If you deal with Bitcoin, you quickly succumb to the fascination of the cryptographic currency. The application possibilities that result from the use of Bitcoin and the technology behind it seem almost infinite. So it is only understandable that the digital coin has now been able to win over numerous prominent supporters.
Bitcoin has prominent support
Among them was Steve Wosniak, one of Apple’s founders, who turned out to be a big Bitcoin fan at a financial conference in Las Vegas in 2017. Wozniak is enthusiastic about the finite amount of Bitcoin, which is subject to a mathematical limit compared to gold and fiat currencies. In doing so, he supports McAfee founder John McAfee, who previously argued strongly in favor of the cryptocurrency and predicted Bitcoin’s exchange rate to grow to $1 million in 2020. Actor Ashton Kutcher, a technology venture capitalist who has invested in well-known companies such as AirBnB and Uber, supports BitPay, a payment interface that enables merchants to accept Bitcoin as a means of payment. Rapper Snoop Dogg demonstrated his interest in new technologies by announcing that his new album will be “available in bitcoin” and “delivered in a drone”. Unfortunately, he did not stay true to the announcement after the release of the album. For the fame of Bitcoin, it was nevertheless a success.
His musician colleague Mel B., the former Spice Girl, finally made Snoop’s announcement and, in cooperation with a London technology company, accepted Bitcoin as the first female musician ever to use Bitcoin as a means of payment. Mel B. is convinced that new technologies like Bitcoin make life easier. Icelandic singer and composer Björk is also driving the spread of cryptocurrencies. Her album “Utopia” can also be purchased via cryptocurrencies such as Bitcoin, Litecoin or AudioCoin in addition to Euro and US dollars. Pre-orders are rewarded with a small AudioCoin credit for which the cooperation partner automatically sets up block pools. Thus the AudioCoins can be converted into other cryptocurrencies, paid out or even saved. In any case, easy entry into the world of cryptocurrencies is guaranteed.
But of course, Björk also wants to profit from the new payment method. For them, the AudioCoins act like a customer loyalty tool, a real marketing instrument. Reward mechanisms could be implemented, such as the payment of a small amount directly to the fan wallet for linking the Björk shop. Facebook entries or blog posts could also be remunerated. The possibilities seem endless. Even two Montessori schools in New York now want to earn money from the hype about cryptocurrencies. In May 2017, the parents received an e-mail informing them that from now on the school fees could also be paid with Bitcoins and Ether. In New York, which is open to technology, cryptocurrencies have long since arrived in the mainstream, so that the parents of the Montessori pupils inquired about payment options.
The schools quickly recognized the advantages of digital transfer — in particular, the speed and the supposedly low transaction fees convinced the decision-makers. However, once the digital coins have landed in the school wallet, the further handling is still quite conservative — due to the strong price fluctuations, the schools do not pay or speculate with Bitcoin and ether, but rather convert them automatically converted to US dollars immediately upon receipt.
The Crypto Profiteers
Interesting for speculators
Jackie Fenn already described the concept of the hype cycle in 1995, which divides the introduction of new technology into phases. In the beginning, there is always the publication of something completely new, which meets with an enormous interest of the specialized public. The reports multiply, skim and generate exaggerated expectations of possible applications of the new technology. If these expectations cannot be fulfilled promptly, the euphoria that initially triggered the hype quickly subsides. The discussion again becomes emotionally neutral and much more objective than before. The hype is over. Technology only becomes productive when its advantages are generally recognized and accepted.
Related to Bitcoin the Hype grows around the cryptocurrency at present from day to day. The media come straight into travel, recognize Bitcoin as a system, which is free of any regulation and thus no banks or Zahlungsdienstleister needs. In addition, the blockchain is free of corruption or manipulation. But all these advantages, which make the virtual currency fast and forgery-proof and enchant proponents of the cryptocurrency — they seem meaningless against the fact that Bitcoin, Ethereum and Co. have the potential to bring fast money. Almost daily new reports appear on new course bestsellers. This attracts speculators. The number of users, a mixture of Bitcoin enthusiasts and speculators, is constantly increasing. The number of newspaper reports increases daily. Market capitalization is growing. It is still unclear whether we are already at the apex of the hype cycle or whether enthusiasm will continue to grow.
