Plato’s Allegory of the Cave and Bitcoin: Identifying the Shadows and the Responsibility to show the way to the Light

In Plato’s Allegory of the Cave, the story goes that a group of people are chained to a wall inside a cave, where they see shadows projected on a wall in front of them. These shadowy projections are made from objects moving in front of a fire behind the prisoners. Therefore, the shadows are their only connection to reality apart from themselves. When one of the prisoners manages to go free, he/she realizes that there is an entirely new reality outside of the cave, one where the sun casts the light over everything instead of a little fire like back in the cave. However, when this prisoner returns to the cave to lead the other prisoners outside towards the sun, the prisoners reject this, refusing to believe that there is another reality apart from all they have ever known.  They’ll even think that the freed prisoner has suffered some form of delirium since they can not make sense of the things he is speaking about that are outside of the cave. Should the freed prisoner continue his efforts to free the others who remain chained and committed to their reality? Or just let them be?

Partly why Bitcoin is in a bearish market is because the projected reality of the current global financial system is more real than the reality that Bitcoin purports to have. Fiat is all we have ever known and therefore it’s the one model that makes the most sense. Government makes the money, supports and backs it, and citizens use it to pay taxes and to pay each other and engage in commerce. Not much thought is required to understand that model and so far, it has worked. To nearly everyone else, from the average Joe on the street to the CEO’s of major banks, Bitcoin is an aberration, an affront to everything they have ever known, an insult to the established models of finance. Because theres no central leadership, no central accountability, no figure-head to appeal to for answers or direction, the rest of the world sees Bitcoin as a collective system of fraud that is bound to die and fail any day now… except it hasn’t and wont. Understanding the reality of Bitcoin requires them to understand (and more frighteningly accept) the projected illusory reality of the fiat model of money.  It requires them to ask uncomfortable questions about the quality of the foundations that have kept them financially cushioned and protected, even during and after major financial crisis. If theres one thing that Wall Street hates its uncertainty and lack of confidence. Keeping the projections alight is essential to keep the confidence going. The stronger the projections are, the less ‘real’ real is. In this case, the reality offered by Bitcoin is presented as illusion and must be avoided, keeping the prisoners away from knowing that an alternative exists.

Keeping everyone faithful to the projections on the financial wall means assaulting Bitcoin’s features, painting them as wasteful, inefficient, inconvenient, and ultimately unnecessary. This is done on various fronts:

Bitcoin is a waste of energy

Bitcoin transactions are inefficient compared to fiat

Bitcoin can be stolen

Bitcoin is pure speculation and therefore fraudulent and unnecessary to hold

Others smarter than me can delve into dismembering each of these claims, point by point, but for the purposes of keeping it succinct, here goes concerning the energy argument. Bitcoin’s energy consumption is not a waste because it achieves its purpose with considerably less energy than the current model. Bitcoin makes it own money, and processes transactions. Its fiat equivalent in energy consumption is the total energy consumed by the global banks AND the governments who produce the money. Take the total energy consumed by banks and governments and the result is a massive number in energy costs far surpassing Bitcoin, a system without governments, guns, or greedy banks to keep it afloat.

This is the system we have ever known. The phrase “full faith and credit” of whatever government is all that really gives weight and support to fiat money. Ever since the gold standard was dropped, money is backed by the presumed power and stability of both the political and military arms of governments. One country’s money is better than the others because one country has the most weapons and the most stable political system. When confidence in either of these becomes shaky, the value of that money falls into question. Currently, the projections remain relatively real. Developed nations have military power and their political systems are working but as seen in recent global events (rise of nationalism, trade wars, currency manipulation, government corruption, centralization of personal data, global sovereign debt) the “full faith and credit” is starting to become as real as shadows being forced to be cast upon a wall, a propped up reality that could go bust at any moment.

Bitcoin, and the idea of decentralized networks, represents a new method of accomplishing real results that for centuries required authority figures, who then usually played fast and loose with the rules to make realities that suited them best and first. Hierarchies were the ones making the flames behind humanity, using complex contraptions and systems of governance to make projected shadows of authority and reality for the people to see and abide by. Decentralized models prove that something more real can be made, without the need for hierarchies. This is why Bitcoin receives a lot of hate. As all disrupters do, Bitcoin undermines their need for relevancy and with it their claim to power and authority.

