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Tom's BitCoin 101

Discussion in 'Bitcoin Forum' started by TomB16, May 22, 2020.

  1. TomB16

    TomB16 Well-Known Member

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    I'm posting this for an acquaintance. He's not a member but I will send him a link to this thread.

    As far as I know, this doesn't exist on the net. People just understand it and assume everyone else does or they have no clue and the working of bitcoin is a total mystery. My estimation is that 99.99999% of people fall in the later category, despite everyone claiming to be in the former.

    Being an old guy, I will compare BitCoin to the monetary system I know. To be fair, it isn't a high ratio of people who understand the traditional monetary system but it's a lot more than understand BitCoin.

    Here we go...

    The Fed creates money. They power up their printers and create notes. They also inject it into the financial system through virtual mechanisms. The government gives this money legal value by fiat (they write a law that forces people to accept money as "legal tender for all debts, public and private").

    How much money do they create? For the most part, this is a closely guarded secret. We know that sometimes they create *a lot*. When the fed prints money, the rest of the money becomes worth less (inflation).

    Money represents national productivity so, as productivity goes up, money becomes worth more (deflation).

    Traditional thinking is the Fed should print a bit more money than would balance productivity gains. In other words, it is generally accepted that we should have some inflation. This is purely by convention and not any sort of requirement or "correct" operating mode.

    The government could run up a huge debt and the Fed could print a ton of money to reduce the value of money through inflation. The government can borrow $10, buy 4 loaves of bread, print enough money to inflate the price of a loaf of bread to $12, then pay back the $10 plus a bit of interest, and end up buying 4 loaves of bread for the cost of 1. It's a beautiful thing.

    How do we know the Fed won't go berserk and print so much money, we will be stripped of our buying power? We don't. For those who don't trust the Fed, what options do they have?

    Satoshi Nakamoto did not create the BitCoin currency. He created the BitCoin algorithm and released it to the public domain. The algorithm gained enough mindshare that some people started running the algorithm on their computers in a process called "mining". They did this because it was a novel idea. The algorithm is designed such that running it will result in discovering tokens. These tokens are the BitCoins. All new BitCoins come from miners. Initially, BitCoins were a commodity, not a currency, although it was always intended for BitCoin to be a currency.

    BitCoins, as a commodity, gained value only because people wanted them enough to pay for them. They had artistic value because they were only worth what someone would pay.

    BitCoin turned into a currency the moment the first person decided they wanted BitCoins bad enough they would let people come to their store, buy goods, and pay for them with BitCoin. The currency gained traction due to more people accepting it as currency in exchange for goods and, eventually, people began accepting it as payment for labor. 50 cent famously sold his album "Animal Ambition" for 700 BitCoins in 2014.

    Once you could purchase goods or services with it, BitCoin had real value and became a real currency.

    Miners are trying to inflate the currency. They are trying to find all of the tokens they can, as fast as they can. They are the equivalent of the Fed trying to print as much physical money and inject as much virtual money as possible. The rate of mining is limited by the complexity of the algorith and the cost of electricity.

    So...

    The cost of electricity will fluctuate regionally, around the world. When the cost of electricity goes up in an area, miners will stop mining. Other areas, where power is cheaper, will continue to mine but the community will shrink so there will be fewer BitCoins introduced.

    These days, BitCoin is mined primarily in Slavic states and Asia, where power is cheap (and economies are bad).

    If enough people stop mining BitCoin, the supply will dwindle, pushing the price up, and BitCoin mining will become profitable again.

    The value of BitCoin is tied directly to power, in that power is needed to create new BitCoins to meet demand for the currency.

    When it started, the guy with the fastest CPU would find the most BitCoins. This created an arms race of buying the most, fastest, CPUs.

    Graphics cards have the ability to perform mathematical calculations quickly and massively in parallel. That's how they render images for games. These days, a GPU (graphical processing unit) can have thousands of cores, each able to run calculations. The first guy to mine for BitCoins with a GPU cleaned up, for a while.

