drying up most Bitcoin-denominated commerce save whatever speculative buying and selling happens on exchanges. Some new world order. All that transparency and all those low interchange fees aren’t going to do you much good if you don’t ever want to spend these things and no one wants to give them to you anyway.
Severe Problem Number 3: Lack of Convertibility
There is a common misconception among people that there is such a thing as an inherent value of money. There is no such thing. Paper assets are literally only valuable to the extent they can be exchanged for other paper assets. A dollar is worth a certain number of euro cents. A euro is worth a certain number of yen. A yen is worth a certain number of dollars. A dollar can be put in a bank for a certificate of deposit, which can then be exchanged for a dollar. It can be turned into a cashier’s check or a personal check, and then converted back to cash or deposited. It can be converted to traveler’s checks which can then be converted to yen on your vacation. Even if you spend your money and buy a sandwich, the sandwich stop only took that money because it was convertible to something else, such as a payroll check and then a bank account. Paper <–> Paper <–> Paper. All the same, all different. It’s a beautiful circular equilibrium. Envision a tee-pee. Paper assets are the poles; they fall over by themselves, but leaning against each other they form an edifice.
The critical point here is that exchange rates might change, but they never go away completely. The term in economics is “convertibility”. For Bitcoin to work as a currency, it would have to act as a predictable store of value, which means it needs to be easily convertible to all other stores of value depending on an individual’s needs or wants. It needs to be a part of that tee-pee. It isn’t.
The problem here is that because Bitcoin is completely decentralised, no one is completely invested in the long-term success of the system. No one is literally making the market, saying “no matter what happens, I’ll buy Bitcoins from you at some price”. I understand that there are “exchanges” floating around. Their commitment to this market is (in my opinion) not credible. Anyone and everyone can just pick up their ball and leave.
As a result, my ability to turn a bitcoin into a dollar or a euro or a yen is no greater than my ability to sell my laptop on eBay. I can probably do it, but that doesn’t mean I’m going to start measuring my bank account in MacBook Pros, because one day I might not be able to find a buyer, and then what?
Because of this, Bitcoin is not really a currency, it’s an asset [and a particularly useless one at that]. It is being marketed as a currency to appeal to people who are crazy, idealistic, or afraid, and it is a scam.
Severe Problem Number 4: When Something Goes Wrong, It Will Die
In the early days of the great depression, some Americans started to worry that if their bank closed, they would lose all of their money. They then tried to take money out of banks all at the same time, which actually caused some banks to fail. That made even more people nervous, which caused even more banks to fail. That’s called a bank run, and for obvious reasons we want to avoid them.
After that happened, the US government started explicitly guaranteeing savings deposits (as well as implicitly guaranteeing other forms of financing, see Bush, Obama et al, “Bailouts”, 2008). Despite everyone’s frustration with this state of affairs, it turns out to be vastly preferable to a complete collapse of our banking system, so it continues on.
Now, fast forward five years. The Bitcoin economy is roaring! Everybody owns these things. Life is great. But then…something goes wrong. Maybe it’s a slight hardware glitch. Maybe there’s a rogue node somewhere in the system that causes transaction delays. Maybe some people were storing their bitcoins on Amazon Web Services and they lost it when it crashed again. It doesn’t really matter what: something will eventually go wrong, and Bitcoin will be tested.
Will it pass this test? People will get nervous. Some will panic. Few will run for the exits. The exchange rates will dip. Others will get nervous. Some will realise they never really had faith in the system to begin with. That will make them really nervous. Who is going to step in to backstop this system?
More importantly, is there anyone that even CAN do that? When a bank collapses, the federal reserve can honor deposits by quite literally printing money and giving people their cash back if need be. That slight increase in expected inflation (maybe) is a small price to pay for avoiding a financial meltdown. In the Bitcoin economy, that’s literally impossible. It’s decentralized; it’s a published algorithm. No one can change it, and even if they could, it’s no one’s job to do so. Anyone with a large stake in Bitcoin will be too busy trying to get their own money out to worry about systemic risk.
Bitcoin (and really, any e-currency) is inherently unstable. And with currency, stability is everything.