With a well-documented history of hierarchies falling to corruption and mismanagement, it’s a wonder that we as a society still look to them as the arbiters of what is real and what is not concerning our money. This is why it is a responsibility for Bitcoin proponents to educate others about the principles of what makes bitcoin possible and why it is a superior choice over the current model. Bitcoin is NOT about getting rich quick… but those who do have the foresight and vision and act on them soon tend to be rewarded the most in time. As the global financial crisis of 2008 proved, no one is safe when those at the top are allowed to pull the levers of the economy and are free to print as much money as they want. Because no one is safe, everyone needs to be given the chance to transfer the fruits of their labor over to a new system where the consensus rules ensure that everyone plays fair rather than relying on who has the most guns or who has the most stable political system. Sooner rather than later, the shadows will be shown for what they really are.

When the Wall Street Journal gets it wrong, it’s time to start behaving like a contrarian

When the WSJ editors allow this to be published, they may as well just say “we didn’t bother to do any research, but the sentiment seems bad so let’s get something written up from a skeptic’s perspective, so we can stay relevant”.

Writing for the WSJ, Paul Vigna writes that Bitcoin is like ‘private money’ projects of the 19th century. He goes on to lump Bitcoin with all the other alt-coins, as if it’s not worth mentioning how different and unique bitcoin is, possessing properties and qualities that no other coin will ever be able to match. EVER.

Long story short: Bitcoin is NOT private money. There is nothing private about it. It is run on an open blockchain, with borderless, censorship-resistant properties, is decentralized and is secured by global consensus where everyone must play by the strict mathematical rules of the system. Anyone can join the network. Anyone can participate in development. Anyone and everyone can submit upgrade and change ideas to the network. It is a network that belongs to everyone and yet no one. Logically, one may question how such a system can operate when there is no clear leadership. The answer lies in the game theoretical reward system for miners, who confirm global transactions for a small fee, and the global network of nodes that decentralize the network. Anyone can run a bitcoin node. And although mining is expensive for the average person, there are signs of the ASIC hardware prices returning down to earth, making it possible for once again for average people to become miners.

Ultimately, there is nothing “private” about bitcoin. But the fact that the WSJ goes out of its way to wrongly characterize the nature of bitcoin, it’s no surprise that there remains A LOT of confusion, misunderstandings, and lack of proper media coverage about this technology. With the media being either willingly or unwittingly complicit in spreading false information about bitcoin, the effect is that more people become inclined to sell their holdings, many of whom got in during November and December. These new users/buyers look at the price and come across articles like this from ‘established’ voices in the finance industry and conclude that perhaps their investment is not worth holding on to any longer. The opposite is in fact the better truth: when the talking heads start tripping over each other to explain why the price of bitcoin is going down, and they do so using wrong facts and misinformed comparisons, that’s usually a ‘buy’ signal.

One last note: the writer conveniently chooses to ignore upgrades such as Segwit and Lightning Network, both of which have pretty much laid to rest the arguments about bitcoin transaction scalability. Raising a problem from the peak of transaction usage in December without mentioning the solutions that are now very much real is itself an example of shoddy journalism.

A thought experiment: Bitcoin volatility and jump rope

The internet has made a certain argument against cryptocurrencies loud and clear: it can never be used as a reliable medium of exchange if its price will swing wildly one day to the next. Volatility is only for the traders who can manipulate the market with pump and dump schemes, making cryptocurrencies nothing more than electronic gambling chips. Its an argument that has its merits and the evidence to back it up since there are many examples of pump and dump schemes and fraudulent activity in cryptocurrency exchanges worldwide. So, what then? Let’s pack it up, sell what you can, cut your losses, and go back to S&P index funds? Is volatility a core feature of cryptocurrencies that far outshines any supposed utility of the token?

This is where a thought experiment might help address the issue. Let’s imagine there are three people in a park with a jump rope. Two people at the ends control the rate at which they swing the rope and the person in the middle has the job of successfully jumping over it at every swing.

Anyone who has jump-roped knows that not every jump is done at the same amount of time in between each jump. In addition, not every swing of the rope is done with the same rate of speed. However, given these inconsistent variables in speed of the swing and rate of jumps, the person in the middle can adapt to this volatility and successfully jump over many of the swings. It takes time and practice, but both the jumper and the two people at the ends can adapt to the volatilities of their respective roles.