Because one must not forget one thing. Up to now, the topic Bitcoin is quite complex, altogether rather technical, the procurement and storage comparatively complicated - You first have to think your way into this supposed currency of the future. The broad masses have taken note of Bitcoin, but are still failing because of the technical hurdle and are unsettled by countless, partly outdated information, which circulates on the net and Bitcoin as a currency, which can be apparently only for nerds of interest.
For speculators, the technical hurdle is much smaller. This is not about paying with a cryptocurrency or getting paid with it but only about buying and selling. Specialized service providers have long occupied the market for this. This “misuse” of cryptocurrencies ultimately leads to the fact that the leap to the recognized currency is currently not yet feasible. The price is too volatile, the technical hurdle too high to hold one’s own in the market. The SWIFT Institute’s study, according to which Bitcoins are currently used primarily as a capital investment and not as a means of payment, brought certainty. As of the end of 2017, there are approximately 16.9 million Bitcoins with a market capitalization of almost 148.5 billion US dollars. About 36 percent, i.e. 53.46 billion of the Bitcoins, is distributed over only 1000 wallets. This is converted into an average of 53.46 million US dollars per wallet. This supports the hypothesis that the majority of Bitcoins are used for speculative purposes. Their owners are either very wealthy and have invested part of their assets in the cryptocurrency to diversify their portfolio or they have bet on Bitcoin at the right time. They may even have mined themselves at a time when this was still profitably possible. In any case, the stock is held in order to sell it again at a suitable time.
The distribution of Bitcoin riches
The figures thus point to an extreme concentration of assets, distributed among a small proportion of Bitcoin users. The spectacular growth of the Bitcoin share price has quickly turned an elite group of speculators into Bitcoin kings. Among the approximately 22 million Bitcoin owners worldwide, there are just two hands full of billionaires. This small group has a disproportionate impact on the Bitcoin economy. They are very interested that Bitcoin works, that Bitcoin is accepted, that Bitcoin may even become a recognized means of payment. All this influences the price of the cryptocurrency. There are reports of luxury purchases with Bitcoins: big cars, villas and even a flight into space.
Because by the rapid course development Bitcoin created a new generation of the super-rich. Super-rich, who did not have to work their fortunes out, but at the right time on the right horse set. The super-rich, whose investment was partly a few thousand US dollars, invest at a time when a single Bitcoin was still worth a few cents. Or who mined Bitcoins at a time when it was still possible to do so with private hardware.
Bitcoin is transparent. Every single transaction is documented in the blockchain. Just like the content of all wallets. The sender and recipient addresses, as well as the transferred amount of each individual transaction, are stored. In contrast to a bank account, the addresses, i.e. in principle the account numbers, can generally not be assigned to a natural person or a company. This is referred to as pseudo-anonymity. In contrast to a bank account, the individual accounts can also be viewed by anyone. Anyone can check at any time how many Bitcoins are in an account. However, one piece of information remains hidden: namely who owns this account at all. Pseudonym.
So you can find a handful of websites on the net that deals with this topic and fuel speculation about who the owners of these Bitcoin whale lets are. For quite some time, the largest wallet was owned by the American Federal Bureau of Investigation (FBI). The FBI had previously confiscated all Bitcoin stocks from the Silk Road Darknet trading exchange. However, the stocks were auctioned to the highest bidder sometime later.
