As you might imagine, we field several inquiries about Bitcoin each week. The intrigue is certainly understandable and we have been doing our own research in an effort to make sense of it all. Our objective is to develop a sober and rational perspective. We do not want to find ourselves among the many wild-eyed (and often wild-haired) Bitcoin evangelists or their equally fervent opponents.
The concepts of blockchain, cryptography, and cryptocurrency are all related and work together to produce the technology we are talking about. My favorite video explanation so far is this one. Here is the basic foundation as we understand it.
- Blockchain technology is a way to keep track of property claims without relying on a central institution. It is still in its infancy and the potential uses are unfolding.
- I will not even attempt to describe the importance of cryptography to the system, but the math behind it is fascinating to learn about.
- Cryptocurrency, such as Bitcoin, provides the economic incentive for voluntary participants to maintain the blockchain. Some cryptocurrencies are intended as a traditional currency alternative, such as Bitcoin. Others are intended primarily as currency to be used for services within the blockchain network.
- The supply of Bitcoin is well understood because it is defined by the software, but the future expected demand will drive the price and is impossible to forecast. The complexity comes from a variety of variables, including speculation, emerging competition, the functional use of the currency relative to other currencies, potential government involvement, and so much more.
- Bitcoin has an intriguing story, including a mysterious founder, that has generated interest in a similar way that YouTube videos go viral. Like many successful stories, it appeals to fear, greed and other sensitive areas of the human psyche. The Yale endowment’s Robert Shiller recently said “It’s a contagion. People are getting excited watching other people invest.” The environment is ripe for wild speculation and volatility.
I sleep well at night owning zero units of Bitcoin no matter what the price movement will be in the coming days and months. If your research leads you to a decision to buy cryptocurrency, we encourage you to do so in small doses that will not materially impact your family’s future.