What happens when we introduce a second jumper? Or third or fourth jumper in the middle? Or maybe ten jumpers? Obviously, the rope will have to be longer, and the jumpers in the middle will have to agree on a synchronized rate at which to jump together at the same time. As they align the rate of their jumps, the two people at the end must also agree on a consistent rate at which to swing the rope so that the group in the middle successfully makes the jumps with every swing. The key elements at play in this scenario are that as more jumpers join in the middle, the lesser the volatility will come to be, both in rate of jumps and speed of swinging the ropes. One could even call this successful scenario of agreement between jumpers and swingers as representing a consensus of forces to make possible a certain outcome. More participants in a project result in lesser volatility of variable factors within the project.

Bitcoin, and many of the other cryptocurrencies, are still at the one jumper phase of this ambitious project. Market cap and money being transferred throughout each blockchain network of transactions still represent a small number of the total global economy. Each coin, each network, has its own participants, each competing in the market of ideas and solutions against the traditional system of government-issued money. Some of these coins and networks are either scams, untested networks, or overly ambitious projects doomed to fail as soon as a more promising disruptor enters the market. Apart from Bitcoin and maybe Ethereum, just about every other cryptocurrency network has yet to prove its level of security to ensure the viability of their features that are not available on Bitcoin or Ethereum base layer.

While the marketplace still matures, some coins will last, many will go bust, and some projects may even merge with others through features like Rootstock and second or third-layer technologies that work on top of more established networks. These additional layers of technologies don’t necessarily have to be forced upon the entire community since these can be done as a soft-fork as in the case of SegWit.  Or they can be opt-in functionalities like Lightning Network. With this reality, and as more users continue to join the decentralized network, consensus will still need to be reached and volatility will still exist. But as the mass of users choose with their wallets which network fits their needs best, the one with the most users will experience less volatility. It is more likely that the most secure and battle-tested network will be the foundation upon which other coins’ projects will be built upon in the near future.

Her First Starry Sight

Every now and then, when Gäaldnéma got near an oceanic vent, she’d see hints of the Gaia’s power as the ground would crack and release high-pressure gas and lava into the ocean floor water. Sometimes, these cracks of energy resulted in a sparkling display of small bursts of lights, lethally dangerous and yet beautiful at the same time. As a young lass, she’d be told to never get near them, as they’d be known to violently expel harmful gases and lava that could injure or even kill her. Despite these warnings, she was defiant the moment she heard them, and enjoyed seeing this display of natural forces coming from deep within the core of Gaia’s true power.

“Where does it come from, pa?” Gäaldnéma remembered asking. After ages and ages long gone and passed, she had forgotten the verbatim responses her father and elders would give her. In fact, such a long time had passed that she no longer remembered their faces, their voices, their visages of an underwater deep-sea race that was ancient as well as majestic, but now all gone. Not after the incident that wiped out her whole family and species, that occurred between the two land masses high above in the now dry and lifeless surface.

The Atalanta Incident, when dry beings harnessed too much of Gaia’s power, too much for their own good, and Gaia fought back and destroyed every living thing in the dry surface. Merciless, but a just punishment, for abusing what was not theirs. Unfortunately, much of her race and her family got caught in the middle, a futile attempt to make truce and mingle with the dry beings. And now they’re all gone, alive only in a vague memory in the mind of Gäaldnéma.

But the question remained. Where did all this power truly come from? The most she could remember was that within Gaia was an even more ancient power, one that came from outside of this world, above and beyond the surface, and even past that, higher and higher, from a black realm of a void where the only light came from what her father called Stars. That’s where Gaia’s power came from… Stars. And although it was forbidden for those too young, her mother told her that if she’d swim up and above towards the dry surface, at just the right time, she’d perhaps have a chance to see these stars high above with her very own eyes.

Since her species lived closest to the core, she and all her kind possessed the light of these Stars in their natural born eyes. At least that’s what she was told. Gäaldnéma had not seen her own reflection in a countless amount of time. As the last of her kind, her escape from Atalanta had been swift and abrupt. She hadn’t the time to escape with her personal belongings, such as a mirror she had as a young lass. Often she’d feel her own face with her hands, carefully scanning and rendering in her mind what she must look like. But she longed to actually see her own eyes… and she longed to see these magnificent and awe-inspiring Stars, the source of great power and light that these ocean vents would only give hints of.

