Speaking at Magellan’s Sydney roadshow yesterday, chief executive Hamish Douglass took aim at the world’s most talked-about crytocurrency, bitcoin.
The value of bitcoin has appreciated from just under US$1,000 at the beginning of 2017 to US$3,860 Wednesday afternoon – down from an all-time high of US$4,683.87 on 31 August 2017.
JP Morgan chief executive Jamie Dimon recently said bitcoin is “worse than tulip bulbs” (referring to the 1630s asset price bubble in Holland) and threatened to fire traders from his bank who were caught trading the cryptocurrency.
Mr Douglass pointed to the structure of the market, which mandates there will finite supply of bitcoins – specifically, no more than 21 million.
At present, there are just under 12.5 million bitcoins in circulation. However, it is getting harder and harder for miners to produce additional bitcoins, Mr Douglass said.
“Every time a [bitcoin] transaction is completed a new chain gets created, and this has to get confirmed by the bitcoin ‘miners’,” Mr Douglass said.
“These miners actually get rewarded by being issued new bitcoins. So there’s a strong incentive system to be issued more bitcoins, and as more people do this and want to speculate on it, the currency becomes more valuable,” he said.
“People are putting computer farms near nuclear power plants at the moment to do this mining in China,” he said.
“I don’t know what happens once you remove that incentive [to mine bitcoins]. Once you’ve removed the incentive for people to effectively get more bitcoins through the chain, what happens at the end of the period?” Mr Douglass asked.
“I think it could be a spectacular collapse end of this, I think that’s a very very major risk,” he said.
“But of course everyone’s inventing the next cryptocurrency so the crowd will just dump bitcoin and move onto the next one.”
However, the technology behind bitcoin – namely blockchain or the ‘distributed ledger’ – has the potential to be “revolutionary” for financial markets, Mr Douglass said.
well it would be confusing to quote their value as the number of goats they can purchase
Every time a new Bitcoin transaction is made a new chain is NOT created. A new block is added to the existing blockchain (the block is also not just one transaction, but rather a large number of transactions combined into a single string of data called a ‘hash’. Other information is then added – such as headers – to create the final block). The block is created by the miner (computer) who is able to solve a complex cryptographic puzzle, which costs money in the form of electricity (also known as proof of work). The distributed ledger means that unlike a single ledger held in one place or on one small group of computers, each computer on the network holds a copy of the ledger (otherwise known as the Blockchain) and at least 51% of the computers on the network must ‘agree’ that the next block that has been added is indeed valid, otherwise it is rejected. The distributed ledger removes the need for trusted third parties, as long as there is enough diversity of computers on the network. The miners are incentivised by being paid in Bitcoin for being able to solve the abovementioned puzzle. Miners are also paid transaction fees (which is happening right now and will continue to happen), so even when the final Bitcoin is mined, the miners will continue their role as transaction processors and receive payment for this. The miners are incentivised to do the right thing because of the distributed ledger. If a miner creates a false or erroneous transaction, it will be rejected due to the consensus algorithm used (across the entire network of mining nodes), but said miner will still have had to expend electricity (and therefore money) in order to mine this block.
A single Bitcoin can be divided into 100,000,000 pieces, called ‘Satoshis’ (named after the eponymous Satoshi Nakamoto – the original inventor (or inventors) of Bitcoin).
Bitcoin is also able to be sent in seconds to anyone in the world, with extremely low fees. When you compare this to existing, cumbersome and costly methods, you can see the immediate advantages.
All of the information I’ve posted above is freely available on the internet. There are some great informational videos on YouTube – also freely available – that explain how this amazing technology works. Micropayments are just one area where Bitcoin and other Cryptocurrencies will change the way we do business. Have a look at mining farms on YouTube (such as Bitmain). This is not a geek in their parents’ basement. This is serious business. I’d also recommend listening to any podcasts with Andreas Antonopoulos (one particularly good one is his interview with Laura Shin on the ‘Unchained’ podcast entitled ‘Blockchain 101’). I highly doubt that any rational person who has listened to this podcast could categorically state that Bitcoin is going nowhere.
Here in western world, we don’t necessarily need Bitcoin. However there are billions of unbanked and underbanked people in the world who will find this technology to be exactly what they need. It’s already legal tender in Japan and Venezuelans are using it as a de-facto standard due to hyperinflation of their currency. Yes it will go through some volatility over the next few years while it is adopted, but over time it will stabilise, it is just likely to stabilise at a much higher price per coin.
Will Bitcoin fail (spectacularly or otherwise)? Not sure, but it’s highly unlikely. I’d like to see some solid reasons behind your assumption.
Will Blockchain technology change the world? Absolutely. It’s not going away any time soon. The big money is becoming very concerned as this is a significant change in wealth distribution never before seen. So, before opinions are stated, please make sure to read up about this amazing technology as this will lead to robust and meaningful discussions on the topic. I’d highly recommend starting with the book “Down the Rabbit Hole” by Timothy Lea.
interesting though that the value of bitcoins are still referred to in dollar terms.
well it would be confusing to quote their value as the number of goats they can purchase
Not really. Gold, oil, commodities, shares and many other items of value are priced in dollars. Why should Bitcoin and Cryptocurrencies be any different?