Ann I. Nygren

Bitcoin: A Bubble or the Next Big Thing?

Back in 2014, I wrote a column about a relatively new cryptocurrency called bitcoin that was largely ignored by the muggle world. Very few people knew (or cared) what it was. Today, it’s become a worldwide phenomenon with a roller coaster valuation that rises and dips wildly on a daily basis. The truth is, most people still don’t know much about bitcoin. How does it work? What is it really worth? You’ve got questions, and you’ve come to the right place. Provided you’re not looking for definitive answers – those are hard to come by.

Depending on who you ask, bitcoin is either: A) a decentralized digital currency capable of revolutionizing the way people transact around the world; B) a wickedly volatile investment commodity; or C) a convenient way to sell drugs and launder money with anonymity. In fact, the answer is: D) all of the above. Whether it’s the next big thing or the next big bomb is still the subject of much discussion by the pros. And the cons.

What is Bitcoin?

Bitcoin was created in 2009 after the global credit crisis as an alternative to government-controlled money. Exactly who created bitcoin is still a mystery. An anonymous individual (or group of nerds) under the name Satoshi Nakamoto published a paper titled Bitcoin: A Peer-to-Peer Electronic Cash System.

Bitcoin is a peer-to-peer version of electronic cash that allows online payments to be sent directly from buyer to seller without going through a financial institution like a bank, Visa or PayPal. Thus, no middleman transaction fees. International payments are cheaper because bitcoins are not tied to any country – and not subject to regulation. Whether that’s a pro or a con is debatable.

How Does Bitcoin Work?

Bitcoin’s engine is open-source software controlled not by a single entity (like a Central Bank), but by bitcoin users around the world connected through a peer-to-peer network of servers. Nobody owns the bitcoin network, just as no one owns the tech behind email.

The system is populated with bitcoins through a competitive, decentralized process known as mining. Individuals in the network use their computers to solve complex math puzzles akin to Good Will Hunting. About 16.7 million bitcoins exist today, and the number of new bitcoins created each year is automatically halved over time until issuance halts completely with a total of 21 million bitcoins in existence (somewhere around the year 2140). Limiting the number of bitcoins in existence prevents a flood of new bitcoins that devalue those already in circulation. No “quantitative easing” monetary manipulations allowed.

Is Bitcoin Unique?

Nope. There are more than 1,300 cryptocurrencies listed on CoinMarketCap.com with a total market cap of more than $341 billion. Bitcoin was the first cryptocurrency and is by far the biggest – it’s the gold standard of the industry. Most other cryptocurrencies are little more than attempts to reach investors and make a quick buck. Even so, they are playgrounds for testing innovations in cryptocurrency technology, and you never know if one or more of them will gain traction and either dilute the intrinsic value of bitcoin or turn it into the next Betamax.

How Is Bitcoin Valued?

Bitcoin isn’t really money. If you put $20 under your mattress and retrieve it in a few years, it’s still worth roughly $20. Not so with bitcoin. Supply and demand determines a bitcoin’s price. When demand for bitcoins increases, the price increases. Bitcoin’s value today is determined primarily by speculators, and its relatively small market size makes it highly volatile. Check out charts.bitcoin.com if you want the 411 on its market activity.

Rampant gold rush-style speculation following the establishment of bitcoin trading platforms in mainstream financial markets this past December has led bitcoin’s price to skyrocket (one bitcoin was valued at $972 USD on Jan 1, 2017 and $16,238 at the time I’m writing this column in December). Nobody really knows where it’s heading – the Winklevoss twins (aka, the Winklevii who sued Mark Zuckerberg for stealing their Facebook idea at Harvard) predict a multitrillion-dollar value for bitcoin, which they consider “gold 2.0.” And why not? They’ve become the first bitcoin billionaires. But JP Morgan Chase’s Jamie Dimond claims bitcoin is a fraud and said he’d fire anyone at his firm who trades it.

How Do You Buy or Sell Bitcoins?

For those who want to ante up and buy bitcoins (or fractions thereof) without contacting MIT for a mining starter’s kit, the simplest route is to join a bitcoin exchange (there are LOTS of them – Google it). Bitcoin can be used by anyone with a smartphone or a computer. Much of the buying and selling takes place through online apps – people can purchase bitcoins using various currencies and store them in digital wallets that exist in the cloud or on their own computers.

Of course, each method has its pros and cons. Wallets in the cloud could be hacked. Bitcoins kept in a wallet on your computer could be accidentally deleted, or viruses could destroy them. Bitcoin isn’t like money in the bank – it’s like cash. If it’s lost, it’s gone for good.

Where Can Bitcoin Be Used for Purchases?