    GPU mining dominated until somebody with a ton of money decided to make a custom chip that was purposely built to mine BitCoin. These chips immediately dominated GPU miners. From there, each successive generation of chip (with more power) would dominate the generation before it.

    At this point, there is no legitimate reason for mining BitCoin with a CPU because it will cost you a lot of power for extreme little result, due to the ASIC (application specific integrated circuit) mining. But, CPU mining is still interesting where the power is free and so is the CPU. Enter the hackers. Trojan Horses have been written that infect people's phones, tablets, computers, coffee makers, etc. and immediately start mining, returning any tokens found to a 14 year old in Rajasthan.

    BitCoin is traded like a commodity so, if people stop wanting it, the value will go down.

    New BitCoins are somewhat hard to find so, demand for BitCoin will drive the price up, over time.


    Gotta run! I have to chase some visible minorities off my lawn.
     
    #1 TomB16, May 22, 2020
    Last edited: May 22, 2020
    The Brontide and T0rm3nted like this.
  2. TomB16

    TomB16 Well-Known Member

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    Further,

    One of the ways one country can attack another is to inflate their currency. They do this by counterfeiting and injecting cash into the target economy.

    In 2016, India stopped accepting their own bank notes when they realized about half of them were counterfeit. Pakistan was attacking India's financial system.

    BitCoin is reasonably resistant to counterfeiting due to the complexity of the algorithm. It's a lot more resistant than normal cash, even current stuff with a lot of security features.

    The problem with BitCoin is it exists on computers which are eminently hackable. Someone can simply let themselves into your machine and take it.

    I like BitCoin. I hope it succeeds. It is unlikely I will ever own any but it makes sense as a hedge against inflation and is a likely currency in a SHTF scenario. These scenarios become increasingly more likely over time, as governments become less fiscally rational.

    Another hedge against inflation is owning any hard asset, like a company or real estate. BitCoin is more likely to be useful as currency in the next financial crisis which will be created by political lunacy in the future, shortly after we're done digging our way out of this financial crisis.
     
    #2 TomB16, May 22, 2020
    Last edited: May 22, 2020
  3. Fiacobra

    Fiacobra New Member

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    Good read.
     
  4. hitman

    hitman Active Member

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    LOL

    "The Fed creates money. They power up their printers and create notes."

    Yes they do not need permission to create money...but...they "CANNOT PRINT MONEY OUT OF THIN AIR" either.
    They have to back the banknotes by purchasing US government Bonds so basically the buy and sell US government bonds to influence the money supply.
     
  5. TomB16

    TomB16 Well-Known Member

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    [Edit: edited for diplomacy]

    I wish to address a concern of another poster. Currency circulation is not underpinned by bonds.

    A bond is a debt. The same amount of money exists, it's just loaned to the government.

    Currency is a representation of buying power. Injecting currency is comparable to cutting a pie into smaller pieces.

    Currency injection is a dilution of money's buying power and is not connected to the bond market beyond their use as various indicators.

    In fact, the fed could print a $30T bill, the government could enact legislation to make it legal tender, and that $30T could be used to pay the national debt with plenty left over to dole out to foreign powers. That would create a "Day of the Triffids", post apocalyptic, situation due to erosion of confidence in the government but it is likely to happen, at some point, given how wildly the country's finances are being run.
     
    #5 TomB16, Jun 27, 2020
    Last edited: Jun 27, 2020
    The Brontide likes this.
  6. hitman

    hitman Active Member

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    The only reason I wrote in this thread is due to your lack of knowledge for how the Federal Reserve works and it's tie in to the Government. Do some research before you spew out B**LS**t to look good.

    Have a GOOD DAY so ended the lesson.
     
  7. The Brontide

    The Brontide Active Member

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    Excellent writup @TomB16

    I have been playing with Bitcoin since the early days. More recently I from time to time dabbling by taking advantage of certain moves in the markets, mostly but not always profitable.

