How Will The Bitcoin Mania End?

“Bitcoin is capitalism, distilled. You should love it!” – Adam Ludwin

I’ve tried to remain pretty balanced in my view on Bitcoin and cryptocurrencies in general. Back in 2013, I said Bitcoin was definitely money and that the ideological hatred of it was irrational. This monetary view is consistent with the general view I have on cryptos as a part of someone’s portfolio – as I said yesterday, no one really knows how this will play out so you need to be extremely cautious and avoid taking recklessly ideological positions in either direction. As a monetary nerd, I am much more interested in the application of cryptocurrencies than I am with the unpredictable value of the corresponding coins. I think it of as trying to decipher the utility of the internet circa 1995 as opposed to trying to figure out if Netscape is overpriced or not.

That’s a good segue into this post. So I’ll get this out of the way upfront – I have no idea how any of this is actually going to play out, but I have an opinion and I think that opinion might help some people better understand what’s going on and what could go on. So let me elaborate on all of this.

First, I think it’s helpful to hash some of this out by defining some of the terms we’re using:

Bitcoin is a peer to peer electronic cash system.¹

Blockchain is a type of distributed ledger created to trace the use of a decentralized application.

Mining is the process of creating new coins in exchange for validating the ledgers and verifying their accuracy.

Cryptocurrency refers to any of the coins being created to incentivize the mining for various blockchains and their corresponding applications.

There are two elements at work here. First, there is the actual utility via an application and second, the coin that validates the ledger that traces that utility. So, for instance, in the case of Bitcoin and the Bitcoin blockchain, the coin itself is a payment processing tool. The Bitcoin blockchain itself is validated by the miners who are incentivized to mine for Bitcoin. You might use Bitcoin to process a payment with a local business and that transaction will be verified via the mining process. So it’s a decentralized payment system that is self-validating and secure. At present, Bitcoin is kind of the “central coin” in a crypto world with a whole bunch of coins. It’s kind of like the reserve currency of cryptos.

The real goal of a cryptocurrency is to create a decentralized system of peer-to-peer applications. For instance, if you had a crypto wallet that traced the title of your house in your name then you could theoretically give that title to a new home buyer in exchange for some amount of crypto. You cut out all the middlemen in the process and the title is secured on the blockchain as a valid transaction. Super secure, safe and inexpensive. You could take this general framework and apply it to millions of other applications.