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The $1,000,000 Schrodinger’s Cat

HODL

Today, I am going to talk about Hodling.  A while back, some drunk dude in the bitcoin community typed HODL instead of Hold and now it has become crypto-parlance for holding bitcoin.  We say it stands for  Hold On for Dear Life.  This is because Bitcoin has more swings than a schoolyard.  It is highly volatile. I have seen the price drop in half at least three times since I’ve Hodled, but I took these lumps like a Stoic philosopher standing under a tree of well-fed pigeons. It’s been a proverbial roller coaster.

                I first heard about the technology in 2014 in an episode off the Joe Rogan Experience. The idea I found most intriguing was that the bitcoin inflation rate is scheduled in advance, unlike the whimsical monetary policies of Central banks.  There amount of new Bitcoin gets cut in half about every four years. Of course, it took me a good six months of research before I mustered enough courage to buy any.  I asked about it on Twitter and someone gave me a small amount, about $1.50 worth using a twitter app named Change Tip. That app  doesn’t exist anymore, but if you are one of the first ten people to share this blog using the hash tag #minimalstructure, I will send you 28,882  satoshis on the lightning network. Just send me an invoice. I’ll explain how to do that in another blog if you would like.  The short answer is use Blue Wallet

When I first heard it, bitcoin was less than $200 and down from an all time high of $1,300. If you would have bought some at the height of the market, your investment would have been down about 90% percent by 2014. This didn’t discourage me.  If you had Hodled, your BTC would be worth 4X that initial investment assuming you didn’t put anymore money into it while it was cheaper.  If you had held onto it until December of 2017, everybody including your long-lost dear aunt Sally who has never even sent an email would have told you to “Sell! Sell! Sell”

It went all the way from around $20,000 to $3,000 and it’s $5,000 today.  It jumped about 17% the last time I looked.  So you might be asking yourself, what the hell is wrong with this guy?  Is he  more Loco than El Pollo?  I thought bitcoin was dead again. What’s going on here?

                Well, if you look at the worst-case scenario where someone invests in December of 2017 and holds onto it all the way until last month, you are selecting for the worst-case scenarios, which is aweful, but If you started investing in 2015, you are up about 20X.  There is another financial blogger who I love and respect that talks bout once getting $300% returns because he got lucky.  This is 2000% return, and for the record, I am not a millionaire.  If it makes you feel better, I made less than $8,000 in 2017, so it’s not like I had a lot off capital to throw into bitcoin. Even If I had a lot more, I wouldn’t have gone all-in anyway.  I also listened to an podcast about bitcoin in 2015 called EconTalk, an economics podcast hosted by Russ Roberts, professor of Economics at George Mason University.  It’s a great podcast with a wide range of past guests that include Milton Friedman, Charlie Munger (Warren Buffet’s partner) and Thomas Piketty.  I like the show because even though Roberts is biased, he is willing to talk to a wide range of guests.  He even had Gavin Andreasen back in the day when it just $1.00, but I was not lucky enough to listen to the show back then.

                In 2015, he had Wences Casares, CEO of Xapos, on the how. Casares talked about growing up in Argentina a country wrecked by hyperinflation while he was a child. He told a gut-wrenching story about having to run around the grocery isles to try and beat the price labeler to the punch so they could buy their food before the prices went up again.  We don’t really think about this type of stuff in the United States because this country has never experienced hyperinflation.   This clearly illustrates why he is so biased to believe that the technology is so powerful.

The Bitcoin Inflation Schedule

                Bitcoin is designed to eventually be neither inflationary or deflationary.  At first it is inflationary. It started out by increasing at a rate of 50 new Bitcoin issued every ten minutes until the first having after 4 years.  Then it decreased to a rate of 25 new Bitcoin every ten minutes.  In 2015, it decreased to 12.5 new bitcoin every ten minutes.  In 410 days from 4-8-2019 (the date I published this)  the rewards will decrease to 6.25 new bitcoin every ten minutes.  4 Years after that, it reduces to 3.125 every ten minutes.

