February 23rd 2018.
Next club meeting Monday 5th March 2018.
· Subject - Club Auction
Monday 9th April 2018.
Monday 30th April 2018 (Note date change due to Bank Holidays).
At the February meeting we welcomed our own Chris Moore (and Rachel) who gave a talk on Bitcoin, Cryptocurrencies and the Blockchain.
Chris began by saying how difficult it had been to prepare for the talk. Articles and such like are often unclear and ambiguous and the subject itself is very technical and more suited to mathematicians, though he did spare us the mathematical details. Beginning with the question, “What is Bitcoin?”, Chris illustrated that even formal definitions leave one none the wiser. Chris’s view is that the best way to view “Bitcoin” is not as a currency, even though it is, albeit a digital cuurency. Bitcoin is the most used cryptocurrency, though there are over a thousand others to choose from. A cryptocurrency is a digital currency in which encryption techniques are used to generate units of currency and verify the transfer of funds, operating independently of a central bank. Hence the currency is an outlet for personal wealth that is beyond restriction and confiscation – in theory. In practise, a Government could confiscate your computer and then get you to give them your password for example. Another point about cryptocurrencies is that they are traceable.
So, why did Bitcoin come about? To start answering this, Chris took us back to the question “What is Money?”. These days, money is a type of IOU, the days when you could exchange your banknotes for gold sovereigns are long gone. Chris had examined Government documents that clearly showed that this is how the powers that be think of money, just a promise to pay. What makes it special is that everyone buys into it. Money is a store of value, a unit of account and a medium of exchange. Historically it has also been required to be incorruptible, divisable, uniform and with limited supply – a good definition of Gold as currency. Currency is issued by the Bank of England and the Royal Mint, also in the form of Central Bank Reserves, ie. loans to banks. High street banks issue loans to customers and customers create money by using their accounts/cards. Only a fraction of this movement of money is actually backed by anything tangible. Supply of money is regulated by means of interest rates and such things as Quantitative Easing (printing money). The emphasis is on flows of money. Chris pointed out that there are similarities between the Weimar crisis in the thirties and modern times.
People wanting to protect their assets from inflation, governments wishing to track flows of money, and the Total Global debt having risen to $233 trillion - meaning that the worldwide financial system is not that stable - all provide fertile ground for the development of cryptocurrencies.
Technically, Bitcoin is an electronic ledger, where details of each Bitcoin are kept, including all the transactions it takes part in. Data is added to the ledger in ‘blocks’ and the whole is called the blockchain. Each new block, which contains details of many transactions, can only be added after it has been ‘verified’. The verification is done by ‘miners’, individuals who use their own computers and get paid ‘by the block’. The average time to complete a ‘verification’ is about ten minutes, though you can pay for a quicker verification. The ledger is held in several copies on many computers, called nodes. The maximum number of Bitcoins is 21 million. Chris tried to become a ‘node’ but it proved to be too difficult.
If you want to purchase a Bitcoin you can go to bitcoin.org or there are other facilities such as electrum or Bitpay. You will be asked for a great deal of information, including your passport. Chris declined. Bitcoins are kept in an electronic ‘wallet’ (similar to PayPal) – there are several choices. Not many places accept Bitcoin, only 1 in Reading and 69 in London and 17 ATMs. A Visa type card is available – but not if your British! A PayPal card is a better option, these are debit cards, not credit, you must have the Bitcoin in your wallet before you can spend it.
The history of cryptocurrencies starts in 1998, it was brought to the ‘Proof of concept’ stage by ‘Satoshi Nakamoto’ whom no one knows and who disappeared without trace in 2010. An initial release of a cryptocurrency called ‘Ripple’ took place in 2012 and this became a stable release in 2017. Ripple was intended to enable transfers between banks, without the intermediary use of one of the Central Banks. Another major player was ‘Ethereum’ and modern cryptocurrencies are often based on the Ethereum model. By April of that year the value of Bitcoins issued exceeded $20 Billion. On the day of the talk, the Bitcoins market was worth over £100 Billion and a Bitcoin was worth $7196.
Chris then explained some of the more technical details of cryptocurrencies, including ‘Alt coins’, ‘Hard Forks’, ‘protocols’, ‘white papers’ and ‘ICO’s, which led to new cryptocurrencies, each with slightly different properties. He drew a comparison with the evolution of the five pound note and the Betamax vs VHS battle. Investing in cryptocurrencies is different to investing in a company, you only get the coin not a share of the company that pays dividends.
Chris then covered the future of cryptocurrencies. The Etherium model is favoured because it allows additional capabilities and services to be supplied and can reduce the size of the workforce needed for a particular job, for example, it could be used for tracking property ownership or even keeping track of gambling. Such things are called ‘smart contracts’.
Next, Chris compared the current cryptocurrency storm with the dotcom bubble. He thought that we had reached the end of the ‘euphoric’ stage, where people invested purely because the offer included the word ‘cryptocurrency’. Chris gave some examples of hype, where it was pointed out to investors that they were going to lose money yet still they put money in! Another wonderful piece of hype was a book that advertised ‘Nothing but Blockchain’ for £7.46. Inside was page after page of the word ‘Blockchain’. Apparently it sells pretty well. In general in new technology of this sort, after the ‘euphoric/hype’ stage there should be a gradual rise from the bottom to a ‘Plateau of Productivity’ though no one knows for sure how long this will take. It is likely that the company that really puts cryptocurrencies on the map has not appeared yet, we are waiting for the next Apple or Microsoft.
Chris then explained some of the difficulties with cryptocurrencies, he compared it to using computers before Windows. Cryptocurrencies can only perform 3-4 transactions per second, compared with up to 56,000 with Visa. Low liquidity leads to high volatility, there is a problem if everyone cashes in at once and the value is very susceptible to news reports and rumours. Further problems arise as it is easy to forget a password, the hardware can get corrupted, each transaction is traceable (so it’s not that private), it’s bad for the environment – a great deal of power is consumed by the computers supporting Bitcoin, it’s possible for a group of ‘miners’ to get together and if they account for greater than 50% of all the miners, then they can do what they want to the Blockchain and of course, computers can still be hacked the old fashioned ways, stealing passwords and scamming people.
But, a different future is still possible. The UN has set up a climate Chain Coalition to examine what benefits the technology could bring to, for example, carbon emission trading and even the Central Banks are thinking of setting up their own cryptocurrencies.
In questions, Chris revealed that although it is possible to convert your Bitcoins to other currencies, the price for doing so is likely to be high. He also mentioned that Russia is starting to develop its own cryptocurrency and that various national blocks have dominated the cryptocurrency market from time to time, leading to the worry that one or other of the blocks could manipulate the currencies. Chris discovered from the FCA that they are not examining this possibility, since Government has not said it is within their purview. A further interesting fact was that the most accommodating country for cryptocurrencies is the Isle of Man.
Chris’s final thought was that the technology was likely to be a major part of our future, so we should learn more about it but that its future as simple money was unlikely. Thanks go to Chris (and Rachel) for a very interesting and well researched talk.