Book review: “Digital Gold: Bitcoin and the Inside Story of the Misfits and Millionaires Trying to Reinvent Money”
Knowing more about Bitcoin was one of the points on my personal “to do list” for this year. By chance I found this book on Amazon which looked like it would be a good starting point.
This book is written by a “real” journalist, so the style of writing and the pace of the narrative is very good.
It covers the story of Bitcoin from the very beginning, when a guy calling himself Sathoshi Nakamoto uploaded the original white paper on Bitcoin in 2008 and was met initially with very little feedback.
The author manages to both, tell the story of Bitcoin and the various characters involved in the beginning and to explain the way the technology works in a very accessible way. In the beginning, very few people actually understood the idea and it were mostly “nerds” who played around with it.
One of my favorite stories is about the guy who in the beginning offered 10 thousand Bitcoins if someone sends him a Pizza to his home. A guy managed to get 2 Papa John’s Pizzas delivered and got the reward. At current prices, those were the most expensive pizzas ever at a cost of 3 mn USD each….
The book shows how Bitcoin, after starting with some nerds, became a worldwide phenomenon. One of the first “real world” applications was the infamous Online drug dealing venture “Silk Road” run by a guy called Ross Ulbricht who ended up getting a life long prison sentence. Bitcoin also had early fans in Argentina where a non-replicable currency was a no-brainer in a country wiht hundred percent annual inflation and currency controls.
Many “Libertarians” were also attracted to the concept as well as Bitcoin can be spent anonymously and without interference from Governments.
Bitcoin really take off when Silicon Valley and in parallel the Chinese became interested. Today, the value of Bitcoin outstanding is approaching 10 bn USD, quite an achievement for such a short time.
With Silicon Valley funding, more and more “professionals” are entering the Bitcoin space, mostly to enable people to buy and/or trade Bitcoins against EUR, USD or other Fiat currency. Part of the success can be also clearly attributed to the aftermath of the financial crisis which created a very bad reputation of the once trusted financial institutions.
In short, I can highly recommend the book to anyone who has a general interest in Bitcoin and wants to get started with a non-technical, entertaining book.
My few cents on Bitcoin /Blockchain
So what is the revolutionary part of Bitcoin ? In my understanding is actually a combination of mainly these features:
- Encryption: A transaction can be “signed” by a single, unbreakable code
- A distributed public ledger recording the chain of every Bitcoin transaction
- An intelligent way to verify that no one is cheating within this record
- The people who run the infrastructure (“miners”) get rewarded for their work with new Bitcoins
As a result, you get a system of electronic money where no central institution (aka Central bank) is needed to verify and manage balances and transactions. According to the book, the original “Satoshi” intended Bitcoin to be “Electronic gold” rather than electronic money and he therefore limited the theoretical maximum amount of Bitcoins to 21 mn. Other than Gold however, Bitcoins can be divided down to a “one hundred millionth” of a coin and transacted separately. This “base unit” of Bitcoin is nowadays called a “Satoshi”..
Bitcoins have been stolen quite often (Mt. Gox, etc.). Once you obtain the private key of a Bitcoin account, one can easily transfer them anywhere . And as the accounts are anonymous and transactions not cancellable, it is close to impossible to get the stolen Bitcoins back. On the other hand, the Bitcoins themselves and the Blockchain have never been hacked, despite many attempts. No one has ever succeeded in creating fake Bitcoins which you cannot say of any “real currency”.
The “value” of Bitcoin
For me, the “true” value of Bitcoin (or other electronic currencies) lies especially in the speed at which transaction are executed and the low-cost associated. A Bitcoin transaction usually fully settles within 10-30 minutes no matter where you send the Bitcoins to. Even including bid/ask spreads, the cost is much cheaper than with almost any other means of transferring value.
However that seems to be one of the big problems of Bitcoin. According to one of the earliest and most influential developers, the Bitcoin community is not able to increase the block size for various reasons. That means that there is a limited amount of transactions that can be settled which clearly limits the use of Bitcoin as a means to transfer value.
My impression ist that currently the biggest use of Bitcoin is to speculate on its value, not to sue it as a cheap medium to transfer money.
I have absolutely no clue what a fair price of a Bitcoin might be. But I believe that in order to have value it has to be widely used and not just to speculate on an increase in value. Personally I would never “invest” in Bitcoin as for me, an investment needs to produce cashflows.
Other electronic currencies & The Blockchain
Based on Bitcoin technology, a lot of other “electronic crypto currencies” have been created. A site called “Coin Gecko” lists 60 different ones.
Although I have still a very limited understanding, Ethereum seems to be one of the most advanced concepts. In theory, Ethereum looks like a kind of Operating System for blockchain programs (Smart contracts) with some very interesting possibilities. For instance it seems to be quite easy to create one’s own digital currency on Ethereum.
The “Blockchain” concept is currently hyped everywhere, but in principle it is just a concept of how to keep score of who owns what on a distributed basis. If you imagine however that most financial institutions do little more than keeping score of who owns what, the potential impact of Blockchain technology is potentially significant. I think it is not unsimilar to the potential impact of 3D printing on manufacturing at some point in the future.
Clearly, all companies whose main purpose is to move money from A to B will at some point in time get impacted by this technology one way or the other. But also other financial institutions will need to understand this technology rather sooner than later.
A final comment on Satoshi:
I think that the fact that no one knows for sure who the creator of Bitcoin actually is, creates much of the fascination and allure of Bitcoin.
According to different sources, the initial amount of Bitcoins mined (or created) by Satoshi is worth 700 mn USD at current prices. Due to the Blockchain one can see that none of those Bitcoins has ever been spent but remain in the original.account.
Quite recently, an Australian guy claimed to be Satoshi but failed to deliver any proof for that. According to the book, Satoshi disappeared in 2010 saying that he “moved on to other things”. In any case he is/was a guy who left behind a quite significant legacy….
Final (final) note:
Just to be clear: I am not interested in fundamental discussions about the monetary systems or where the price of Bitcoins will go in the future. Please spare me comments about these aspects. Thank you.