This is technically inflation, but in about two years the rate of inflation will be less than that of the inflation of the US dollar. Eventually there will only be 21,000,000 Bitcoin.  Technically it’s slightly less, but we all say 21M just for simplicity.  Those 21 million can be divided by 100 million individual units called satoshis.  In other words, there will be 2,100,000,000,000,000 individual units for circa 8 billion people in the world.  At this point, more Bitcoin will be destroyed and no more will be created.  Miners will be paid by fees. Technically there will be some lost coins and forks that may be considered inflation or deflation, but the protocol that everyone deems as Bitcoin has not inflation after that. 

“ Eventually at most only 21 million coins for 6.8 billion people in the world if it gets really huge.  But don’t worry, there are another 6 decimal places that aren’t shown for a total of 8 decimal places internally. It shows 1.0 but internally it’s 1000000000.  If there is more inflation in the future, the software can show more decimal places.” Satoshi Nakamoto, creator of bitcoin. Here’s how bitcoin’s inflation works until 2022:


I didn’t add every halve-ning to this table. Basically, It gets halved every 4 years. Do the rest of the math yourself, don’t  just take my word for it. That’s the beauty of it, you don’t need to trust anybody!

                So, if I had to explain Bitcoin in one paragraph I would put it like this: Bitcoin is an experiment in one where the unit of account is verified by cryptographic signatures on an individual level and a cryptographic hash on the group level. This cryptographic hash time stamps a public ledger that needs no trusted third party or central bank because everyone knows how much Bitcoin has been spent. And how much will be released today, 4 years from now, and 140 years from now. The collective is rewarded with new Bitcoin and mining fees for time stamping this ledger.

In other words, everyone is incentivized to hide their keys and miners are incentivized to keep the public ledger verified every ten minutes.

$1,000,000 Schrodinger’s Cat

In that episode of EconTalk, Wences Casares said he believed that there is about a 50% chance that bitcoin will fail, but there is also a 50% chance that it will succeed and be worth $1,000,000 within the next 15 to 20 years.  Using this framework, I like to compare Bitcoin to Schrodinger’s cat, only this cat is worth $1,000,000 and it stuck in the box for 15-20 years.  It is both dead and alive at the same time, just waiting for an observer to set off the device that either kills the cat or lets it live based on where the proton is at the time of the observation. If we see the proton ends up on the poison gas side, Bitcoin dies.  On the other hand, if the proton does not set off the poisonous gas, one Bitcoin will be worth a million dollars. **

Casares admits that he is super biased, and no one can really foretell the future, but his early childhood experiences clearly have colored his Bitcoin colored lenses.   The world is full of examples where a national currency has failed. We have all heard stories of Zimbabwe, Argentina, Germany after world War 1 where hyperinflation became the sad, scary reality of those nation that printed too much money and were unable to pay it back.  We have recently seen issues with Brexit, protests of austerity in in Greece, and dangerous hyperinflation in countries like Venezuela. Since these are international events, they undoubtedly create political divides, but one thing is clear—These things keep happening again and again. It would be silly to think that every currency in the world will not never have these issues again. Even though most of the world is not in hyperinflation, many countries have currencies that are experiencing 10-20% inflation and most of the world has no access to any banking system. 

I really do not know what bitcoin will be worth in 20 years, but Casares suggest putting no more than 1% of your wealth into this new technology.  He reasons that most people can afford to lose 1% of their wealth.  I think this is an acceptable risk for me, so That’s what I do.  Now you see why I’m not rich, given that I make so little money.    It would clearly be a mistake to put your kids college fund into it or take out a second mortgage, but I think it’s a fine idea to risk 1% for most people as long as you are willing to lose it.  The thing is, even if it does go to a million dollars it is very easy to still lose all your Bitcoin.   If you put it in the wrong wallet, your money is gone forever and there is no customer service to help you retrieve it in bitcoin.  Think of it as digital gold that is buried and can only be recovered with a special shovel. If you lose the shovel you are screwed. No one can get it back to you.