The Atalanta Incident is what gave her great pause from daring a venture high up to the surface. Maybe Gaia was still mad at those above and would punish her if she dared go up there? Maybe it’s too high up to swim anyway, and she’d lose her way back down to her own cave where she had made home for many an age past. Despite knowing that her kind had been granted since birth a unique longevity , vastly surpassing that of other ocean living things, Gäaldnéma began to feel her age in her body. She could no longer approach these fissure vents close enough and yet swim away fast to avoid injury. As time went on, she had to keep a safe distance from these displays of power and energy and sparkling lights she enjoyed seeing quite often. They served to reinvigorate memories that she was slowly forgetting.

After some contemplation, she resolved to ascend once and for all. Once that desire and will had entrenched itself in her heart, her aged body appeared to feel a renewed sense of energy, thrusting her speed as she swam upwards towards the surface. At first she’d pause and look down, hoping to not lose sight of her way back. But as her ascension continued, she felt that her body didn’t need to exert as much energy as she continued to rise higher. The water pressure appeared to be less forceful the higher she went, and this made her feel as if she could effortlessly glide to and fro, sideways and upwards, feeling once again the vigor of her young lass days.

The sights and sounds during her rise caught her attention as well. She could see from a distance the many species of fishes and plant life, crabs and lobsters, oysters and other shellfish, all living in harmony. Very few of these were found in the depths of the ocean caverns she called home. Every now and then she’d stop to appreciate the view of this vast sampling of life near the dry surface.

However, something else that caught her attention, slowly at first, but with greater intensity as she’d rise, was the pungent smell and tastes of the ocean water. The pristine dark blue she had known all her life was now mired in a brown and greenish haze, a taste so bitter she’d often keep her mouth closed, and a smell ever so rotten and pinching to her nose. Even her eyes began to sting, a sensation that scared her at first, hoping her starry eyes wouldn’t receive any lasting damage.

As she got closer to the surface, of which she could now see, the natural ground and sand was replaced with metal blocks and square like foundations deep into the bedrock of the ocean’s highest peaks. They reminded her of the structures of Atalanta that had once grazed the ocean floor. However, the ones she was seeing now were black, grey and dirty, surrounding by corrosive gases and (the sight of which caused her great sadness and dread) the lifeless bodies of many fishes and dead algae and plant life, mutated and now rotting.

She also began to see many vessels traversing across the water and surface. The dry beings had returned, or perhaps not all had been destroyed by Gaia during the Atalanta Incident. She remembered her mother telling her stories that the dry ones had expanded across the many dry lands in the surface. Maybe they hadn’t all perished after all. And maybe… perhaps some of her own kind was among them? This sudden prospect filled her with fear as well as wonder. Her resolve was not deterred and instead she continued going, evading the vessels and stone walls.

As she approached the surface she could see above the undeniable brightness of these Stars. They were bright enough that she could see them from beneath the water and yet, she wanted to find a clear and clean position from where she could rise undetected and truly soak in the view. Once she had found a location in what appeared like a river between two blackened land masses, she swam up and stuck her head, for the first time in her long life, out above the water.

To her great fortune, it was night time. The view of New York City, in all its evening brightened glory, was in full display. However, Gäaldnéma’s eyes had indeed been damaged. She feverishly wiped her eyes with her fingers, hopelessly trying to get a clearer sight of the many lights that she felt the heat from on her own cheeks, neck, and shoulders. ‘Is this what Star light is like?’ She thought. It didn’t appear as a source of great power as she imagined. Instead, she felt more of the bitter tastes and smells of the dry surface. Her skin began to itch and her body began to feel the aches and pains of her long age. Seeing only blurs of light and stinging heat, she ventured her head a bit longer above water, grazing ahead to see what she could of the many lights and sounds around her. ‘Is this really it?’ She thought.

