Reading the book ‘Digital Gold’ about bitcoin was kind of the culmination of my research into alternatives for the dollar. This quote about sums up my sentiment.
“It is well enough that people of the nation do not understand our banking and money system, for if they did, I believe there would be a revolution before tomorrow morning.” Henry Ford, founder of the Ford Motor Company.
Did Henry Ford actually say this? The internet seems to think so. I hope he did. About a year ago I found myself obsessing over how currency worked, sovereign defaults, and most importantly the US banking system and it’s history. Maybe I’ll write a post on my findings of the ridiculousness of our beloved Federal Reserve System soon. Needless to say I found myself increasingly fearful of the amount of debt our country continues to take on, as well as concern about the dollar’s future as a reserve currency.
In trading, if you are invested in a stock or security and are counting on it to rise in value it’s said that you are ‘long’ that stock. On the flip side if you are betting on a stock to go down, you get ‘short’ by selling shares you borrowed from someone else with hopes of buying them back at a lower price to repay your lender. While reflecting on my investments, I realized that I was essentially ‘long’ the US dollar. Meaning all my savings, my property, my investments are all denominated in the US dollar. So my wealth benefits from the value of a dollar rising, and gets hurt from the value of the dollar decreasing. So what happens if the dollar collapses?
Impossible! Most people would say, but the truth is it happens to more countries than you think. Thanks to the Bretton Woods conference (google it!) among other power plays after World War II, we’ve made the US dollar something that no one wants to see fail and thus have bought ourselves a very long timeline of prosperity and high dollar valuation. But the point is it makes no sense to have all of your eggs in one basket, even if that basket is the United States (I would argue especially because it’s the United States).
So what’s a savvy investor to do? It didn’t take much reflection for me to settle on gold and silver as potential investments to hedge my dollars. Gold has been a currency since there was currency, it can’t be counterfeit and it’s a physical asset not produced by a government. The downsides to gold are that it’s not exactly easy to break it up into pieces and buy small things. Nonetheless, I figured that the ‘actual’ value of gold would sky rocket in the event that confidence is ever shaken in fiat currency. At the very least my gold would be worth a lot of dollars in that scenario and I could exchange it making it a worthwhile investment long term. So I bought as much gold and silver as I could afford.
That still wasn’t enough to really quench my thirst for protection against our government’s currency debasement policy (aka printing more and more money to pay our treasury bonds back). I started to consider a future where I permanently move outside the US after reading several successful business owners and traders document their reasons for moving. I thought to myself, in the event of a collapse I could always just pack up and head to a more promising country. The worry there is will the government even let you go, and will they let me take my bars of gold with! During the great depression the government made it illegal to own gold, you had to literally turn it in to the government at their fixed exchange rate. Back then we were on the gold standard and the government was strapped for cash (gold), so what better way than to issue a low (read fake) exchange rate for gold and make your citizens turn in their precious metals. If it happened once in a crisis I certainly don’t see why it couldn’t happen again. This pokes a serious hole into my “just buy gold and silver” plan. Now I’m in need of not only a means to store physical wealth (convert dollars to gold), but I also need a way to get that value out of the country (and away from the would-be broke government).
Book review
Now finally onto the book review. “Digital Gold” takes a reader through the quirky network of the men and women that built and promoted bitcoin.
Bitcoin is a complex technology, but simple concept. Our author Nathaniel Poppers did a pretty good job of writing in a way that would appeal to nerds like me while still being very much relevant to a non-technical person interested in what bitcoin is. Different types of readers will certainly have a different experience with the book depending on knowledge levels, but I don’t see that as a bad thing.
There are two main focuses of the book, the concept and importance of digital currency, and the drama of bitcoin’s early days. Detailed accounts of the first exchanges, venture backed businesses, and strange personalities of bitcoin were fascinating to read. Poppers did an impressive amount of research and constructed the whole story in a way that flows easily.
And here are the biggest ideas of bitcoin, along with a brief explanation of why you should care.
Not backed by the US government - The government doesn’t control bitcoin, therefore it can’t just print more to lower it’s value. Bitcoin has a fixed money supply (only 21 million can exist, period.) so there is no worry of your value being inflated away by reckless bureaucrats.
Easy to transport - Bitcoin is completely digital, your ‘coin’ amounts to some random looking numbers associated with your ‘public key’ (think unique ID number like a SSN, drivers license number etc.). So that means you could transport your entire lifesavings securely on a flash drive, or even on a piece of paper! This is a huge advantage of things like gold; try getting on a plane with 18lbs of gold bars in your carry on.
Easy to divide - Another leg up on gold, you can split bitcoins into .00000001 increments if you want. Try splitting a dollar or bar of gold into that small of an amount. The advantage here is if the value skyrockets (1 bitcoin is now worth a million dollars instead of $317), exchange isn’t interrupted because people can just pay with smaller and smaller increments.
Peer to peer, no central authority and anonymous - This is what appealed most to a lot of early adopters. They now could send money to anyone without the government knowing who sent it and what it was for. Sites like the ‘Silk Road’(awesome coverage in Popper’s book about its creator) became popular due to this advantage of bitcoin. The real beauty of the system is that you don’t need a private bank to tell you your transaction was successful. This means no need for greedy payment processors anymore!
All transactions have to be agreed on by the majority- This is effectively the fraud protection aspect. All transactions made are seen by the whole world in a public ledge (called the block chain). The cool thing here is that if Randy sends a coin to Alice, the world sees it (well it sees their unique anonymous ID’s of course). The transaction only becomes legitimate if the majority of the bitcoin network (called miners) agree that the transaction happened and was legit. So if Randy sends a coin to Alice, then quickly tries to send the SAME coin to Jennifer, the network will catch this and only one of the transactions will get approved and posted to the public ledger. Pretty sweet right?
Can’t be counterfeit - If you’re interested in this, there is a ton of technical documentation about the process and cryptography involved. If you can wrap your head around it it’s a brilliant implementation. I’ll probably write a post about the technical side as a way to learn more later, but this post is catered to a more general audience.
Appropriate transaction fees - With no central organization to go through, there’s no real overhead here for processing transactions. The ‘work’ that needs to be done (ie computing) to verify a transaction is done by the people called miners. They agree to review transactions and add them to the block chain in exchange for a small bitcoin reward at the end essentially. So maybe you are paying a penny or so to send a big chunk of money. They’re tiny if existent at all, and I’m happy to pay them to the people doing work to process my transfers. You can read more about transaction fees on the bitcoin wiki here: https://en.bitcoin.it/wiki/Transaction_fees
