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what is bitcoin - bitcoin bull run 2017 - how bitcoin worksBitcoin is one of those quirks in time & space which is as creative as it is destructive.

Never before in history have we had the opportunity to see such gains from an asset, fueled not only by mass hysteria but the new innovations behind the Internet & social media… the price of BTC shot up to $19,000+ at its peak in late December 2017…bitcoin bull run

In order to truly gauge the underlying reality of what made this currency such a boon for some, and a loss for others, is a very simple fact – most people became DELUDED by what it would do for the world.

You see this EVERY time a new technology comes around – one makes a breakthrough and millions of copies/clones are created. The subsequent HYPE surrounding said technology reaches epic proportions, leading millions to become deluded to how transformative it would actually be.

The last time we saw it, it was Facebook & the social media revolution, which is now very much an integral part of our lives. Before that, it was the web in general (more specifically the rise of “Google” and potentially Amazon).

Ultimately, most people tend to jump onto things which are already successful and then try to paint themselves as some sort of sage by predicting its growth / longevity. These people don’t have a clue about anything; their main preoccupation is to make themselves look good.

To this end, it’s extremely important that you should NOT consider what most people say in the crypto space – most are teenagers with absolutely NO idea about the real world.

Bitcoin is built on “Blockchain”

The most important thing to understand is that Bitcoin is one of a plethora of applications built on top of the blockchain database system.

Blockchain was released in 2008 as a decentralized database system – designed to allow applications and computing infrastructure to run on 100’s or 1000’s of systems around the world, rather than the single data processing services which exist today.

The whole idea for blockchain came from the “peer-to-peer” paradigm (as opposed to “client/server” we have today). Peer-to-peer (or P2P) basically means that two or more computing devices will connect & work directly with each other (as opposed to communicating through a central server)…bitcoin peer to peer network

The reason this is important is because it allows for applications to be developed without the need of a central processing service.

So rather than having a Facebook, Google or equivalent, at the centre of all transactions – there is a network which processes the various data submissions and adds them to an extended database that’s then shared across the network as a whole.

Consequently, the possibilities for a number of applications to be developed on top of this network become apparent. Known as decentralized applications, they’re able to function on a global level without the need for any central processor. Whilst there are a number of different applications for this, Bitcoin was created as a way to handle PAYMENT TRANSACTIONS without a central processing facility (bank / government).

To quote the Ethereum Whitepaper:

Satoshi Nakamoto’s development of Bitcoin in 2008–2009 has often been hailed as a radical development in money and currency, being the first example of a digital asset which simultaneously has no backing or intrinsic value and no centralized issuer or controller.

Bitcoin is a decentralized public financial ledger which gives people the opportunity to transfer money (or other transactable data such as emails, bonds or deeds etc) directly to other people, with each transaction stored in a huge public database that runs across 100’s or 1000’s of servers.

The Bitcoin ledger is basically encrypted with a cryptographic (crypto) algorithm which allows the data to be scrambled in such a way that only people with the correct decryption token (coin) can open & read them. This is where the term “coin” originated for the system (each coin is simply a decryption file for the central ledger)…how bitcoin is minted

The problem with Bitcoin is that although it’s a good idea, it has several problems. The most potent is to do with its network.

Whilst blockchain gives rise to a number of better applications than currently exist, the system still requires a way for the data provided by the users to be processed & added to the central ledger. To this end, Bitcoin introduced the idea of mining – whereby a coin (decryption token) is created as a reward for anyone who dedicates their computing power (CPU/GPU) to hashing new blocks in a particular blockchain database.

Although this works well, the main problem is that if you’re relying on this “network” to provide compute resources, they need a good enough economic benefit to persuade them – whilst Bitcoin did this in the beginning, the problem is that it will typically explode the price of each coin as people clamour to try and make as much money from trading them as possible.

This is the issue BTC is facing – its explosive price also has a come-down later on. This will be experienced in early 2018.

Why the High Price?

The big question everybody has is where the price of Bitcoin comes from.

The answer is simple – other people.

Because the only way to make money with crypto assets is to buy/sell on a secondary market, the price of each coin is determined precisely by how much “the other guy” is willing to pay for it.

To give you an overview of why this is important – there are two types of market when looking at financial securities. The first is a primary market, which hosts securities from the primary issuer (be it a company, government or bank). The second is a secondary market, which allows normal people to buy/sell securities between each other.

The reason why secondary markets are important is because they are generally left to the participants in order to determine the price for the various commodities for sale within it.

Whilst this generally works well (no one wants to pay over-the-odds), there are times when the system fails, and people give-in to hype & hysteria. Often described as “bubbles“, this results on highly volatile prices and – ultimately – the sharp spikes we’ve seen from the likes of Bitcoin.