As disappointment began to gnaw at her mind and heart, she turned her head directly upwards and began to notice a different kind of light. Though faint at first, she felt these twinklings of light directly above piercing her eyes, and then healing them of their damage. After a minute or so her vision completely cleared… and for the first time truly absorbed the full sight of the wonder and terror that had only existed in the caverns of her imagination for ages upon ages. What at first appeared like blobs of black stones erected upon the surface were now clearly edifices of power and sounds and lights. The dry beings had been known to play with fire, and Gaia had punished them for it, but it appeared they had perfected their skills and had built something greater than Atalanta. But what really gripped her attention was the lights above in the black void which she now remembered her mother’s voice calling “sky”. And in this sky, she saw marvelous lights of power and energy. She’d never come to know it… but dry beings aren’t capable of seeing star light the way Gäaldnéma’s kind could. To her, the Stars were enlarged orbs of light, radiant and audacious, a daring display of power that existed long before her and dry beings and even Gaia herself. And as she kept her gaze fixated on these giant orbs in the night sky, she felt what appeared like a wave of communication coming from them towards her. Though indecipherable at first, this communication wasn’t in words, but rather in images… Images she had never seen before. They were of a place far west of her current location, to an area in the ocean still undisturbed by dry beings, a location where, if the Stars were to be trusted (and why wouldn’t they be), she would find that she wasn’t alone after all. All the memories, the faces, the voices she had forgotten were all coming back to her. She now knew exactly where to go, how to get there, and how long it would take her.

Gäaldnéma took one last view at the Stars, expressed a deep thought of gratitude in their direction, smiled and descended back underwater. To her amazement, she came across a discarded mirror, probably lost or tossed into the river by some dry being. Nervous at first, she closed her eyes and held the mirror up directly to her face… and then opened her eyes… seeing herself, her mother, her father, her whole kind, all she had known and now remembered, and smiled at how young she felt she was getting again, as the light of her eyes had been blessed by the Stars she had once come from.

Why Bitcoin Mania is completely justified and is nothing like tulip mania or dot-com mania or the housing market mania.

Mania is irrational. You can’t deny that whatever is happening before your eyes is indeed happening but shouldn’t be based on all known rules and limits. When ever a rule is being defiantly broken and leading to success and riches (without anything tangible of value being produced), you question your sanity and everything you come to know and hold dear.

Imagine yourself in the 17th century. There’s no reason a single tulip is worth the same or even more than a whole farm. But your neighbor took a massive loan on his farm and livestock just to buy that one tulip and flipped it at a nice profit… in a matter of days. Makes no sense, but it happened.

Imagine owning a small clothing business in the late 90’s. Your competitor down the block has inferior customer service, low quality merchandise, and is almost always near bankruptcy. But they buy a computer, get a kid to design a dinky webpage, and then they add “.com” at the end of their store name. Suddenly your competitor is considering going public. Might be worth millions if not hundreds of millions once its stock trades on the NASDAQ. Makes absolutely no sense… but it happened.

Bitcoin is currently in mania territory. But it is nothing like the tulips or the dot-com bubbles that it’s commonly compared to. But let’s do so nonetheless, and compare it to the most recent and tragic example of mania: the housing market bubble.

Houses were being bought at irrational prices every day, every week, every month, for years. And almost each purchase resulted in a successful sale at ever higher prices to what appeared like an endless pool of “greater fools” willing to buy and hoping to flip for a quick profit. Is this what’s happening to bitcoin? No. Let’s examine the mania more closely.

Asset bubbles form when more of the same limited number of product is bought and sold and flipped to a new buyer who becomes a seller who looks for another buyer who looks for another seller… and so on. But it’s the same product. When a person bought and sold a house, that same house exchanged hands at higher prices to newer fools. The physical act of buying a home drove prices higher than the rate at which they were being built. The solution appeared to be to build more houses, more condos, more apartment buildings. But since buying homes required borrowing from the banks, it didn’t matter that there was all this mania-driven demand to buy homes. Eventually, the lenders wanted to get paid so that they could pay their mortgage bond investors. The number of home sellers began to outnumber home buyers which began the crash in prices as sellers couldn’t recoup the amounts they borrowed from the banks. As mentioned earlier, buying a home did not contribute positively to the economics of the housing market. It simply shifted debt on to the next fool. Is this what’s happening with bitcoin?