    A bit of my history with Bitcoin.

    I dabbled with mining before the first halving on my old emachines. I mined maybe a bit over 55 coins. My hard drive was failing so I was ghosting the drive to my new laptop.

    But alas, a power bump interrupted the process and my hard drive never spun up again.

    Needless to say, I didn't give the coins a second thought as market price at the time made the total value of maybe two bucks and change.

    Ahh those were the days.

    And now I run a local NAS tied to a remote cloud and everything digital on my PC's, laptops, tablets, and phones is on a constant backup onto a raid 10 system with historical snapshots on each file that ever changes.

    Alot of overkill, surely.

    But the coins kinda became a bit more valuable as we all know now.

    And nobody needs to preach to me about writing down the necessary information onto paper so I can re-access my wallet, now forever stored in a perpetual safe place that nobody on this planet can access again ever.

    *Sighs*, we live and learn. :cool:
     
    TomB16 likes this.
  8. B Russ

    B Russ Active Member

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    My understanding has been this....and i will reduce for simplicity....Tell me where i am wrong....

    Ever since we left the gold standard, where $1 was backed by equal weight in gold, we entered the fiat currency system. 1964, i think it was.... Since then.....
    1 USD does not exist until printed by fed (privately owned)
    said $1 is sold to US gov in form of bonds. Gov makes that the currency, but ultimately has to pay said dollar back with interest. If even .02%, the gov pays interest for dollars borrowed from the reserve. Dollars that didn't exist until printed....How could that debt ever be paid in full?

    enter the debt based society. a loan cant be paid in full with something that didn't exist until created, but now must be paid back with interest....So everyone borrows in a ponzie scheme type scenario...If you save, u lose. Because inflation is plugged in to the formula. There will 100% have to be continual money printing. We just put it into ludicrous speed....printing/inflation:) (tsla and spaceballs plug.)....but for real....and though, i wonder where/when the inflation shows up....that seems like it should be more glaring, but is buried deep in cooked books...

    that is the oversimplified, as i have understood fiat currency/vs gold standard.

    anyway, i know this is about bitcoin, but all principals apply when talking exchange rate...IMO.

    Edit: edit....bitcoin, also, last i understood, had a finite number of coins that can be discovered...Once all are discovered, that makes it more like a gold standard than a currency.
     
    #8 B Russ, Jun 28, 2020
    Last edited: Jun 28, 2020
  9. The Brontide

    The Brontide Active Member

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    21 million possible? And about 12 million lost to the ether eternity like mine. Last I heard.
     
  10. TomB16

    TomB16 Well-Known Member

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    The Fed has several ways of injecting money into the economy. Buying government paper is just one thing they do.

    They've recently been buying corporate paper, also. I endorse that approach, oddly.

    They can spend money any number of ways.
     
    #10 TomB16, Jul 4, 2020
    Last edited: Jul 4, 2020
  11. Vdubman

    Vdubman Well-Known Member

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    You know how many hundreds of millions worth of worthless altcoin crypto has been printed The last few years. It’s like monthly there is another ann of the next best thing since sliced bread and bam, printing millions of crypto out of thin air to dump on investors, retail, and exchanges.
     
    TomB16 likes this.
  12. Johnatosos

    Johnatosos New Member

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    Thank you Tom for an awesome post, that helped me to clarify something for myself, and in general, you have very good writing. As a beginner trader I am learning a lot in order to gather as much experience as possible and for me is a pleasure to read such nice posts by experienced authors that help you to learn something. I am currently trying to find the best platform to track bitcoin price and other cryptocurrency prices. Also, I am searching for a good trading platform as well that will not trick me if I win some money and will want to withdraw them later. Nowadays there are a lot of fake ones but the one I am using right now seems to be good.
     
    #12 Johnatosos, Oct 15, 2020
    Last edited: Oct 17, 2020

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