The problem with Bitcoin in particular is that it’s almost entirely misunderstood (as is typically the case with new technology). The underpin is that the masses think that Bitcoin will somehow change the underlying fabric of money – essentially competing with the USD… which is false.

Bitcoin is a payment settlement network – much more similar to Visa or Mastercard than any fiat currency. Indeed, if you want to buy things with BTC, you’re actually just transferring fiat currency to someone else…how bitcoin activity stacks up against other payment networks

The sole reason why people have been buying the various Bitcoin assets is simply to sell them onto other people. Whilst there’s nothing wrong with this, it’s highly indicative of a bubble.

In reality, Bitcoin is meant to be a system which allows you to send money to another party. This works by you taking a bitcoin wallet (client software), putting a Bitcoin inside it (this is where most people have drawn the price from) and then sending the coin to another party (identifiable with a Unique ID number).

The wallet will then send the coin (or equivalent USD/GBP/EUR value) to the other party by way of sending the transaction to the mining network (to have it validated). The transaction is then added to the central Bitcoin ledger (blockchain), to which it’s updated across the entire network…the bitcoin (BTC) transaction life cycle

Whilst this is somewhat effective (although its processing times are woefully slow compared to the likes of Visa or Mastercard), the simple reality is that it’s ALL done without any central processing system (bank / government) who could accept/deny the transaction.

This means the Bitcoin network is actually most effective in facilitating cross border transactions – between two or more parties with whom it could be the case that various governments or regulations have otherwise prevented transactions from being carried out before.

Unfortunately, this functionality has been lost in the rumor & hype surrounding the new coin. The fact is that BTC has value but not the same value as many people have been lead to believe.

What next?

Like ALL of the technological progression of recent times, the allure of growth is almost entirely obscured by the reality of market dynamics.

Any seasoned professional will be able to explain about how an investment is only as good as the value it offers.

Indeed, the trick to creating effective (long term) investments comes in the form of first identifying the intrinsic value of an asset and then matching that to an appropriate price.

From here, the investor is able to determine whether the asset is over priced or under priced (by the market). The way to make a profit is to buy assets which are under priced, wait for them to appreciate and then sell when the price matches its underlying value.

Unfortunately, the majority of technology securities that get offered (typically on the NASDAQ) are hyped to oblivion because of the single biggest facet to value – growth.

Whilst having value is good (and by the way, value is simply a denotation of how the asset can be traded for food — having a “lot” of value means the asset can be traded for a LOT of food regardless of what may happen in the wider world) – what’s more important to many “market makers” is the idea that a product’s value can be disseminated to a large number of people.

The more growth an asset may have (IE the more people who may wish to buy it), the higher its price becomes – typically because analysts will believe its revenue/profit potential to be massive. Consequently, when considering the likes of Facebook’s stock price, the reason why it IPO’d so well because the majority of investors believed it had a lot of growth potential yet untapped… despite the company earning less than Microsoft.

As such, the same phenomenon occurred with Bitcoin. The price of Bitcoin was based on a set of value which was almost entirely false (mass delusion), and what fueled its exponential growth was the idea that it would be needed by a large number of the world’s population.

However, unlike the iPod or Facebook – which had demonstrable market value – the price of a Bitcoin was in no way, shape or form a reflection of its core promise. Consequently, its price begun to fluctuate wildly as most traders simply valued it based on the hearsay & scuttlebutt they heard from others…

bitcoin price charts

Therefore, it’s widely considered two things will happen in the crypto space next:

1. Rise of The “Platforms”

Firstly, a larger amount of money is expected to flood into the platform systems – Ethereum, Ripple & Stellar especially. Unlike Bitcoin, these systems have not been positioned as currencies and are therefore not as hyped as BTC.

Furthermore (and more importantly), the platforms actually have a lot of intrinsic value – as demonstrated by Ripple. They not only facilitate the new decentralized paradigm, but actually provide an environment through which developers are able to create decentralized applications.

2. Altcoin Growth

Secondly, many analysts have predicted the growth of altcoins (coins except BTC). The reason for this is that they have more room to grow, now that BTC has seemingly hit several snags.

As is almost always the case in a market, one company will come to dominate proceedings (BTC), with demand trickling down to other offerings. This is being seen in the crypto space, with many of the other altcoins (especially the likes of Verge) now receiving more intense attention from investors.

Ultimately, the only thing we can say about 2018 is that Bitcoin will almost certainly continue to grow (albeit more slowly) with a number of other coins making some significant gains.

As the market has wisened to how it works, it will likely be the case that more valuable ICO’s will begin to launch, too.

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