We all know that there is a thing called a bitcoin. All over the show, there are stories about bitcoin investors who are now millionaires.
What is the truth? A little story: Tim and I were working at a mining camp in the Congo. The mining camp was dry; no alcohol permitted. We followed the rules and, on the last day, set off for the coast because Tim wanted to swim at the equator. When we got to the coast, we found a site for a hotel, as yet unbuilt. Our driver told us that we could buy alcohol from the site foreman, it being kept in storage until the hotel opened. The site foreman went off and came back with a bottle of Johnny Walker. He wanted 15 000 Central African francs for it (about R300). The only money I had on me was $20. So, I asked if he would take the $20 for the scotch. He took the note and looked at it searchingly. I realised I was dealing with the only person in Africa who had never seen a dollar. He shook his head. Rands would do, euros even. But not this dollar thing.
And now bitcoins. Which are like this: say you have a bitcoin (which you can buy on a number of websites). You send them money, and they send you a bitcoin, which has its own unique serial number. If you want to buy something with a bitcoin, you use software to pay and they send you the goods. There is a huge long explanation about how safe this is, none of it more relevant than, for example, PayPal. To make sure that there are no illegal trades, the serial numbers of all the bitcoin locations and trades are kept in an inventory called a blockchain and those who have huge computers (such as Amazon, Google, Microsoft and others) audit the blockchains for accuracy, for which they get paid in, uh, bitcoins. This process is called mining. Bitcoin is divorced from governments and central banks and so all the many rip-offs perpetrated by the money changers in the temple cannot happen.
Those who espouse the bitcoins give this insight: “Bitcoin is unique in that there are a finite number of them: 21-million. Satoshi Nakamoto, bitcoin’s founder, arrived at that number by assuming people would discover, or ‘mine’, a set number of blocks of trans- actions daily.” How terribly sweet.
“Every four years, the number of bitcoins released relative to the previous cycle gets cut in half, as does the reward to miners for discovering new blocks. (The reward right now is 12.5 bitcoins.) As a result, the number of bitcoins in circulation will approach 21-million, but never hit it.
“This means the bitcoin never experiences inflation. Unlike US dollars, whose buying power the Fed can dilute by printing more greenbacks, there simply will not be more bitcoins available in the future.”
What they do not tell you is that there is a fraction of a bitcoin, called a satoshi (named after the inventor), which is one-hundred-millionth of a bitcoin. So the ‘only 21-million’ argument falls a bit flat, since there will be 2 100- million satoshi.
So, what about bitcoins ? In my opinion, they are nothing but a stunt designed to make the computer people rich. If you hand over your cash to someone who gives you bitcoins, you are just handing over cash and will be out of pocket, unless you can get someone to give you cash for your bitcoins. Assuming that you can buy something on Amazon with bitcoins, in what way is this different from just paying cash?
All this talk about ‘mining’ and auditing blockchains is no different from whatever the bank does when you pay an account electronically.
And then there is the hype. If we are all making money from bitcoins, somebody must be losing money somewhere else – this is the law of life.
I find it all breathtakingly naive or cynically criminal. Either way, I must quote my friend Ketelby: “If you can’t understand it, don’t invest in it.” Think about it.