No, Bitcoin and cryptocurrencies are not turds or rat poison.
Don’t get me wrong, I love Warren Buffett and Charlie Munger. They are the people who shaped my investment philosophy, when I first started investing, at the ripe young age of 19 years old. And they are also a part of the reason why I am able to build the stock portfolio I have today. However, I will have to disagree with their opinions on Bitcoin and cryptocurrencies.
During the past couple of days, we had industry leaders come out to speak against Bitcoin and cryptocurrencies. We had Bill Gates, who’s a technological and Enterprise genius and titan, come out to say he would short Bitcoin if he had the means to do so. You hear from multiple major talking heads, who are experts in their respective fields, calling cryptocurrencies a fraud, and then recanting to expound on the real value and numerous use cases of the underlying blockchain technology. And then yesterday, we had Steve Eisman, the person who’s responsible for orchestrating The Big Short, come out to say he does not see any real value or purpose with Bitcoin and crypto.
So, I am here to say that I was also a long time skeptic of Bitcoin and cryptocurrency. However, I decided to ask these questions: What exactly is the real value and purpose of cryptocurrencies and public blockchains? And do we actually need cryptocurrencies for blockchain technology? After collaborating with a couple of valuable sources in the space, here is what I discovered…
If we wanted to start a business or execute an idea in today’s world, we need a lot of resources and face multiple barriers to entry. Think, for example, if you want to open a financial firm or start an investment fund, you need large databases, plenty of computing power, and a strong technological (and organizational) infrastructure to compete with the likes of Goldman Sachs or JP Morgan. (And this is excluding all the legal hoops we have to jump through just to set up shop.) As we can see, this involves large outlays of money from the get-go, and requires a lot of time and marketing expertise to build brand awareness and trust with potential customers/clients. All this is a huge barrier to entry for most parties that want to compete in the space.
With a public distributive ledger built on a certain blockchain protocol, we eliminate a lot of the time and cost requirements for building our own business or executing our big idea. So we may be asking: What exactly is a blockchain protocol? Think HTTP for the Internet, except this is with blockchain technology. Nobody owns HTTP, but it’s required to run the Internet. Everything on the Internet (including websites, web pages, social media, message boards, forums, audio, and video, all the way to the dark web) is built on the HTTP protocol, which is available to the public. Right now, we have software developing teams from all over the world attempting to build the “next” universal protocol for blockchain technology. The most notable competing protocols at this time include Bitcoin, Ethereum, Cardano, EOS, and NEO, among others. Everything related to blockchain in the future will be built on the winning protocol(s), which is another reason why we need cryptocurrencies… these protocol developers need to get paid, and crypto is the most efficient way of paying these hardworking techies.
So, what does this all mean? How does this pertain to us? With a public distributive ledger (or public blockchain) we can build our business or project within an existing infrastructure that’s available to everybody. For instance, we can build our business on the Ethereum blockchain, which eliminates a lot of the time and cost requirements of database building and computer network development. All the technology and computing power will be available to us in the Ethereum blockchain. All we need to do is spend our time figuring how we’ll compete in the finance world. We can spend more time with what we can offer our customers, and figure out which new features we can add to our service(s) to solve real problems. As we can see, this is a much more efficient and cost-effective way of doing business and creating projects. Additionally, this increases competition in the marketplace, which forces big corporations to constantly innovate and stay on their toes in their respective industries…which is all great for the consumer.
Blockchains are trustless. Everything that’s transacted on a blockchain is done by machines, with very little human interference. This means there’s less room for fraudulent actions associated with human behavior.
For those who don’t know, a blockchain consists of a bunch of computers and networks (which are called nodes) located at different places from all over the world. When a transaction takes place with Bitcoin (or any cryptocurrency), the transaction would go through a computer/phone/device, which gets sent to a pool (called a mempool), in which it would wait “in line” to get verified. Transaction verification involves solving extremely complicated mathematical equations, which require tons of computing power provided by all the computers available in the blockchain. Once when verification takes place, the node which solved the math equation would send the verified transaction to all the other nodes within the network, and everything gets recorded into the blockchain. This process is virtually impossible to reverse and basically tamper-proof. Perhaps, the only way to override verified transactions in a blockchain is if a party overtakes and hacks into a majority of the nodes in the system. This will require an insurmountable amount of computing power, along with a lot of time investment and mental energy, and chances of success would still be very low.
Because a blockchain is nearly impossible to reverse and is practically tamper-proof, it creates trust. The public can look into a public blockchain and see what took place at what time. This is very unlike our current system for inefficient fact and evidence gathering, where we go through tons of literature, documents, videos, emails, and voicemails to find proof for an occurrence or details regarding a debatable issue. One can just look at a blockchain and determine the details of a transaction or a past occurrence within seconds with practically zero cost. Just think about how much time and money could be saved without having to go through the old method of collecting information and data. We can potentially eliminate a lot of the shady business practices associated with untrustworthy third parties and reduce a lot of the legal expenses that go into costly and unnecessary court cases.
To run a public distributive ledger requires an enormous amount of computing power, from all over the world. There needs to be an incentive for parties to give up their computing power to maintain a reliable and secure blockchain. Rather than having a centralized entity summing up and dividing all the utilized computing power and, in turn, paying out the respective rewards via fiat to all the different involved parties, cryptocurrencies is the most efficient method for providing incentives to all involved parties. The computer(s) that provides the most power to verify a transaction gets paid with the associated cryptocurrency. The rest of the computers will get their chance in the next transaction. Without this incentive, very few parties would be willing to give up their computing power to maintain a public blockchain.
A public blockchain is available to everybody, meaning we do not need to report to an upper level or entity when we decide to use it. Case in point, you don’t need to ask the government or a bank to use Bitcoin or Ethereum. You just use it. If you want to send money via Bitcoin to someone else, you won’t get questioned by authorities about the amount of the transaction and the purpose of the transfer. You just send the money to whomever you desire, for whatever reason. And you do not need to sign any forms or report anything to anybody.
Cryptocurrency is perhaps the most affordable and fastest way to send money via cross-border transactions. If you haven’t been aware, there was a big piece in the news regarding a $99 million dollar transaction via Litecoin which only took 2.5 minutes and cost 40 cents to complete. There is no other competing technology that allows for such low-cost and speed when it comes to money transfers. Western Union and other wire transfer services can cost up to 20% of the balance you’re transferring overseas. Banks usually take days to complete a wire with huge sums of money, with hefty fees. Existing systems dealing with money transfers are outdated and archaic. Cryptocurrencies is the future.
