Thursday, September 26, 2013

What to do about Banks that are "too big to fail" - Support and Use Bitcoin

It's pretty easy to see that there is a problem when banks are getting bailed out by the government because they are "too big to fail". The problem is that because the government won't let big banks fail, they make risky investments to earn more profit. Why do they make risky investments? It's because they know that if the investment doesn't work out, Uncle Sam will bail them out. This means that while tax payers spend billions or trillions of dollars keeping toxic bank debt from defaulting, bank CEOs are making enormous personal profits.[1] [2] [3]

How do we fix this as a nation? Support Bitcoin. Bitcoin is the most popular crypto-currency, and I believe that it will enhance the usefulness of the internet in the same way that the internet enhanced the usefulness of computers.

For a basic overview of what Bitcoin is, here are some good sources: 

For the current exchange rate of Bitcoin, click here.
Why is Bitcoin going to fix big banks? Because Bitcoin eliminates the most fundamental need for banks; a safe place to store money.

The rest of this article is just going to be about why I like the idea of Bitcoins.
  • Divisibility - 1 BTC can be divided down to 8 decimal places. This is an improvement on standard currencies which can only be divided into discrete coins.
  • Rarity - Each Bitcoin was "mined" and is cryptographically unique. The difficult of mining is predictable and increases with time. The total amount of Bitcoins in circulation is public, predictable, and cannot change from the prediction.
  • Transferable - Bitcoin allows for completely secure transactions from anybody in the world to anybody else in the world given they both have an internet connection
  • Relatively anonymous - It's about as anonymous as cash. If you do research, there are ways to make it anonymous.
  • Unprintable - Nobody can simply make more Bitcoins if they want to. It takes computing power to calculate (mine) Bitcoins. The difficulty of mining Bitcoins increases with time. It is not economical currently for an individual to mine their own Bitcoins at a profit because of the cost of power.
  • Decentralized - A growing network of nodes with an agreed upon open source algorithm determine how Bitcoins work. If one node in the network changes the rules, the rest of the network will reject them.
  • Unregulated - So far the currency is completely unregulated. I believe that in the future the government could only regulate it - if they really cared to - as well as they currently regulate cash (not dollars, but physical printed money). And they can't print more Bitcoins like they can with cash.
  • Secure - You don't need to buy a safe or trust a bank to keep it safe. If you follow best security practices it won't be taken from you.
  • Open Source - anybody can see the programming that makes Bitcoins work. This protects against flaws, vulnerabilities, and allows you to trust it - because you know that if there were big problems, people that understand the code (a lot of very smart young people) would fix it or complain about it until somebody else fixed it.
  • Irreversible -  peer to peer Bitcoin transactions are completely irreversible. This could be looked at as a good thing or a bad thing. I view it as a good thing. It means it's harder for somebody to steal from you also. Quality businesses that trade using Bitcoin will refund you the money if they hope to compete in any market that demands good customer service. But it's there choice if they refund it or not. Also, make sure you send it to the right address.
  • Non-Inflatable - The total amount of Bitcoins will continue to increase until the year 2140 and then after that, no new Bitcoins will be mined. There will be 21 million Bitcoins in existence. It will actually deflate slowly because if people lose their Bitcoins, there is no way to retrieve them. But that's okay because it just means other Bitcoins will be worth slightly more. 
Words of caution:
  • New  - because it's new, it is still volatile. If we treat Bitcoins as an investment rather than a currency, then we can make some good comparisons to trading a stock. The biggest factor in the risk assessment of a stock is how big the company is. This is measured as "Market Cap". Market Cap is calculated by taking the total number of share multiplied by the current price per share. For Bitcoin, here is a link to the total number of Bitcoins - currently ~. Multiply this by the value of an individual Bitcoin - currently ~$160 on 9/26/2013. That is almost 1.9 Billion dollars. If you are a younger stock investor, companies in the 1-20 Billion dollar range are a good risk / reward tradeoff.
  • It could be a bubble - Any investment could be a bubble, or the beginning of something big. I'm personally expecting it's something big because of how revolutionary the idea is compared to anything else we have today. Also, I have zero faith in the (mostly) idiots running the U.S. government to not run our country into the ground. So, as Ben Bernanke continues to Quantitatively Ease (inflate / print) your dollars out of value, Bitcoin will go up in value.
  • New - did I mention it's new? It's not very easy to use yet because companies are still developing ways to make it easy to use. Do careful research, and you can figure it out.
  • Diversity - Buy some stocks, gold, dollars - diversify your investments. Plan for it to fail, and you may be happily surprised when it doesn't.
How do you buy Bitcoin?
  • Sign up for an exchange, give them your bank account information, address, first born child, soul, etc. and they will allow you to trade regular money for bitcoin at the current exchange rate.
  • Buy it from an individual who sells it using - admittedly, this seems sketchy. The idea of taking an envelope with cash in it to a public place to meet somebody so they can transfer Bitcoin to you. Pick your poison from the two main options available. If you choose to meet somebody in person, look for sellers that have 100+ previously good transactions on their account. 

1 comment:

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