The mechanics of buying bitcoin (which is pushing its price higher) follows different rules than in the previous examples of manic bubbles. Physically buying bitcoin has a positive effect on the network that makes bitcoin possible. Every time a person transacts with the network, either to buy or sell, they are forming an indirect relationship with the miners that maintain the bitcoin network. Miners are the backbone of the blockchain network. Every transaction, whether it’s to buy or sell, requires a complicated confirmation process executed by the miners. The miners incentive for processing your transaction is that when they do enough of these complex confirmations, they are rewarded with bitcoins of their own. The bitcoin protocol has limited the number of bitcoins to 21 million. There are currently 16 million in circulation. Since mining bitcoins gets more difficult every year, requiring more time and computing power, it is estimated that the full 21 million will be mined by the year 2130. Furthermore, each bitcoin can be broken into fractions of up to 8 decimal points behind zero. These are called “satoshis”, fractions of bitcoin.

Still with me?

The physical act of buying bitcoin follows the basic tried and true dynamics of supply and demand. As more people enter the network by buying and selling bitcoin, they provide an incentive for the mining network to keep mining. Since their collective mining power maintains the blockchain network of transactions, every transaction is verified and secured. This is the process that legitimizes bitcoin as a secure store of value (like digital gold). Since the supply is limited, it has value the more it is in demand. It’s limited supply also acts as a hedge against inflation. And since that supply can be broken into fractions, it is accessible to anyone in the world at whatever price they can afford: $1, $10, $50, $100, $5000, or the full bitcoin price of $9900 at the time of this post.

Participating in bitcoin follows the rules of Metcalfe’s Law which states that a network’s value increases the more users it has. Bitcoin is made possible by a network. That network is a decentralized group of miners around the world. They are the ones building and maintaining the authenticity of the blockchain network. As more users come in, the more valuable it gets. Currently, 0.01% of the world’s population is using bitcoin. Imagine where the price will be if we reach a full 1% of global population.

During the tulip mania, buying a single tulip didn’t contribute anything meaningful to the tulip market. It simply pushed the price higher, shifting debt to the last greater fool. During the dot-com bubble, putting your crummy business online didn’t really make the internet any better nor did it deliver profits to investors who pushed share prices to ridiculous levels. During the housing boom, buying property with bad credit didn’t make the housing market better with new home owners. It simply delayed the day of reckoning when the lenders wanted to get paid by whoever was the last person who borrowed money to buy it.

With bitcoin, there is no last “greater fool”. Not when bitcoin has yet to tap even 1% of all the people on earth. With bitcoin, prices are going higher because buyers have a direct effect of contributing genuine demand in the bitcoin economy, creating an economic incentive for the network to keep mining for more bitcoins to go out in circulation. Those bitcoins can be broken and sold into fractions, facilitating the ease of access for anyone in the world. Those fractional transactions are equally processed and confirmed by the miners like all the other transactions. Bitcoin mania is, for the first time in human economic history, completely justified to keep going, with no end in sight.

Am I wrong? Leave me a comment and say so. Thanks.

The Next Bottom to get in on Bitcoin is the $8000 level

As I mentioned in another post, BTC is not subject to the greater fool theory in the long run. This might seem stupid of me to say given the recent runup within the last 12 hours as of writing this post: it broke through 10,000 and then 11,000 a few hours later. This is parabolic, plain and simple. A lot of newbs and amateurs got in over thanksgiving weekend, testing the waters, most out of FOMO (Fear of Missing Out). These hands will undoubtedly panic sell if and when the slightest bad news occurs. The coming flash crash will be brutal and quick. Blink and you might miss it. No, seriously. Smart money that still believes in BTC will use that selloff as a buying opportunity. In my opinion, that buying level will be at or around $8000.

However, the point remains: Bitcoin is a revolutionary type of asset. Despite the short term selloffs that will happen, Bitcoin’s future remains sound. Assuming none of the major world powers don’t take the extraordinary (and anti-free market) choice of criminalizing bitcoin, the cryptocurrency has no signs of going away. What helps me sleep at night with my bitcoin investment are the following factors: Metcalfe’s Law, decentralized trustless networks, blockchain technology, and the ease of use for anyone in the world to become a bitcoin user and contribute to the network. Currently, we are at 0.01% of world population using Bitcoin.  In accordance with Metcalfe’s Law, which in basic terms states that the value of a network increases as it gains more users, if bitcoin adoption rose to even just 1% of global population, that would be 10 times what it is now. And were we to multiply the current price of $10,000 per bitcoin, we get the price target of $100,000 per coin. And as mentioned in a previous post, you can buy FRACTIONS of bitcoin. You don’t need to plop down the full per coin amount. Think about that… and tell me my math is wrong.