The currently thickest wallet can be found at the address “3D2oetdNuZUqQHP- JmcMDDHYoqkyNVsFk9r”. Currently, there are about 164,000 bitcoins stored. Their equivalent, as of the end of February 2018: 1.4 billion euros. However, the owner is far less exciting — the daily fluctuating stocks suggest that this is Bitfinex, one of the largest Bitcoin exchanges in the world. The stock exchange probably uses this address, among other things, to save the Bitcoin holdings of its customers. It can, therefore, be assumed that other large Bitcoin exchanges are also among the top addresses.
Nevertheless, one of the large addresses can very well be assigned to a person or at least to a group. They already know who it is about. Satoshi Nakamoto himself is said to have mined over a million bitcoins in the early days of Bitcoin. Unfortunately, he used numerous wallets, one of which, however, has to be attributed to its owner. The address is “1A1zP1eP5QGefi2DMPTfTL5SLmv7DivfNa”, the first Bitcoin address ever created. The Bitcoin Genesis address. Nakamoto has never touched most of the generated bitcoins, has not converted them into a fiat currency, nor is it known that they have ever been used for any other purpose. Why is not known. Nakamoto simply disappeared from the scene in 2011. He may no longer be alive.
This remarkable concentration of wealth does not fit Bitcoin’s ideology. In general, it does not fit Bitcoin’s ideology to use virtual coins as an object of speculation. Satoshi Nakamoto, whoever it is, had conceived Bitcoin as a decent currency that was beyond the influence of banks and stock exchanges. Instead of control, corruption, and manipulation, Bitcoin shines through transactions without a trustworthy third party, instead of through mutual control and the most important thing that makes a currency: trust in its value. When wealth and influence are concentrated in a small group, there is no social trust, mistrust, and envy. Although the situation is similar to the US dollar, the euro and the yen, they no longer have to convince anyone of their worth. The major currencies are socially accepted. The future will show whether Bitcoin can do the same.
Bitcoin as capital investment
The recoverability of traditional currencies results from reserves that are set against a payment instrument. When the Bank of England introduced paper money in 1844, it was backed by a corresponding amount of gold. Theoretically, everyone had the opportunity to exchange paper for gold. It took people some time to accept this mechanism, but eventually, this form of value stabilization spread throughout the world.
Bitcoin is a bit different. In order to guarantee the value of the virtual currency, an artificial link anchored in the protocol was integrated into the production of the coins in order to keep supply and demand in the right relationship. Nakamoto’s protocol foresees that a quantity of 50 Bitcoins will be generated approximately every ten minutes for the first four years. This quantity is halved every 4 years, so that in 2012 only 25 coins per block could be produced, from 2016 onwards 12.5, etc. The number of coins per block will be halved. At some point this value drops to zero, with a total of 21 million bitcoins it is over, no more coins will be generated. This artificial shortage should support the price of Bitcoin and create an incentive to continue mining coins. The lower the payout, the higher the demand, the higher the price.
If one first accepts the fact that, in contrast to traditional money investment products such as real estate, gold, precious stones, coins, antiques or letter brands, Bitcoins in fact neither have a haptic counter value nor represent a shareholding in a company, as is the case, for example, with shares, but when acquiring Bitcoins one invests exclusively in ones and zeros and the firm belief that Bitcoins will actually establish themselves, then one also accepts their suitability as a capital investment or at least as an object of speculation.
A significant contribution to the spread of Bitcoins is being made by online platforms, through which even people with less affinity for technology can now simply buy the digital coin for euros. Without this possibility, the concept would quickly lose its attractiveness. This makes Bitcoin fun — not only for programmers but also for ordinary people who are not interested in the complex technology behind Bitcoin.
Cameron and Tyler Winklevoss are also sure to have a lot of fun today. Many already know them from their lawsuit against Facebook billionaire Marc Zuckerberg, whom the twins had accused of idea theft when they were still studying together at Harvard. Part of the 65 million US dollars with which they were compensated at the time is said to have been invested in Bitcoins with a promising future. One speaks of about eleven million US dollars — at a time when the Bitcoin was still worth about 120 US dollars. The approximately 91,000 Bitcoins that the two bought at that time have since experienced an increase in the value of around 10,000 percent, making the Winklevoss twins probably the most prominent Bitcoin billionaires to date.
