Golden Times for Bitcoin, Verbatim

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A golden era for Bitcoin. Its value overcame the margin of USD 6000 per Bitcoin. The reason is once again the cleavage of the cryptocurrency, as this week is expected to witness the dawn of the new Bitcoin Gold. The principle of Bitcoin Gold is very similar to that of Bitcoin Cash, but the philosophy beyond these two cryptocurrencies is different.

The first split was intended to increase the block´s capacity to 8MB and program Bitcoin for the use of transactions. It was only temporarily successful. Bitcoin Cash is currently half-dead as the result of transactions taking up less than 1MB of the block’s space. The second cleavage might bear very similar results. In this case, the chasm was aimed at decentralising the decentralised currency. Why? Because the mining of Bitcoin is controlled only by a handful of companies with a substantial computational force.

Jack Liao, the man behind the crop of miners who decided to create Bitcoin Gold, wants to change this disbalance of control by modifying Bitcoin´s settings. Bitcoin will be exclusively mined on graphic cards, causing the mining process to become more decentralised. As for the underlying reason, look for the usual – politics and vested interests of the creators of the new currency. Besides the fact that Jack Liao´s company manufactures hardware specially customized for Bitcoin gold, his miners already managed to extract BTG 200,000 – probably to be sold immediately after the next cleavage.

Seen from a sober perspective, with the advent of the new Bitcoin nothing revolutionary happens, since we are talking about borderline fraud. Yet, the price of Bitcoin soared quickly. The majority of investors boarded the ship of speculation, transferring their portfolios into Bitcoin. This is because when the cleavage occurs, they will receive Bitcoin Gold in a 1:1 ratio to their current stock of Bitcoins. Now, everybody is waiting to acquire it with the intention to sell right away. It is important to note that the cleavage is not supported everywhere so it is necessary to keep the Bitcoin in a place where you can actually obtain it.

The implementation of Bitcoin and the unceasing interest of the media mainly in the context of regulations and usage can also be factored in to the collection of causes of the recent price growth. To put it bluntly, Bitcoin continues to cement its position on the pedestal of public interest.

The president of the World Bank, Jim Yong Kim, lately admitted that Blockchain could be very useful in our current economic environment – however, he simultaneously stressed his fear of the threat of Ponzi schemes in the case of derivatives such as Bitcoin. Cryptocurrencies have also gained the interest of Christine Lagarde, the President of the International Monetary Fund, who sees their potential (while explicitly highlighting Bitcoin) in transforming financial systems and reforming the operation of financial markets. Her attitude towards cryptocurrency regulation thus looks close to positive.

It is not only the IMF or the World Bank whose interest in Bitcoin is growing. More and more states find themselves on the pathway of Bitcoin´s seduction. For instance, Slovenia would like to become the EU´s leading country in terms of the Blockchain. Details were presented by Slovenian Prime Minister Miro Cerar within the unfolded strategy labelled Digital Slovenia 2020. Meantime, the island state of Vanuatu offers a citizenship that would allow you to travel to as much as 113 countries without visas for merely 43 Bitcoins. The Central Bank of another island-state, Mauritius, is planning to use Bitcoin as a collateral. This is hard to imagine due to persisting problems associated with the cryptocurrency´s volatility.

Other courted countries include Bahrain, Sweden, India or Japan, which carries a very influential voice in terms of trading. Last but not least, let us talk about Venezuela, a country that clearly does not want Bitcoin, and which yet offers the help to people desperately in need of escaping the claws of misery caused by socialism. The estimated inflation in Venezuela in September hit the mark of 2400%. The last week of the same month saw a trading of USD 1.1 million in Bitcoins, according to LocalBitcoins, a decentralized market. If we look at the map provided on the webpage, which shows places connected with Bitcoin worldwide, it is clear that there are more and more stores accepting Bitcoins in Venezuela. Likewise, the number of miners in the country is increasing, with digits currently estimated at 100,000.

Despite the fact that many of Venezuela´s citizens are hoping for the best, I is unlikely that Bitcoin could represent real money. With its rigid setting (21 million Bitcoins) and the looming potential of invoking similar harm as an inflationary currency, it’s difficult to envision its operation equal to real “hard” money.

Imagine a situation in which you, as an entrepreneur, decided to borrow circa USD 60,000 in Bitcoins a year ago to carry out a project. This would have equalled to roughly 100 Bitcoins plus interest, for example 5%. Today, you would be obliged to repay 105 Bitcoins, but their value would be nearly USD 600,000. A project producing a tenfold of the original value in merely a year looks like nonsense. We can also try to reverse our scenario. If the value of Bitcoin dropped to a tenth of its original position, you would certainly be happy, but your creditor would be in a significant disadvantage.

There will never be a relevant Bitcoin loan market. Even if we would account for our profits and revenues solely in Bitcoin, the problems would persist, as Bitcoin would gradually destabilize the interest rate, cutting the loan market´s viability to a very short period of time. This would only result in a disintegration of the production structure. Long-term loans are important due to their support of relatively more effective projects which require more time and capital for their functional set up. A short-term Bitcoin loan market would make such durable endeavours impossible, unless people would voluntarily opt for greater poverty. Greater poverty equals shorter production cycles, which then equals a shorter-period loan market. Bitcoin is bad money, but an important technology that can offer many solutions in the field of finance.

Translated by Simon Senčar

Martin Lindak