Websites like CoinDesk and 99Bitcoins list the businesses that accept the bitcoins burning a hole in your virtual pocket. You can buy a Lamborghini or a Trump condo in Soho. The D Las Vegas Casino Hotel and Golden Gate Hotel & Casino were the first to accept bitcoin for non-gaming purchases in Sin City. But on the whole, you’ll find that very few merchants accept bitcoin as payment today.

The people who ARE jumping on the bitcoin bandwagon are investors/speculators. The reason? Bitcoin’s value is soaring. Over a 40-hour period this past December, bitcoin’s value rose 40% for a YTD gain of 1,500%. That was around the time Chicago-based CME Group and the Chicago Board Options Exchange received approval from the Commodity Futures Trading Commission to begin trading bitcoin. The Nasdaq Stock Market will start a bitcoin futures site on its commodities trading platform in 2018 as well, and financial firms including Cantor Fitzgerald and Goldman Sachs are discussing the trading possibilities around bitcoin (which has a market value larger in size than petroleum giant BP as of December 2017).

In Bitcoin We Trust?

In essence, bitcoin is nothing more than a mathematical model. It’s not backed by a gold standard or anything in the physical world. The real value of bitcoin currency is determined by people’s willingness to assign and agree to its value. Of course, the same can be said for all money. The paper dollar in your purse or pocket is nothing more than paper and ink without the tacit faith in its underlying value.

Think about it – the money sitting in your bank account is really bits in a computer. They aren’t actual dollar bills sitting in a vault, waiting for you to cash out. A few are, but the rest have been oversubscribed and loaned out to others. The U.S. dollar is no longer backed by gold – it’s our society’s social agreement that dollars have value that makes them worth something.

Who are you going to trust? A government that routinely manipulates its currency (China)? One that issues FDIC insurance even as it racks up trillions in debt and unfunded liabilities (USA)? Or a worldwide system off the political grid, monitored and maintained by the individuals most concerned with keeping it stable and valuable (Bitcoin)? #DeepThoughts

In Bitcoin We Trust?

In essence, bitcoin is nothing more than a mathematical model. It’s not backed by a gold standard or anything in the physical world. The real value of bitcoin currency is determined by people’s willingness to assign and agree to its value. Of course, the same can be said for all money. The paper dollar in your purse or pocket is nothing more than paper and ink without the tacit faith in its underlying value.

Think about it – the money sitting in your bank account is really bits in a computer. They aren’t actual dollar bills sitting in a vault, waiting for you to cash out. A few are, but the rest have been oversubscribed and loaned out to others. The U.S. dollar is no longer backed by gold – it’s our society’s social agreement that dollars have value that makes them worth something.

Who are you going to trust? A government that routinely manipulates its currency (China)? One that issues FDIC insurance even as it racks up trillions in debt and unfunded liabilities (USA)? Or a worldwide system off the political grid, monitored and maintained by the individuals most concerned with keeping it stable and valuable (Bitcoin)? #DeepThoughts

The Cryptocurrency Revolution

Bitcon’s “halleluiahs” can also be seen as Achilles heels, depending on your point of view. With bitcoin, all transactions are recorded in a public log that’s traceable, but the names of buyers and sellers aren’t revealed – only their wallet IDs. This anonymity keeps users’ transactions private. That’s good, right? Drug lords certainly think so, which led NY Senator Chuck Schumer to call bitcoin “money laundering” and demand a crackdown (or, to be precise, more government control – go figure).

Cryptocurrencies aren’t regulated, which means your money’s not insured or secured by government oversight. By the same token, it’s secure from political influence – cryptocurrency entrepreneur Erik Voorhees calls it “the separation of money and state.”

As money with a limited, controlled supply that is not changeable by a government, a bank or any other central institution, cryptocurrencies attack the scope of monetary policy. They take away the control central banks exert on inflation or deflation by manipulating the monetary supply. How long governments of the world will stand for that is, like most things involving bitcoin and its crypto-brethren, anyone’s guess.

Op/ed column submitted by Ann Nygren, President of Key Consulting Software. KCS is an IT consulting company focused on gaming and hospitality applications ranging from Agilysys (LMS/Stratton Warren/Infogenesis), Infinium (AM, AR, FA, GL, GT, HR, IR, PA, PL, PY, TR), Bally’s (CMS, CMP, ACSC & SDS), and interfaces with Aristocrat, IGT and Micros to Transitioning properties during purchase, sales, or merging of properties. KCS provides IT Departments with assistance in installation & upgrades, customization, interfacing and creation of unique client-specific software. Ann can be reached at ann@kcsoft.com.