Since December 2017, companies and institutions have also had the opportunity to speculate on a change in the Bitcoin exchange rate. From now on, Bitcoin futures can also be traded on the Chicago Mercantile Exchange (CME) and CBOE Global Markets. This form of speculation is attractive for companies, as it minimizes the risk of a rapid price loss that the high volatility of Bitcoin entails. Futures are used to determine the price at which a Bitcoin is traded at a given time. This characteristic of forwarding contracts, as futures are also called, not only protects buyers and sellers against price fluctuations but also leaves room for speculation on future price developments and is thus misused as a kind of bet on the Bitcoin price. For example, an investor speculates that Bitcoin has a certain price on a certain day. If the price is higher on that day, he wins. If it is lower, it was a minus transaction. The US regulatory authority Commodity Futures Trading Commission (CFTC) is responsible for supervising the trading of the new derivatives. The authority is responsible for regulating commodity trading and had voted on the issue for several years before finally classifying Bitcoins as a commodity due to their nature. After the successful launch in the USA, Deutsche Börse also became aware of the success of the future. Here, too, talks are already underway to introduce appropriate derivatives. However, it is still unclear whether and when this will happen.
Advocates see this development as a big step in the acceptance of the cryptocurrency, critics dislike Bitcoin’s change from the originally disruptive approach to an emotionless one.
Bitcoin — equipped for the future
Undoubtedly, Bitcoin offers advantages. Many advantages. The cryptocurrency works without banks or other payment service providers and is therefore free of manipulation and corruption. Because there is only a limited number of Bitcoins, Bitcoins are even largely protected against inflation. The Bitcoin concept is designed for fast transactions and forgery-proof. The transactions themselves are largely anonymous and often free of charge or subject to low transaction fees. In the meantime, Bitcoins can be used to pay for goods and services worldwide. Micro-soft accepts virtual coins in some countries as well as the world-famous film studio Lionsgate Films or the travel platform Expedia.
Nevertheless, many financial experts warn against Bitcoin as a capital investment and forecast the bursting of the investment bubble that has arisen around the virtual currency.
Due to their design, Bitcoins are highly speculative, explains Carl-Ludwig Thiele, member of the Bundesbank’s Executive Board, to the Handelsblatt. The price fluctuations of the last years showed that Bitcoins are not suitable as safe investments at present yet. As Thiele stresses, there are no state guarantees, a total loss for the investors is possible in principle.
In spite of due caution many Chinese and Russians invest a large part of their assets in Bitcoin since their national currencies seem too insecure to them, the fear of the devaluation of their own currency is too great. Although the Bitcoin has already been declared dead several times due to massive price fluctuations, people all over the world are fleeing into the virtual currency. From their point of view, the cryptocurrency offers more security and a faster chance of a sale.
This phenomenon is particularly noticeable in the landlocked state of Zimbabwe in southern Africa. There, Bitcoin’s price on the local Bitcoin exchange golix.io is traditionally more than well above the international market value. While in Germany at the end of February 2018 one has to invest about 8700 Euro for a Bitcoin, in Zimbabwe it is already 10,850 Euro. What here literally screams for rip-off is ultimately only the result of supply and demand, related to the local Bitcoin market. Because it is comparatively small and highly volatile. These are the conditions under which often excessive prices prevail.
Fluctuating prices in different countries and different crypto exchanges are not unusual, but in most cases, the difference is less than 1 percent. In Africa, however, these rules seem to have been repealed. The South African stock exchange ice3x.com is also well above the average with a deviation of about 5 percent. The African economy itself is responsible for this. Zimbabwe, for example, is suffering from a currency crisis. In times of crisis, people tend to invest their money in substitute currencies or safer assets. This creates a high demand for Bitcoins.
