Bitcoin Explained (Video)

Before[1] jumping on the Bitcoin bandwagon, you should acquaint yourself with how it works. I found the following video to be quite helpful.

Ever wonder how Bitcoin (and other cryptocurrencies) actually work? by 3Blue1Brown (YouTube)

Another article, How bitcoins became worth $10,000 covers some of the same territory as the video, but also provides more of the history of Bitcoin as well as details about some of the current factions and infighting among the various communities and e-currency proponents.

“Bitcoin’s status as the default medium of exchange in the blockchain world pushes its value upward in a similar way. Bitcoin is a popular medium of exchange for cryptocurrency-to-cryptocurrency transactions. […]

“This helps to explain why Bitcoin’s price started to soar in early 2017 at the same time as the larger blockchain ecosystem was booming. People needed bitcoins to participate in other cryptocurrency offerings, and Bitcoin became caught up in the general cryptocurrency euphoria. […]”

Finally, the article Bitcoin an even bigger waste of energy by John Quiggin (Crooked Timber) addresses the bubble-like nature and extraordinary wastefulness of making a currency based on “work” in a world already besieged by climate change.

“[…] most of the market value of a Bitcoin reflects the electricity wasted in the calculations needed to “mine” it, with the obvious disastrous implications for the global climate.”

This might not be so bad, if it was actually worth something. But it isn’t. People will make money off of it, but not because anything of value was actually produced in the real world. Bitcoins aren’t even really a currency—there are few places where you can use Bitcoins or any of the other e-currencies. That means that they are just another financial asset class that will make the riders of the bubble a lot of money and lose money for everyone else. It’s a pyramid scheme.

“Despite the huge increase in the market value of bitcoins, they seem further than ever from becoming an actual currency. Unsurprisingly, there’s no sign that governments are willing to accept bitcoins as legal tender. Nor is there any sign that they are displacing standard forms of money. On the contrary, bitcoins now seem to be seen as a financial asset, with no real suggestion that they will ever be a general medium of exchange.”

Quiggin, who is an economist, takes heart that, despite the waste of power, damage to the environment and strong likelihood that people are, once again, being duped, Bitcoin’s success would prove him wrong and prove EMH-supporters right.

“At any rate, the durability and magnitude of the Bitcoin phenomenon, running for nearly 10 years and with a putative value of nearly $US 100 billion, provides us with a very sharp test of the Efficient (financial) Markets Hypothesis. If Bitcoin eventually becomes a currency, the EMH and its supporters will be vindicated, and I (along with quite a few other economists) will have a lot of egg on my face. If the bubble bursts, the roles will be reversed.”

That Quiggin thinks that the “roles will be reversed” is far more hopeful than I’m willing to be: When the bubble bursts, nothing will change and we will all get ready for the next bubble, herded onward by the same cowpokes who drove us to financial ruin during the last one.

Some of the comments on that article offer some interesting insights.