So, do I think Bitcoin is a good idea? The cryptography system seems to have technical merit although I’m not a cryptologist. If it were thoughtfully integrated into a legitimate banking product it might be a good idea. But this is not a good idea, this is a scam. Someone out there is trying to become very rich off of this system, and anyone who participates will be playing hot-potato until the inevitable collapse.
In a different way, according to Cody Shirk, In his statement, he mentions that, I Owned Over $500,000 Worth of Bitcoin. Here is What I Learned. In 2012 I bought $1,000 worth of Bitcoin at an average price of $5. Today, those 200 Bitcoins are worth about $360,000. That’s a lot of money and a tremendous return on my original investment. It’s by far the best return of any investment I’ve ever made.
When I made that first investment, I barely told anyone. I wasn’t keeping a secret or anything, it’s just that at the time Bitcoin was virtually unknown. And if you tried to explain what the cryptocurrency was, you’d just get weird looks.
“So, you’re telling me you spent $1,000 on a currency that is held in a computer and isn’t recognized by any government?” That was the normal question I got when I rarely brought up the idea of using Bitcoin.
“Well, yeah. But, it’s much more than that. You see, Bitcoin is decentralized, so it can’t be manipulated by a government. It’s kind of like gold, but you can transfer it over the internet,” I’d tell people.
“So it’s gold on the internet?” They’d ask.
“Well, kind of. But, really the most important thing is the Blockchain. That’s the future. Bitcoin just uses the Blockchain,” I’d respond.
At this point, I’d get a blank stare. So, then I’d move the conversation onto a different topic.
I was very excited about Bitcoin in 2012. I knew it would have a bright future.
Then, in 2013 I started to trade Bitcoin. When I say “trade,” it’s not like I was trading baseball cards for bubble gum. I was trading Bitcoin on a cryptocurrency brokerage based out of a foreign country.
I did very well. I almost doubled my position.
Today I would have well over $500,000 worth of Bitcoin.
Yes, I would have had.
Remember how I told you that I was trading Bitcoin on a foreign brokerage? Well the US government didn’t like that. Something about me being a US citizen trading cryptocurrencies on a foreign trading platform sounded weird to them.
The brokerage received a ‘notice’ to cease doing business with US citizens. With that threat, the brokerage froze my account which prevented me from making any trades. Then, the brokerage went under.
Poof! Gone. I was devastated.
Keep in mind, this happened when the price of Bitcoin was still under $100. So, I lost a serious amount of money, but it wasn’t anywhere near what it would have been today.
At the time, I just chalked it up as a loss. In reality, I only lost my original $1,000. Little did I know that the price of Bitcoin would soar to over $1,800 and my potential holdings would have been worth over half a million dollars today.
So here is what I learned:
#1 Bitcoin is exciting. However, the Blockchain is even more interesting.
#2 Never put all of your assets into one account. That applies to regular fiat currencies, cryptocurrencies, and any other type of asset you hold. You must diversify where you hold your wealth.
#3 Never underestimate your vulnerability to an outside force. This doesn’t mean you should live in fear, but just be aware that you’re never 100% safe.
#4 Bitcoin is an excellent answer to fiat currencies that are highly controlled and manipulated. But gold, land, art, and collectibles are also great options. Bitcoin is NOT the ultimate solution.
#5 The Blockchain (which Bitcoin is built upon) will have a huge impact in the future. Many companies are developing technologies which utilize the Blockchain, so it’s important to learn about how it works now.
Clearly, I made a lot of mistakes.
However, hindsight is 20/20 and I would have never guessed what that original $1,000 investment could have turned into.
Despite this painful learning experience, there is one thing that I can take away more than anything:
Be open to new ideas and changes.
When I first invested in Bitcoin, a large majority of people assumed Bitcoin was just a big scam. I’d attribute this assumption due to lack of understanding.
Learning about Bitcoin and how the Blockchain works was very difficult in the beginning. But, if you take the time to look at the facts with an open mind, you’ll be amazed.
To Read: How Secure Is The VPN You’re Using?
