Monthly Archives: November 2013

Bitcoin: Rebuilding the Financial System

First, let’s start by describing the current monetary system, 95% of all the currency in circulation including the world reserve currency (US dollar) are Government Issue currencies. That means, in today’s world, the quantity of money and the price of money (the interest rate) are determined by a bureaucrat, not by supply and demand like in a ‘’free market’’. This monopoly of currencies issue started in the middle of 19th century in Europe (Bank Charter Act 1844) and in 1913 in United States by the creation of the Federal Reserve (the American central bank). This monopoly is sustained by a panel of laws including the famous ‘’legal tender’’ that forces all the individuals to use only government currencies with no other choice.

By these days, at least 90% of government currencies are scriptural money, also called ‘’digital money’’ This digital money is kept in the commercial banks accounts or network, and  flows as digits in the database on a bank’s computer server. This is not dramatic in itself, because banking services like (paying bills online, transferring money, credit card…) are very useful services. The issue is that, in order for individuals to have access to those basics banking services they need to deal with financial institutions that will act as trustees.

When you deposit your pay cheque in your chequing account you are lending your money to the bank, so legally you don’t own it anymore; it’s your bank who owns it. When you process a transaction, let’s say you buy an Item online; it is your bank that is processing the transaction for you, and in exchange for this service the bank needs to access your personal information. Each time you use the banking services you are giving up your identity and your anonymity. The current financial system, forces us to deal with third parties (financial institution) each time we wish to access to ‘’basic banking services’’. Those financial institutions have formed a cartel that have made the cost of banking services extremely high. Customers must pay fees to banks every time they use the banking network to transfer money. The result of this system is that more than 90% of the world population doesn’t t have access to credit card, and more than the half doesn’t have access to bank accounts. The current financial system is excluding a very big portion of the world population from accessing the international trade.

Let’s now explain how the Bitcoin works and how he makes things different. Bitcoin is a distributed, peer-to-peer digital currency that functions without the intermediation of any central authority. The concept was introduced in a 2008 paper by a pseudonymous developer known as “Satoshi Nakamoto”. (Wikipedia).  At the moment the price of one Bitcoin is approximately 339 $, less than one year ago the price was approximately 14 $ per Bitcoin, this is a return on investment of more than 2000% for an 11 months investment.

The Bitcoins are created through the ‘’mining process’’. Mining means providing computer power to solve complex algorithms. The reward for the miners is a block of 25 Bitcoins. The total number of Bitcoins that will be issued is limited to 21million Bitcoin; there is currently 12 million Bitcoin in circulation (already created). Whereas there is currently 12 trillion US dollar in circulation and the supply could be infinite. Where the US dollar is an inflationary currency (the US dollar has lost more than 90% of its value since the creation of the FED), the Bitcoin is a deflationary currency.

OST3“Where did the fiat money come from? It came – and this is the most important single thing to know about modern banking – it came out of thin air.” –Murray Rothbard

The Bitcoins, are stored in a personal wallet, a wallet is a digital portfolio that has a public key and a private key. The public key is your Bitcoin address or identifier. The private key is a secret number that allows Bitcoin to be spent. Everyone has the possibility to own more than 100 million different addresses.

All the Bitcoin transactions are visible and are recorded in a public ledger (a ledger in accounting, is a book that you cannot edit once you have written in it) called the Blockchain. This ledger is updated by the Bitcoin users themselves, without any third party or fiduciary. It is completely decentralized, peer to peer system. The Blockchain is like an asset register that permits to see and track all Bitcoins in circulation.

The ownership of Bitcoin remains totally anonymous through cryptography. One of the early Bitcoin developer said: “Even though the transactions are public, the individuals tied to the transactions are anonymous. This is similar to how the stock exchange makes stock values public without disclosing individual owners.”

Current financial system is the complete opposite, the banks act as third parties each time we use their network to make transactions. The ledgers are not public or updated by the users themselves, otherwise they are private, controlled and managed by the banks. The current financial system is entirely centralized.

Thanks to the state’s privilege of being the unique providers of banking services. Banks have made the cost of transactions extremely expensive. The Bitcoin since it is a decentralized peer to peer currency; there is no third party that we have to pay, in order to access to the banking network. Therefore the Bitcoin transactions are almost or totally free.  The equivalent of a 6 million dollar worth of Bitcoin got transferred from a wallet in the US to a wallet in the UK. The fees for this transaction were 6 cents. PayPal for exactly the same transaction would have charged more than 100,000$.

Many experts think that the impact of Bitcoin and crypto currencies in general, on the current financial system, will be very similar to the impact of MP3 introduction and the peer to peer media sharing networks on the music industry. Bitcoin is already catching the attention of governments and banks. Countries like China and Russia encourage the usage and the acceptance of Bitcoin, as a method to avoid the US dollar and its chronic inflation. Germany and Canada have already recognized Bitcoin as a ‘’private money’’.

A Bitcoin Mining Farm :

 Mining-rig-extraordinaire-the-Trenton-BPX6806-mod

References:

 

Bitcoin blog about to go live

In the past few weeks the bitcoin has rallied to all time highs and broken many records. It’s getting attention from many people, and is now more than ever seen as a potentially useful instrument.

My perception is that Bitcoin’s power lies way beyond it’s use as a currency, rather it is a decentralized sequential register of trust. I will go into more details as to my understanding of bitcoin in this blog.

I’ve been busy the last couple weeks mining and investing left and right, i have had no time to structure the blog. I’d like to welcome a new Author and contributor: slimus.

He’ll be offering his opinion, knowledge and advanced financial skills on many aspects of the Bitcoin phenomenon.