Bitcoin – Gold With Wings?

Two points to make re the following article.  One, is that neither the author, Rudy Fritsch, nor the Gold Standard Institute International, offer it as investment advice.  We are NOT investment advisors.  All the usual precautions should be taken when investing – in anything.

Gold is different; Gold is what you hold when you are not investing; especially when you are not investing in dodgy investments like government debt paper.

Two, is that though the Blockchain technology that underpins Bitcoin is a quantum leap with diverse and far-ranging applications, the Institute reserves judgement on Bitcoin.

I have published the article because, though it is not about money, it is an interesting article in a related area.

PB May ‘17

There is a lot of talk about crypto currencies these days; especially as the insane Nirp and its bedmate the War on Cash gains traction. To get a handle on all this, and to see where cryptos may be heading, we need to take a close look at the whole Bitcoin ‘bubble’… and what if anything is behind it.

Is Bitcoin simply a twenty-first century ‘Tulip Mania’… or is it something more? In simple terms what, if anything, is behind or ‘backing’ Bitcoin? More generally, what is behind the whole Crypto currency phenomenon?

The history of Bitcoin is telling; from humble beginnings and a very low valuation (price in USD) of less than $0.10 per Bitcoin in 2010… Bitcoin then rose to around $12.00 by 2012. Early holders made a USD fortune. But things did not stop there; by 2013, Bitcoin valuation soared to over $100.00… Today Bitcoin trades near $1,500.00.

So what’s the deal? Is it simply hype, hysteria, madness of crowds… or is it something more? After all, even tulip bulbs have some (reasonable) market value; the tulip mania was built on this residual value. So, what value does Bitcoin have? To understand this, we need to understand the fundamental principle that underlies Bitcoin… and indeed underlies the whole crypto phenomenon.

The principle is called Block Chain.  What on Earth is the meaning of Block Chain, you may ask? The answer shows simplicity and genius. Just like the Internet itself is a phenomenon of distributed computing and distributed responsibility/authority, so is block chain. Just as the Internet was designed to resist shutdown and was designed without controlling authority, so is block chain designed.

Compare the interned with its distributed nodes to broadcast stations; a broadcast station is run by one owner, one authority… and the owner has control of what is broadcast, and what is not. Indeed, one owner may control all of the few existent broadcast stations; thus controlling all broadcasts. This is close to the situation of mainstream media today.

By contrast, the Interned has millions of ‘broadcasters’, each individually owned, with each owner having the choice of what to broadcast or not. Thus the internet is a wonderful tool for overcoming information tyranny.

Think of any Fiat currency; like Dollar, or Euro, whatever; all these currencies are controlled by Banks of Issue; that is, by central banks. So authority, control over the currency, resides with the central banks. Think of your bank account; your bank has a book of accounts, with various ledgers, and if you have any deposits with your bank, the details reside in that ledger.

If you have a loan, same deal; the details are recorded on the bank’s ledger. So with all Fiat transactions; the details lie on some bank’s ledger, in one spot under one authority. This system is at the very heart of tyranny; he who controls the world’s money controls the world’s economy.

The Fiat system is authoritarian, top-down, subject to abuse and to hacking. When outlaw Jessie James was interviewed and was asked ‘why do you rob banks’ he answered ‘because that’s where the money is’. But what if instead of money being held in a few banks… like information is centralized in a few broadcast stations… it was distributed over thousands, no millions of tiny ‘safes’?

Suddenly, there is no bank worth robbing. There is no means of central control, no opportunity for one owner to control a few banks. Money is no longer concentrated, but is highly distributed; just as information on the block chain is no longer concentrated, is no longer subject to central control. Information Nirvana!

This is what lies behind Bitcoin and cryptos in general; the block chain that substitutes for the bank’s ledger. Instead of one central ledger, each ‘node’ on the block chain network carries a copy; the monopolistic bank ledger is replace by thousands of distributed ledgers, on thousands of independent computers… and information about deposits, loans, transactions is duplicated thousands of times.

