Posts Tagged ‘altcoins’


The 7 Network Effects of Bitcoin

by adminadam in articles

Trace Mayer, J.D., a long-time Bitcoin Guru and Investor in Bitcoin companies such as Armory and Kraken, explains the network effects that will lead to Bitcoin’s continued success.

From his talk hosted by CRYPSA at LaGuardia Community College – June 29, 2015.
Listen to the audio:

The 7 network effects of Bitcoin are as follows:

  1. Speculation — As a novel, cryptographically-backed asset class with the potential for appreciation and high volatility, Bitcoin is perfect for speculators with a high tolerance for risk.
  2. Merchant Adoption — Merchants will increasingly accept Bitcoin because they can increase their profit margins by avoiding credit card fees and chargebacks.
  3. Consumer Adoption — Consumers can use Bitcoin to save money at certain vendors. For example, getting a 20% discount on Amazon by spending Bitcoin through Purse. Additionally, consumers can buy things with Bitcoin that they cannot buy (easily) in any other way. Consider: An American can buy Persian rugs or Cuban cigars online despite trade embargoes. Bitcoin increases the efficiency of the economy, particularly in niche areas such as these.
  4. Security — Merchant, consumer, and speculator adoption lead to a higher price and thus incentivize more miners to participate and secure the system. The decentralized, immutable transaction ledger also serves as a form of Triple Entry Bookkeeping, wherein Debits plus Credits plus the Network Confirmations of transactions increase trust and accountability across the system.
  5. Developer Mindshare — Bitcoin is a “dumb”, predictable network with simple rules and a publicly-auditable codebase. It is fertile ground for the development of complicated algorithms, machine-to-machine payment protocols, smart contracts, and other tools. Its decentralized nature allows for innovation without permission. Altcoins (such as Litecoin and Ethereum) pose little threat as Bitcoin is already dominant as a store of value and as a medium of exchange in the cryptocurrency space. If you harbor doubts about the importance of this currency network effect — or worry about altcoins overtaking Bitcoin in some other way — I would point you to Daniel Krawisz’ insightful and though-provoking article on the subject: “The Coming Demise of Altcoins“. Ultimately, developers will continue to flock to Bitcoin.
  6. Financialization — Bitcoin will eat up progressively more of the market share of legacy banking institutions in areas such as remittances, micropayments, peer-to-peer lending, and the exchange of stocks and securities. This process has already begun (consider NASDAQ’s support of Open Assets/Colored Coins for the transfer of securities, NYSE’s investment in Coinbase, etc.). Old money risks dying out lest it embrace new protocols such as Bitcoin.
  7. Adoption as a World Reserve Currency — Eventually all transactions will be settled on the blockchain, including house titles, stock purchases, car titles, and other monetary instruments and currencies. Network effects one through six culminate in this final network effect. Any newcomer in the realm of cryptocurrency — or traditional currency, for that matter — would need to beat Bitcoin in all seven of these areas. This is unlikely considering the pace of development in Bitcoin Core, the level of investment in Bitcoin companies around the world, the growth in Bitcoin’s user base, and on and on… Further price increases will only accelerate the process. Finally, a speculative attack could dramatically boost the value of Bitcoin almost overnight.

Bitcoin is a strong currency: it thrives on the internet; it frees its users from 3rd parties; it saves merchants money; it is deflationary; its code can be audited by all; its developers work tirelessly to improve upon it; the list goes on. The above-listed network effects can only serve to strengthen it. Competitors beware.

READ THIS NEXT: Speculative Attack, by Pierre Rochard

An excerpt from the introduction of “Speculative Attack”:

Bitcoin will not be eagerly adopted by the mainstream, it will be forced upon them. Forced, as in “compelled by economic reality”. People will be forced to pay with bitcoins, not because of ‘the technology’, but because no one will accept their worthless fiat for payments. Contrary to popular belief, good money drives out bad. This “driving out” has started as a small fiat bleed. It will rapidly escalate into Class IV hemorrhaging due to speculative attacks on weak fiat currencies. The end result will be hyperbitcoinization, i.e. “your money is no good here”.


