In the digital currency market, it’s not just the quantity of money that counts. It’s also the quality of that money.
Bitcoin, a digital currency based on a technology called “blockchain,” is distinguished by two qualities: it has value because people think it has value; and it has a lot of value because people think it has a lot of value. The first quality is what I call “investment opportunity.” The second is what I call “undervalued.”
So if you want to invest in digital currency, make sure you understand what’s going on.
The dark side of the digital currency market is that it’s very hard for anyone to tell what’s going on. It’s not like the financial markets where you can open an account with a broker, buy a stock and see how it performs. You don’t know if you’re buying a penny stock or if you’re investing in IBM.
With the digital currency market, exchanges don’t give out much information. The exchanges are pretty secretive and they don’t want anyone to know what they’re doing. They’d be giving away their secrets in order to attract investors, and there’s no reason to think attracting investors is one of their goals. So it’s very hard to find out whom you are dealing with.
Bitcoin, the digital currency that has recently gained a lot of attention, is a form of money based on math. It works like this: first you have to buy something called a “bitcoin.” Then you have to keep it safe in a virtual wallet. Bitcoin is fairly easy to store. You can hold it in an ordinary wallet just like you would keep money in your own wallet at home. But how do you get bitcoins? The short answer is that you don’t, not directly. You have to buy them from someone who already has them. If you want to buy some bitcoin, you have to go to one of the exchanges, where there are people who will trade it for dollars or euros or whatever else they want.
The exchanges are places where people sell and buy things. In the old days, before there was much regulation, many people who sold things on the exchanges did so by taking money from their customers’ bank accounts and handing out paper receipts that looked just like checks but had nothing on them except a number and a password-like code. That’s illegal now; exchanges have to be regulated as banks. But they still sell bitcoins because they can’t make any money otherwise. They can’t ask customers for cash or charge them interest; they couldn’t even
I am not a cryptologist. But I have been investing in bitcoin for about a year, and I’ve been impressed with its performance so far. I’m not sure how to value it now, but if you think it’s a good investment, you might want to read this.
I’ll start with an analogy from the stock market. Bitcoin is a new kind of digital currency. Like gold or silver, it has an intrinsic value—you can use it to make jewelry, or you can use it as money. But unlike gold or silver, bitcoin doesn’t occur naturally in nature; you can’t find them on Earth. Bitcoin comes into existence only by being put there by human action.
It’s like the first time someone ever stamped out coins in gold and silver and handed them to others. In the weeks after that first coin was made, people realized they could trade the coins among themselves, even across long distances and without the help of banks or other intermediaries. For the first time in history, all of humanity came together to create wealth in common.
Before that momentous event, gold and silver were just too heavy for ordinary people to carry around as money, so they were used for other things: for jewelry ornaments, for making paper money
Bitcoin was invented in 2009 by Satoshi Nakamoto, an alias for a group of unknown developers. I don’t know who they were or where they were based, but I suspect they were operating out of some part of the world the US government regards as off-limits.
Bitcoin isn’t actually a currency; it’s a protocol for transferring money. The first use of bitcoin was to facilitate payments for illegal drugs and other illicit activities.
The bitcoin protocol guarantees that transfers will be safe from fraud, but it doesn’t make fraud impossible. Bitcoin transactions are irreversible, so if you send bitcoins to someone and then try to double-spend them, the second transaction will fail and the first one will stick. You can’t get back your money after you’ve spent it, because once it’s gone it’s gone.
The utility of bitcoin is that it makes it easy for people to transfer money without going through banks. It has never been used widely for any other purpose because it is open to abuse by criminals who want to make payments anonymously. But there is a lot more legal activity being done with bitcoin than illegal activity; in fact most of the larger commercial exchanges are run by law firms rather than shady operations.
How do you define “digital currency”? After all, money is a digital thing. The first digital currency was the US dollar, and it has been around since 1971. To be called “digital” does not necessarily mean that it is electronic. It can be printed on paper, like the first Australian dollar or the Dutch guilder.
It’s not clear what makes a currency digital. One definition is that it exists only in a computer program, like Bitcoin’s program for keeping track of payments between its users. Other currencies exist in physical notes and coins as well as electronic ones.
That’s not just a joke. It’s the title of a book I wrote in 2003. (In fact, it was called What Will Be: Adventures in the New World of Finance.) I don’t know if my book is still in print; if it isn’t, the book has been translated into Chinese and Japanese.