Interesting Facts About Bitcoins
According to Fossbytes, With the exponential rise in the price of bitcoin, this cryptocurrency is generating tons of interest among people. By now, many people have heard of bitcoin and it’s gaining acceptance. So, in that line, here are some interesting bitcoin facts that you must know. Give them a read and share it with your friends and family:
1. Bitcoin creator, Satoshi Nakamoto, is still a mystery figure
Satoshi Nakamoto is the name used by the person who designed bitcoin but there’s still doubt about the real identity. Over the years, many people have been linked with the same, including Nick Szabo, Dorian Nakamoto, Hal Finney, Craig Steven Wright, and others. Some people consider Nakamoto might be a team of people. As of May 2017, Nakamoto is believed to own about 1 million bitcoins with a worth of more than $2 billion.
2. Bitcoins are limited in number
You might’ve heard about bitcoin mining, the process using which bitcoins are generated digitally. So, does this mean there could be an infinite number of bitcoins? That’s not the case. A pre-defined schedule has limited the number of bitcoins. They are slowly approaching a total of 21 million and the mining process is getting harder with each passing day.
3. It’s impossible to know the sender/receiver details
Bitcoin addresses are a long string of 34 alphanumeric characters. Using that address, it’s impossible to tell the recipient. Probably, this is the reason why most of the illegal transactions are carried out using bitcoins. To protect the privacy even further, most wallet programs assign the users a portfolio ID, which is also used as a username.
4. Pizza was the first thing (good) purchased using bitcoin
After the first bitcoin transaction took place between Satoshi and Hal Finney in 2009, the first recorded purchase was made for buying pizza worth $25. To do so, 10,000 bitcoins were spent.
5. Bitcoin network is much powerful than supercomputers
According to the experts, Bitcoin networks has a computing power of 2,046,364 Pflop/s. This is my personal favorite fact about bitcoin. If you go ahead and combine the computing power of the 500 most powerful supercomputers, you’ll get a combined fever of 274 Pflop/s.
6. Bitcoin has been sent into outer space
In 2016, Genesis Mining, a bitcoin cloud mining provider, set bitcoin to space. This was done using a 3D bitcoin model and a bitcoin paper wallet, which were tied to a weather balloon. The whole journey was recorded using a GoPro focused on the model and wallet. Once the weather balloon reached a height of 20 kilometers, the ground team made the transaction to paper wallet. Another transfer was made to the wallet once it achieved the maximum possible altitude of 34 kms.
7. A bitcoin transfer is irreversible
Transaction of bitcoin, a preferred currency involved in the transaction of illegal goods, can not be reversed. Unlike popular platforms like PayPal, you don’t get second chances while making a transaction.
8. The FBI has one of the world’s largest bitcoin wallets
When the FBI shut down the operations of the Silk Road, it also seized the owner’s assets. In that process, the FBI also became one of the world’s wealthiest bitcoin owners, A report from the Wired magazine claims that the FBI controls as much as $120 million.
9. Losing a bitcoin wallet means losing those bitcoins
Just like you save your money in your online bank accounts, your bitcoins are saved in bitcoin wallet. It’s a highly secure storage wallet. But, if you lose it, your bitcoins are lost forever. It’s also impossible for any person to use your bitcoins from your wallet until you give it to them. Also, if you have a bitcoin address, you can see the number of bitcoins the owner has.
10. Bitcoin is highly volatile
Since its launch, in past one decade bitcoin has become one of the most important phenomenon in the digital world. Its price has touched thousands of dollars. However, the price keeps fluctuating and it remains volatile. Predictions have also been made that bitcoin might fall in the future if it follows the current path. This is because a small number of people, about 10, control the majority of bitcoin. This defeats the entire decentralized nature of currency.
So, did you find these bitcoin facts interesting? Don’t forget to share your views and take part in the discussion.
Advantages of Bitcoin
Bitcoin is very similar to PayPal, but with several advantages and differences.
- Bitcoin has lower transaction fees (zero)
- Bitcoin does not subject merchants to chargeback risk.
- Bitcoin has stronger privacy protections than PayPal. Accounts are numbered, but have no personally identifiable information, similar to a Swiss numbered account.
- Your bitcoin account cannot be frozen or seized. PayPal often freezes accounts used to sell virtual goods and stored value cards because of the high fraud and chargeback risks. Bitcoin is more suited for these applications.
- Bitcoin transactions do not incur currency exchange fees. Capital controls in many countries and central bank fixed exchange rates which are below black market exchange rates create an incentive for bitcoin adoption. Bitcoin serves as a digital alternative to existing hawala networks.
