Welcome to Brave New Coin’s Bitcoin 101. First-timers, we’d like to introduce you to the wonderful world of cryptocurrency; where payment is frictionless, free and instantaneous, and pizza could cost you $5 million dollars (more on that later). Sections 1-6 will cover the essential things you need to know about Bitcoin.
To our experienced readers, welcome back. Sections 7-10 contain some more advanced ideas and fun trivia. Read up, get to know Bitcoin better, and discover how cryptocurrency could change the world. Let’s get started.
Where’s The Intrinsic Value?
People complain that there is no way to calculate Bitcoin’s intrinsic value. Unlike gold or oil which have well defined, tangible values, bitcoin’s price just seems to be whatever someone else is willing to pay. How can we figure out how much a bitcoin is worth?
It (bitcoin) equals the value of a single slot in a finite sized public cryptographic ledger through which value can move. The total Bitcoin ledger has value corresponding to the volume and velocity of transactions that will run through it in the future; by extension, each slot in the ledger has fractional value determined by the total number of slots (which, in Bitcoin’s case, are limited to 11 million today and 21 million ever).
Marc Andreessen, a famous venture capitalist and bitcoin evangelist, explains how bitcoin can have an intrinsic value:
Taxation & Legal Hurdles
Bitcoin provides a serious challenge for regulators, presenting a whole new set of unexpected opportunities and problems. The current regulatory situation is uncertain, with different governments taking different approaches to bitcoin. In order for bitcoin to reach widespread use, there will need to be clear guidelines on how people transact and use bitcoin. But getting this right in a way which will not stifle innovation will not be an easy task.
Globally, countries like Israel, Canada and the US are maintaining open positions towards the currency, whilst China, Russia and India are all taking hostile stances, and even “banning” its use. Taxation offices around the world are issuing guidance on how investors, miners and people being paid in bitcoin should expect to be taxed. That said, these early recommendations and policies will adapt and change in the future as regulators, businesses and governments come to better understand Bitcoin and how it works.
Whilst Bitcoin is a fascinating disruptive technology, it does have its shortcomings:
Proof Of Work: Bitcoin’s method of verifying transactions, has been criticised for the hardware arms race it has created and the energy consumption it needs to maintain the Bitcoin network. An alternative, known as Proof-of-Stake, has been proposed which addresses some of these problems.
Limited Supply/No inflation: There is concern about the economic effects of bitcoin reaching its final supply and the detrimental effect of removing inflation. Whilst banks can print money irresponsibly; quantitative easing, when used properly, is a useful tool for maintaining a healthy economy.
Confirmation Times: 10 minute confirmation times can become clumsy and cumbersome for merchants who want to transact quickly. It also slows down the time it takes for bitcoins to securely be sent between addresses, making it less liquid. Luckily, payment processors such as Coinbase can conduct these transactions “off the blockchain”, insuring merchants receive payments securely and instantly.
SHA 256: Some worry about the long term security of bitcoin’s hashing algorithm, SHA256. If there was a way to “break” SHA256, bitcoin would encounter serious problems. Multiple algorithm altcoins have been created to address this problem.
Blockchain “Bloating”: Like anything else digital, the blockchain is a file. As more and more transaction blocks are added to it, the file grows in size. The blockchain is already a few gigabytes in size and growing. This presents a scaling problem, making full bitcoin clients, which download the entire blockchain, difficult to run and even more difficult to create.
Bitcoin may not ultimately become the cryptocurrency that reaches mainstream use, in the same way that Facebook came to dominate its predecessors such as Myspace and Bebo. A future cryptocurrency may be created one day that reaches higher levels of popularity by improving on Bitcoins strengths and addressing its weaknesses. That said, many think Bitcoin’s “network effect” already guarantees it a place in our future.