Legal matters, business strategy, and life perspectives from the mind of a non-attorney.
Bitcoin. It’s all the craze.
Pretty easy to understand why… People are making MONEY. Not stacks – no, no – heaps and piles and truckloads of money. We’re talking life-changing, legacy-altering, never-have-to-work-again-if-you-don’t-screw-it-up kind of money.
But how? I mean… What is it? And… Are we all stupid for not jumping in?
These were all questions that my family was asking as we hovered over our meals on The Night Before Christmas.
I sort of knew what it was: This Virtual Currency thing that people somehow “mine” to acquire. I knew that “mining” it took a lot of CPU horsepower. I knew that some merchants accepted Bitcoin as a “legitimate” means of purchasing stuff. And finally, I understood that it was traded on Exchanges, just like any other stock/bond/currency.
Basically, I didn’t have much to offer that the #fam didn’t already know, so instead of jumping into the conversation… I kept quiet and let somebody else struggle through the difficult web of questions that inevitably accompany a Bitcoin conversation.
The one guy that had a legitimate background in finance and currently spends his days working with – arguably – very smart business minds came up with: nothing – zip – zilch – nada.
I blew my shot to look smart in front of the crew.
Albert, you wise son-of-a-b****.
I don’t have any stats to support this, but my feeling is that maybe .1% of our population (300,000 Americans, for example) have an extremely intimate knowledge of everything Bitcoin. Certainly, many others “get it”. Maybe they can’t explain it to a child, but they know what’s going on. Well enough, at least, to have an opinion on whether or not they would ever invest in it. Then, there’s the rest of us. We’ve heard of it and we have no freaking clue what is going on.
If you read my first blog, you know THAT is why I write. To explain complex legal and business matters in a way that people can actually understand.
So, here is my shot at redemption.
What is Bitcoin?
It’s money. But you can’t put it in your wallet. You can’t hold it.
When did Bitcoin start?
Who started Bitcoin?
An alias named: Satoshi Nakamoto. This alias could represent a single person, or – more likely – a small group of people. Regardless, the true creator of Bitcoin has never come forward.
How did Bitcoin start?
In the beginning, the person – or small group of people – who created Bitcoin had to convince other people that this “thing” was worth something. A trade had to happen.
Allow me to repeat: they had to convince someone that a Bitcoin – this thing that you cannot see or feel or smell or taste or hear – was worth money.
How much money? In the beginning, one Bitcoin was worth about $0.00076 USD
In other words, 1,309.03 Bitcoin = $1.00 USD
Basically worthless, but still, it had to start somewhere.
Why did the first – and subsequent – trades happen?
Ideas are worth something. Ideas have potential. This “Bitcoin” idea promised – and still promises – the following:
- Globalization. You don’t have to worry about crossing borders. Bitcoin is accepted anywhere.
- Decentralization. It’s a fancy way of saying that there is no government authority – or any authority, really – that regulates Bitcoin. Nobody will “print” or “create” more of it on a whim, and nobody has the authority to declare it invalid.
- Accessibility. Payments can be made at any time, to anyone, including on “holidays” when banks are traditionally closed.
- Transparency. Bitcoin users will know if extra fees – no matter how miniscule – are being charged by merchants when they pay with Bitcoin.
- Privacy. Payments can be made without personal information being shared.
- Low Fees. The cost to process a Bitcoin transaction is currently much lower than the cost to process a credit card transaction.
The first users of Bitcoin were believers in that idea. They were willing to trade actual money – something that is universally accepted – for Bitcoin – something that would only be accepted among their own tiny network of users. They believed that as the idea spread, more people would be interested in using it. Eventually, real demand would be created and the cost of Bitcoin would rise.
What is Bitcoin “mining”?
It is HIGHLY complex and, to be honest, way beyond my capacity for understanding. It involves computers, algorithms, and really really smart people.
I will not attempt to describe the detail that goes into Bitcoin “mining”. Why? 1) I will fail miserably 2) It isn’t important. Here is what you need to know:
Bitcoin “mining” is the process that verifies a Bitcoin transaction is valid.
To best explain it, allow me to go back to the beginning again. We don’t know for certain, but let’s imagine it went something like this:
In the beginning, Satoshi Nakamoto had some Bitcoin. Let’s say it was 1,000 Bitcoin.
Satoshi sold some Bitcoin to another person. Let’s say it was 100 Bitcoin for roughly $0.08 USD.
Now, this is when “mining” happens. After a transaction is accepted, it must be verified. Computers talk to each other… Smart people do smart things… 10 minutes later… Approved!
What is the incentive for Bitcoin “mining”?
People that verify Bitcoin transactions are called “Miners”, and Bitcoin transactions are grouped together into a “block”. “Miners” are awarded Bitcoin for making sure the transaction data inside a “block” is legit.
In the beginning, “mining” a “block” of transaction data came with a reward of 50 Bitcoin.
It’s safe to assume that Satoshi was also the first “miner”. So, following the first transaction, the breakdown of Bitcoin looked something like this:
1st Investor: 10 Bitcoin
Satoshi Nakamoto: 990 owned + 50 mined = 1,040 Bitcoin
Total in Circulation: 1,050 Bitcoin
The reward for verifying transactions decreases over time. Every 4 years, the reward is cut in half.
The reward has gone from 50 -> 25 -> the current reward of 12.5 Bitcoin per “block”. Rewards will be cut to 6.25 Bitcoin per “block” in June of 2020.
As more and more users join the Bitcoin network, the transactions become increasingly difficult to verify. More difficult algorithms = more powerful computers = more energy consumption = higher costs for miners.
To tie that point together: As time passes, the benefit is going down and costs are going up for Bitcoin “miners”.
How many Bitcoin are there now?
As of the time of this writing, there are roughly 17 million Bitcoin in circulation. The maximum capacity of Bitcoin is 21 million. Once 21 million are in circulation, “miners” will no longer be awarded new Bitcoin in exchange for verifying transactions.
Most estimates indicate that all 21 million Bitcoin will be in circulation by the year 2140. At that point, the reward will be .00000042 Bitcoin / Block “mined”. Again, the current reward is 12.5 Bitcoin / Block “mined”.
Err… will “miners” still do the work to verify transactions if there is no incentive?
Nope. They will not.
At some point, the cost (primarily energy consumption by high-powered computers) of “mining” Bitcoins will outweigh the actual reward, and it will no longer be profitable to “mine”.
At this time – or much sooner – “miners” will start charging transaction fees to Bitcoin users who want to buy something with their Bitcoins.
The business that is Bitcoin “mining” – while HIGHLY profitable now – will likely become one of razor-thin profit margins at some point in the future. Small margins may be palatable, however, if millions of transactions are occurring daily.
What is one Bitcoin worth?
In January of 2011; about 7 years ago, one Bitcoin cost $0.35 USD.
In January of 2014; about 4 years ago, one Bitcoin cost $881.66 USD.
In January of 2017; about 1 year ago, one Bitcoin cost $985.56 USD.
As of January 5th, 2018 at 9:00 am, one Bitcoin costs $15,188.70 USD.
That’s over 4,000,000% growth in 7 years.
Straight facts homie. I’ll leave all the hot takes to the so-called “experts”. Show us some love if my shot at redemption was a success.
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