Legit Bitcoin! Is that an oxymoron?

Don’t trust bitcoin? How about legit bitcoin, how about AML Bitcoin? Or is it all just a form of snake oil? I can think of one way to stack the odds in your favour.

Article updated: 9 March 2018 10:00am Author: Michael Baxter

I came off the fence on bitcoin last October, finally concluding it was a mother of a bubble. But, blockchain, as I argued then, and still believe, is a good idea, and may one day be pretty transformative, but even then, I think it is overhyped.

To remind you, the idea of blockchain is to have a decentralised ledger - transactions of any type of asset, whether it be money, ownership of digital music, property rights, shares, or, well the list goes on. The ledger recording ownership of this asset is held on every computer used to transact it - so to hack into it, you would need to hack into all computers, simultaneously. Maybe quantum computers will be able to do that one day, but right now, such synchronised hacking en masse seems to be impossible.

Bitcoin is a very specific form of blockchain, created by the mythical Satoshi Nakamoto. It has two interesting properties and one big advantage. Property one: its ultimate supply is limited - there will come a time when there are no bitcoins left to mine. This property appeals to the libertarians who distrust the way central banks control the money supply. The psychology behind this libertarian motive is similar to the motive behind gold bugs. Indeed, many see bitcoin as a kind of virtual gold standard. It gets complicated, as three new bitcoin types have been created, but that is a story for another day.

Property two: this relates to the way bitcoins are created - via data mining. Bitcoin mining has become enormously energy intensive.

The big advantage relates to the price - currently around $8,500. The fact that so many people are willing to pay for bitcoin, seems to give it a degree of legitimacy.

Legit Bitcoin and AML Bitcoin

Many critics of the currency say that it amounts to little more than a way to buy and sell drugs, fund terrorist activities and porn.

This is what is interesting about AML Bitcoin - a form of blockchain currency that is supposedly impossible to use illegally. See this ad for the product, featuring everyone’s favourite North Korean dictator, or a Kim Jong Un impersonator, proving unable to use the product for various nefarious activities. That’s the thing about AML Bitcoin, it is meant to be 100 per cent compliant with financial regulations.

Legit Bitcoin is something different. This is a market that is sodden with scams - legit bitcoin mining refers to miners that are supposedly trust worthy.

Motivation is the telling point

But why do people buy bitcoin? What reasons are given to buy the asset? It seems just one reason is given - look at how much money you would have made if you had bought it in the past. I regret not buying bitcoin in 2014, when I first wrote about it here, the price has risen 16-fold since then. But halved since peak.

But buying an asset because it has done well in the past is no reason. It’s not worth its weight in ether.
Not so long ago, pyramid schemes were all the rage, I kept hearing, ‘but this one is different’. I could never get my head around why people could not see the fatal flaw.

Bitcoin is similarly flawed.

But there is a bigger problem. This paranoid distrust of central bankers is misplaced - you may disagree with quantitative easing, but a growing economy needs a growing money supply. If the money supply is determined by something arbitrary, such as the amount of gold or bitcoins, this is potentially a recipe for another Great Depression.

The way you can win

But there is a way to stack the bitcoin mining odds in your favour. The biggest cost of bitcoin mining is the electricity - it is more likely to turn in a profit where electricity is cheap. That is why Iceland seems to be a home of bitcoin mining - because of the ready supply of thermal energy. North Africa or the Gulf, via solar power, could be - source of cheap electricity, but because the regions are so hot, the cost of keeping computers cool is prohibitively high. But if you live on the top of a hill, and have a wind turbine to hand, then bitcoin mining could be lucrative.

These views are those of the author alone and do not necessarily reflect the view of The Share Centre, its officers and employees.

Michael Baxter portrait photo
Michael Baxter

Economics Commentator

Michael is an economics, investment and technology writer, known for his entertaining style. He has previously been a full-time investor, founder of a technology company which was floated on the NASDAQ, and a director of a PR company specialising in IT.

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