Zimbabwe had permitted several foreign currencies as means of payment at the beginning of 2009, including the US dollar, the South African rand, and the British pound. After China had canceled about 40 million US dollars of debt from the landlocked country, the renminbi became the official means of payment from 2015. In October 2015, the Zimbabwe dollar was finally officially abolished.
But Zimbabwe is allowed to use foreign currencies as a means of payment but cannot produce them itself, which is why there is a shortage of genuine banknotes in the country. There is a lack of liquidity. To make up for this shortage, Zimbabwe also introduced promissory notes as a parallel currency in 2016.
Completely unsettled by all these pseudo-currencies, people flee into crypto-currencies. Even companies prefer to be paid with volatile Bitcoins instead of promissory notes and accept high price losses when they transfer Bitcoins across the border.
Anyone who comes up with the idea of profiting from the extreme Bitcoin price in Zimbabwe by transferring local Bitcoin stocks to Zimbabwe and selling them there at an inflated price is advised against this. Trading on the local crypto exchange golix.io requires a bank account in Zimbabwe. A transfer from there to a foreign country is not so easy. The payment on the spot over the bank counter or there EC ATMs is also not possible due to the lack of dollar bills. Thus it is theoretically possible to profit from the exchange rate difference, but in practice, the money is stuck in Zimbabwe afterward. It is precisely this shielding of the local market that ultimately leads to the fact that the Bitcoin rate has not yet self-regulated and adjusted to the international level.
Bitcoin soon more popular than gold
Does this mean that gold has served its useful life as an investment product in the future? The precious metal is still regarded as the most popular investment product in times of crisis and a typical indicator of the mood of crisis in society. The higher the price of gold, the greater the uncertainty on the financial market. Is the cryptocurrency suitable for assuming the function of gold as a crisis indicator? Bitcoin scores above all with the younger generation. According to a study by Facebook IQ from 2016, 92 percent of the so-called millennials (the generation after Generation X) expressed their distrust of the classic banks and financial institutions. The cryptocurrency Bitcoin is regarded as a practical and fast means of payment, which is why the majority of this generation is looking for an alternative to today’s banking system.
Whether Bitcoin or another cryptocurrency will ever establish itself as a global means of payment is still in the stars. The probability is too high that governments will put a stop to development in a good time. Because it is difficult to monitor payment flows, so it is difficult to levy taxes on profits. But nothing is impossible.
It is also difficult from an investment perspective to make a forecast about the potential for value appreciation. According to a study by the SWIFT Institute, Bitcoins do not yet have sufficient acceptance in society to be used primarily as a means of payment. Bitcoins are used as an investment. Perhaps a good approach, because the value of all Bitcoins produced so far and produced in the future (remember, the number is limited to 21 million) is virtually negligible compared to other capital investments such as gold, bonds or shares. Therefore, if only a fraction of these classic investments were converted into Bitcoin, the exchange rate could quickly increase by a factor of ten.
The Bitcoin exchange rate will certainly remain volatile for a long time to come, but in the long term, it has the potential to rise sharply. In any case, Bitcoin probably offers an interesting opportunity to diversify the portfolio and to focus on high price gains.
Pizza for Bitcoins
“A” Gentleman’s Agreement
When Laszlo Hanyecz joined the Bitcoin Forum in 2010, the crypto currency was even less spectacular than today. Just a handful of people were busy with it and nobody knew what groundbreaking development Bitcoin would take in the next few years. The forum members were, therefore, all technology enthusiastic, the speculators of today did not exist at that time yet. Everything revolved around the mines and the actual Bitcoin code in a more playful and experimental context. There was no use case for Bitcoin yet, nothing had ever been paid with Bitcoin.