- Not everyone in the world has access to traditional banking services, but everyone in world who has a cell phone can use Bitcoin.
Differences from PayPal:
- Bitcoin is decentralised.
- Bitcoin is floated and not tied to the dollar. PayPal is pegged to the dollar (like the Yuan). Bitcoin exchange rates are established by markets.
- PayPal’s behaviour is backed by a contractual relationship with a corporation. The Bitcoin protocol’s behaviour is backed military grade cryptography, not by contracts.
- Bitcoin’s design reduces the counter party risk inherent in legacy payment systems such as eGold and PayPal.
Many feel that the level of privacy that bitcoin offers is immoral or dangerous. Regardless, there is an extremely large demand for the superior banking privacy that bitcoin offers.
The weight of the advantages of bitcoin make it extremely appealing to a diverse range of people for a diverse range of transactions.
Most Arguments Against Bitcoin are Grounded in Misunderstanding:
- Bitcoin is not a ponzi scheme. Bitcoin does not pay interest on deposits. Adam seems to be using a “very unique definition” of ponzi scheme, which includes any asset which is appreciating in value. “Facebook stock is a ponzi scheme because the people who bought stock first made more money!”
- Adam describes a bank run scenario on Bitcoin. Bitcoin does not have a bank or any counterparty.
Factors Driving Bitcoin Adoption
- Bitcoin only needs to be better than alternative payment systems for specific applications.
- Bitcoin will be adopted where it has advantages over alternative payment systems
- PayPal became the dominant payment processor for eBay but has not seen much success at displacing credit cards for general online payments. PayPal adoption for instance was driven by the need of eBay merchants to transact payments digitally. PayPal had a niche to fill because most eBay merchants did not have the transaction volume required for a traditional merchant account.
- When Visa, Mastercard and Paypal froze the accounts of Wikilieaks, they were able to raise millions in donations through Bitcoin. Bitcoin is rapidly filling the cracks between legacy internet payment systems.
- Bitcoin will be most successful in those niches (and geographic regions) where there are not already satisfactory alternatives.
- People do not use Bitcoin because of its flaws, people use Bitcoin because of what it is good for.
How To Spend Your Bitcoins
Currently, there are numerous ways available to pay for something with cryptocurrencies, but they are not ubiquitous.
There are many, many ways to make your Bitcoins spendable today. You can exchange them for fiat money on an online exchange or with other users on a service such as LocalBitcoins and you can purchase products online on websites which accept Bitcoin directly or via the services of a payment processor like BitPay. You can also conduct purchases through plain old forum dealings and there have even been attempts to create point-of-sale terminals for merchants to accept Bitcoins in brick-and-mortar shops.
Some of these solutions are more popular and convenient than others, but none of them can be called universal. You still can’t just waltz into the first shop you see and pay with Bitcoins willy-nilly.
Future Of Bitcoins
Will spending cryptos become easier any time soon?
It definitely will, as progress keeps advancing at a rapid pace.
One of the most recent innovations in cryptocurrency payments is plastic cards. An example of this is Monaco, which is currently nearing the end of its ICO campaign.
Monaco works just like regular Visa cards, and you can use it at any place that has a terminal for bank cards. The difference is that you can top up the balance of your Monaco card with Bitcoin or Ethereum and pay with that.
The system automatically takes care of exchanging your BTC or ETH coins into the appropriate amount of fiat currency at a perfect interbank exchange rate.
You don’t have to do anything other than deposit your cryptocurrency to your Monaco balance. Whenever you use it to pay for something at a store, the service will do everything else, from withdrawing the needed amount of coins from your balance, exchanging it into fiat, to sending the resulting money to the merchant.
If Monaco succeeds in developing and delivering their product to the markets, it might mean a revolution for Bitcoin and altcoin payments, as they will become easily spendable at any place that accepts Visa cards, online or physical. If you’re interested in the success of this project, feel free to visit its ICO page for more info.
I hope this article has been of help to you. Credit goes to Wikipedia, Bank Of Uganda, Quora Forum, Fossbytes and Coin Telegraph as they have been a great source of reference in coming up with this article. Let me know what you think in the comment box below.