The term ‘block’ refers to one ‘chunk’ of data; for example, if you deposit some money into Bitcoin (buy Bitcoin), a bit of data is generated; if you transfer Bitcoin to someone else, another bit of data is generated; and so on for all trades. Then, every few minutes, all the data is back referenced to existing data; from which account the coin was transferred, to which account it was transferred, etc. All data in the new ‘block’ is verified, referenced to previous data, the existent data; and this is done simultaneously by ALL the computers in the network… thus the new data block is ‘chained’ to the old.

The block chain system is essentially un-hackable; 51% of all the thousands of duplicate databases would have to be modified in the same way at the same time, before the next ‘block’ of data is processed. By contrast, hacking a central database is possible, and lucrative; like breaking into a bank with mucho money is possible and profitable. Trying to break into millions of tiny safes is a losing proposition.

This is the true value behind Bitcoin, the block chain technology. Block chain, the distributed, un-hackable, uncontrollable method of handling information. It matters not whether the information is ‘monetary’ like Bitcoin, or not. In the crypto world, there is a broad division between ‘crypto currencies’ that are intended to be digital, un-hackable techniques of transferring and storing value (monetary coins)… and what are called App coins…  tokens that represent applications, rather than currency units.

An app coin is not a crypto currency; rather it is a crypto ‘share’ of the company issuing it. It is in effect a way to own some of the value of a company, just like a conventional equity share… but without the broker, the exchange, without the middlemen. Like crypto currencies are monetary tokens without middlemen.

The companies issuing app coins today are like early internet companies; many will fail, but some will become the new Intel, the new Microsoft, the new Apple. All these new companies build their apps (application software) around block chain technology.

Some are concerned with security; a US Dept. of Defense drone is subject to hacking… but not if the software it runs uses block chain technology. The millions of ‘Internet of Things’ devices are subject to hacking; but not if they use block chain technology. This is a blue sky opportunity; think of just the US security budget.

Others app coin companies are using block chain to revamp international trade transactions; current methods take weeks to clear, and involve buckets full of paperwork. A block chain solution will do the ‘heavy hauling’ of clearing international trade at a small fraction of the cost… with absolute security… and in a matter of minutes. This is truly awesome; we have here an echo of Real Bills circulation; a cyber coin whose value reflects the volume and value of international trade.

Many other cyber apps are being created; un-hackable online (Cloud) data storage, un-hackable social networks, and on and on. Human creativity is being unleashed here… and the potential rewards are humongous.

As for Bitcoin itself, it is the original digital currency; the power of being first is enormous. Bitcoin is in the number one crypto position, although many are gunning for ’Number One’. In a way, Bitcoin is the reserve currency of the Crypto world… to purchase most cryptos, one must first exchange Fiat currency for Bitcoin, then use Bitcoin to exchange for other cryptos… same in reverse.

This brings us back to the title of this article; is Bitcoin really Gold with wings? Well, clearly Bitcoin is not Gold… far from being Gold, it is not even a promise of Gold… although some cryptos are working on digital Gold. But does Bitcoin have wings? Well, yes, in a way. The wings of Bitcoin are the Internet; Bitcoin and other cryptos will continue to ‘fly’ as long as the Internet stays up.

All in all, the future of Bitcoin and other cryptos looks amazingly bright; today, all cryptos taken together represent a market cap value of 40-50 Billion Dollars… and growing fast. But this is not even a rounding error in the world of Fiat currency. Physical Gold in existence is valued near $7 Trillion. Global equity markets are valued at about $70 Trillion, bond markets valued at over $100 Trillion; Forex markets are even larger.

A few years ago, cryptos did not even exist; a few years from now, cryptos will be valued at least a hundred times higher than today; seemingly the sky is the limit. Maybe Bitcoin is not ‘Gold with Wings’; but it certainly is ‘Cash with Wings’. Bitcoin is cash without borders. As more retailers accept Bitcoin payments, and as more investors buy and hold Bitcoin, the Fiat value of Bitcoin and other cryptos is bound to increase radically.

My usual advise for all readers is to own Gold, Silver, and small denomination Fiat bills. I now expand my advice; I strongly suggest that you add Bitcoin and other appropriate cryptos to your holdings.

Rudy J. Fritsch