At that time, the complex computing processes of mining were still handled by the central CPU of the computer. The first discussions arose about being able to use the much faster graphics card processor GPU for the calculations. Also, Satoshi Nakamoto had already expressed himself months before in a post about it and warned to delay the arms race as long as possible.
We should have a gentleman’s agreement to postpone the GPU arms race as long as possible for the good of the network. It’s much easier to update new users if they don’t have to worry about GPU drivers and compatibility. It’s nice that anyone with only one CPU can compete pretty evenly at the moment.
Surely no one could have guessed at that time what dimensions this arms race would actually have only a few years later when entire mining factories would completely displace the smaller home miners.
Laszlo Hanyecz was not only one of the first to use his computer mining Bitcoin when this was still possible from home, but he was also one of the first to convert his computer to mining with a graphics card processor, thus increasing the computing power of his computer many times over. Since the advent of the cryptocurrency, he has been able to secure countless Bitcoins, which the Bitcoin concept envisaged as compensation for the miners for electricity and computing power. In fact, Hanyecz probably owned the largest share of all Bitcoins ever mined at that time. But his contribution to Bitcoin’s history goes far beyond that.
For what use is the supposed wealth if nobody can be found who accepts the virtuous coins as a means of payment? So Laszlo Hanyecz came up with a simple and groundbreaking idea on 18.05.2010: in a forum, he offered 10,000 Bitcoins for 2 pizzas.
I pay 10,000 Bitcoins for a few pizzas … maybe 2 big ones, then I have some left over for the next day. I like it when I have some pizza left to nibble on later. You can make the pizza yourself and bring it to my home or order it for me from a delivery service — but I wish the food would be delivered in exchange for Bitcoins! (…) If you are interested, please let me know and we can negotiate a deal.
Until then, no one had ever accepted Bitcoins as a means of payment in the real world, let alone a pizza baker in Florida, home of Laszlo Hanyecz.
Where to with all the Bitcoins?
Bitcoin’s concept is based on transferring payments directly from one buyer to the next, without any controls. In the absence of a pizzeria that accepted Bitcoin as a means of payment, Hanyecz first needed a middleman to make the deal possible. From his point of view, 10,000 Bitcoins, then about 40 US dollars, were enough to pay two pizzas and compensate the middleman for his efforts.
What happened then is history. A few days later a forum member from England came forward. Jercos, his name, ordered the pizzas from Hanyecz’s favorite pizzeria in Florida from England via the Internet and paid with his credit card. Hanyecz then transferred 10,000 Bitcoin from his wallet to Jercos. Bitcoin’s first step into the real world.
By the way: If one were to rate the pizzas at today’s market price (1 Bitcoin corresponds to about 8700 euros), they would have a value of about 87 million euros.
Hanyecz regrets nothing
If you believe a New York Times interview with Laszlo Hanyecz in 2013, he has not regretted investing a large part of his Bitcoins in pizza to date.
Bitcoins had no value at all back then, so the idea of exchanging them was simply cool.
When Bitcoins reached the value of one US dollar, Hanyecz sold the rest of his crypto assets and bought a new computer from the profit. He is still happy about that today.
Jeremy Sturdivant alias “Jercos” wrote Bitcoin history on 22.05.2010. The then just 18-year-old sold the software developer Laszlo Hanyecz two pizzas for 10,000 Bitcoin. Just one year later, the pizzas would have been worth 57,000 US dollars. The transaction, which can be traced at https://blockchain.info/tx/a1075db55d416d3ca199f55b6084e2115b9345e16c5cf302fc80e9d5fbf5d48d, is considered to be the first documented purchase made via the Bitcoin network. Sturdivant is still a Bitcoin enthusiast today, using Bitcoins like a giro account, doing business both online and offline whenever he has the opportunity. He quickly spent the 10,000 Bitcoin from that time. The equivalent value at that time: about 400.00 US dollars. A good deal for Sturdivant — because he was able to increase his investment tenfold and considerably increase his video games library.
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