Noteworthy Bitcoin News: Spring, 2014

by adminadam in home

A few weeks before tax day, the IRS gave guidance saying (that is, they declared that) Bitcoin is, was, and always has been a commodity in regards to tax burden. Capital gains tax applies each time a transaction is made with this currency commodity (shall we call it a commurrency?), even if it is just a cup of coffee being purchased. If the price of Bitcoin was higher when you bought the Bitcoin than when you made the purchase, then you are liable to pay capital gains tax on that purchase. This is great for institutional investors, not so great for people in the U.S. who are using it as a currency. Personally, I wonder about the IRS’s capacity to enforce and act on this with the growing adoption of Bitcoin. Also, since the ruling is retroactive, all purchases/transactions made with Bitcoin since the beginning of time are fair game. So what if you don’t or can’t know the input and output values of all your coins (including other virtual currencies like Litecoin, Dogecoin, etc.) since 2009, when Bitcoin was released?

There is a clause apparently that says that if you can’t provide this information for some reason, or if you don’t have the records, then you *may* be forgiven of some of your burden for some of your gains if you appeal upon being audited for a given amount. Losses do deduct from total gains, just like you would expect, but I guess I just wonder how the IRS expects to keep track of Bitcoin transactions and audit people going forward. I know a number of people who bought their first Bitcoins through coinbase using a bank transfer. Like most people in this boat, you then transfer those coins to a safer-than-coinbase storage medium, whether that’s a paper wallet or the Bitcoin-Qt Standard Software Wallet which you run on your home computer (hopefully safely encrypted and backed-up — see my guide on doing this here). Each transaction made in order to get these coins under your control in this scenario is a transaction, but note: you haven’t purchased anything, or traded anything of value for your Bitcoins. Ultimately, essentially, all Bitcoin transactions whether purchases or personal fund-movements appear identical to the Bitcoin network. Were there some greater level of willing transparency on this issue from the IRS, we could know if they plan to, say, host their own bitcoin node, download the blockchain themselves just to make sure they understand it, or merely check transfers using an online blockchain (the public ledger), like, for example.

The final obstacle in collecting (and reporting) revenues from cryptocurrencies stems from high-frequency trading — say you bought your Bitcoin on a U.S. exchange, then transferred it to BTC-e in Bulgaria (where it’s counted as a virtual currency, incidentally…), then engaged in a bout of high-frequency Bitcoin/Litecoin/Dogecoin/Peercoin trading. The IRS doesn’t likely have legitimate access to these trades, nor may you have even a decently-complete record of what’s transpired; all you know now is you have more fill-in-the-blank-coins than when you started.

Another complication arises with the arrival (soon: May Day) of dark wallets and (next-gen) seamless coin mixing services. Dark Wallet by Defense Distributed is one such development which will be used to strip coins of their identifying information (i.e. where they came from first/middle/last). Anonymity in cryptocurrency will be possible (more possible than it is now). Add to this the facilitation of anonymous purchases through dark markets and distributed markets, such asĀ BitWasp and DarkMarket (this also from Defense Distributed). Where the Silk Road was shut down, Silk Road 2.0, and others now exist. Add to this these 2 more new projects and project outwards: we are seeing exponential development and evolution in this economic space. Many more black, grey, and unrestricted markets will bloom — expect to hear more about this soon!

In other news, China is still wishy-washy about Bitcoin, but hasn’t outright banned it, and since some time has passed since the last definitely-going-to-be-banned rumors spread, the price has come back up a bit to around $500, from a low of approximately $350. Ultimately, the failure of Mt. Gox brought the value down by half in the early part of 2014, simply because so many people lost their money, and also because of all the FUD (fear, uncertainty, and doubt) spread about by the media; read: “Mt. Gox failed; Bitcoin’s dead!” Such proclamations will likely continue to be heard for a few years to come for a variety of reasons, but whatever happens in one country or region need not happen in another (I’m talking about legislation, FYI…). Finally, I will say I believe Bitcoin’s value will continue to rise as the technology is made more accessible through simple, non-smart phones, as more people learn how to send Bitcoins through SMS, and as more charities and families are able to receive donations and remittances throughout the world with near-0 friction, essentially for free at that.

Lastly, in the news: Sidechain innovation. I’m excited about this for Bitcoin and its future. Basically, instead of creating new alt-coins in the future, it may be possible to update the Bitcoin core to more easily extend Bitcoin into semi-temporary Sidechain-coins with different, varying properties based on people’s needs. Say you need a coin that transacts (or is confirmed) quicker — you simply create a sidechain, put some Bitcoin in escrow to initiate this, and create Side-Quick-Bit-Coins or whatever you wanna call them. Then when or if the need is gone, return the Bitcoins in escrow to the normal Bitcoin network. I’m fuzzy on the details, but stoked about the implications, particularly for Bitcoin’s ability to compete with Ethereum and other Bitcoin 2.0 protocols like Mastercoin and Colored Coins. The bottom line is new functionality and greater scalability with this.