As seen below in the list of buy and sell orders on a bitcoin exchange (GDAX, a division of Coinbase), you can see that people are buying and selling FRACTIONS of bitcoin.

Why Bitcoin is NOT bound by the greater fool theory

In short, the greater fool theory regarding investments refers to the the irrational buying of a product at foolishly expensive prices hoping that there will be another fool, a greater fool, looking to pay you more than you did so that that fool can find some greater fool to pay him more than what he paid you. Still following me? Good. This happened during the 17th century tulip mania. This happened most recently during the housing boom and sudden collapse. Remember how we all seemed to know of someone who was eager to flip houses for a profit, paying exorbitant prices for homes that they couldn’t afford to live in but hoped someone else would buy it off of them at a higher price. Those are prime examples of the greater fool.

Bitcoin is NOT bound by that theory. For a very simple reason: unlike tulips or houses, you CAN buy FRACTIONS of bitcoin. The current price of bitcoin as of this blogpost is $9975. According to the greater fool theory, that means I would need to buy it at $9975 and hope there’s a greater fool willing to pay me $10,200 so I can make a quick profit of $225. With numbers such as that, it seems like the theory makes sense and that at any moment, we will run out of fools willing to pay $10,500, or $11,000… or $20,000.

But is that really the case? My answer is a loud and resounding NO!

Because we can purchase bitcoin at any amount, whether it’s $1, $10, $50, $100, $500, or the full per coin price currently at $9950…. we don’t need greater and greater fools willing to pay bigger and bigger amounts. I can buy $10 of bitcoin fractions … and there can easily be another buyer willing to pay $20 for my fractions of bitcoin. It only costs that buyer $20. Since global adoption of bitcoin is at 0.01% of the world population,it will be a VERY VERY long time before we run out of people willing to pay a little extra for the small fractions of bitcoin from sellers who own fractions of bitcoin.

In the case of flipping houses during the real estate boom, you couldn’t buy fractions of a house. You needed to pay the full amount: $200,00…. then $250,000… then $500,000…. and so on and so forth, hoping there’s a greater fool willing to pay those lump sums all in full. When dealing with those massive amounts of money per transaction, of course the market will eventually run out of wealthy fools willing to pay ever larger amounts. But when the product, like bitcoin, is broken into fractions, the number of “fools” is close to infinite, bound only by the size of global population. And as mentioned before, bitcoin adoption is currently at 0.01% of the worlds population. Just imagine where the price will be when more and more people get in on bitcoin via fraction sized purchases. Since last week, I have heard and known of many friends and acquaintances who have got in on bitcoin but with only $100 amounts. That’s why bitcoin is NOT bound by the greater fool theory.

Bitcoin: a layman’s explanation

Before you read any of my later blog posts about Bitcoin, it helps if you have some basic knowledge of what bitcoin, cryptocurrencies, and the blockchain are. A layman’s explanation is this:

Bitcoin is a digital form of holding value. Another object that holds value is the money in your wallet and your bank account. But paper money is controlled by central bankers. Bitcoin is controlled by no one and yet everyone. Thus, there is no central figure or governing body determining value. Bitcoin is made possible by a consensus in a digital online network known as the blockchain.

The block chain is a record of transactions, an accounting ledger that exists on the internet where everyone and anyone can see every single transaction. The bitcoin in your digital wallet is real because you can verify where it came from, thus eliminating the possibility of fraud or “fake” bitcoins. You can’t do that with paper money because paper money can be forged, your bank account can get hacked, or a third-party can screw up your online transaction with paper money.

Cryptocurrencies are forms digital money that are created by highly technical software and hardware. There are many crypto coins out there but the most famous and only one that matters is Bitcoin. For reasons that are too technical to get into, an easier way to understand bitcoin is that is both digital “gold” and digital “money”. You can store wealth in bitcoin (like storing your wealth in gold), and you can buy a plain ticket, a video game, or a cup of coffee with bitcoin so long as the merchant accepts bitcoin.

Next post… why bitcoin is real and here to stay. It is revolutionary technology and it’s only just getting started. In the meantime , I STRONGLY urge you to watch the excellent documentary on Netflix as seen in the pic with this post.

Banking on Bitcoin.