In a way, this is Pascal’s wager for money with one subtle difference. Bitcoin works right now.  I know this because I run a node every transaction gets added to the Blockchain every ten minutes. It’s not dead yet because it still works. This is not to say it won’t be dead tomorrow or 29 years from now.  The future can not be verified, but right now, the past transactions on the Blockchain can be verified.  This is an important point—the future cannot be verified and that is why I can not say for sure that Bitcoin will be around in 100 years. There is no such thing as a sage investment.

                Index funds are the probably the best risk to reward ratio.  Bonds are kind of boring to me, but I understand their purpose.  JL Collins wrote an excellently book called the Simple Path to Wealth that describes all these financial instruments and I highly recommend it and he says nothing about bitcoin or cryptocurrency. You should read that before going deep down the rabbit hole.  He wrote about the big scary events like hyperinflation and deflation.   I just included Bitcoin as another edge versus worldwide hyperinflation.  

To me, it represents an exit plan for people in the countries with no other option, or for people that have no access to a banking system.  To me, this is more valuable than gold… It’s even more valuable than Bitcoin, but that is something you must decide for yourself.  Just make sure you realize that this is not investment advice.  As Satoshi Nakamoto and Mr. Mustache point out, bitcoin does not have a dividend or potential dividend.  Bitcoin is more of a gamble than an investment.  Actually, it’s more like a commodity such as corn or a collectible such as a baseball card, albeit one that allows you to exit the banking system if you have to.  Don’t Risk More than you can afford to lose. I look at it like a coinflip and that’s how you should look at it too. You wouldn’t want to risk your life savings on a coinflip(I hope) and you should also not risk it on a bitcoin flip.

The Cash App is my favorite place to buy it, but please don’t risk what you can’t afford to lose.

https://cash.me/app/MCLFTJTIf

If you would like to store your Bitcoin using Cold Storage, please check out Leger Nano.  https://www.ledger.com?r=6c06a57e6d68

 They are an affiliate, which means I will get paid some money if you get one using this link, but it’s an awesome product that lets avoid exchanges—You know those big news stories you hear about bitcoin getting lost or hacked?  It’s actually the exchanges that get hacked or lose their coins, it hasn’t been the protocol.  You can also store more than bitcoin on it.  Put any questions you have in the comments.

**This is not investment advice. I can’t tell the future and I don’t actually know the percentage of bitcoin going to a million dollars, but It’s an interesting experiment that works right now, even though it is volatile—Which it obviously is.

I also take lightning tips on Twitter @marcsmyname

Thanks for reading.

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I Am Jack’s Ligtning Network Invoice

I listened to Jack Dorsey on The Joe Rogan Experience.  He’s the CEO of Twitter and Square which seem like two completely different companies at first glance.  Square is a financial services company that owns the Cash App which I wrote about in a previous post. It’s my favorite way to buy cryptocurrency because it’s easy and it also gives me the opportunity to send money to anyone, even in fiat.  I get my side hustle income directly deposited into the app which has a routing and checking account number.  Usually, that money goes straight to bitcoin… but the fact is, not everyone is as into bitcoin as I am. I have, however, met someone whom  uses the Cash App even though she has no interest in bitcoin. (I try not to use the no-coiner pejorative)   She uses it to collect rent from a couple tenants.  She is not interested in bitcoin at all, but the app conveniently lets her tenants transfer fiat into her account, and she transfers the fiat into her regular checking account from there.

That’s more powerful than I initially realized.  This app is a technological solution to a huge problem.  The Cash app is an easy way to bank people that have initially been locked out of the banking system because of bad credit, lower income, or just not knowing how to budget properly. Now these people can directly deposit their paychecks into the account and pay their rent to landlords, perhaps buy something online, or even build up savings.  Of course , there is no interest in the checking account, but traditional banks also don’t offer much in the way of interest these days.  A typical bank account pays 0.01% annually.  This translates to $1.00 every year for every thousand dollars of savings.  That doesn’t even beat inflation.  Instead of a savings account, it offers a bitcoin account.  You can save your money or a portion of your paycheck in a deflationary currency.

  Despite the aftermath of the previous bear market, bitcoin has still done exceptionally well compared to the standard savings account.  It was only about $1000 in February of 2016.  A $1000 in a savings account from 2016 would be worth about $1003.03 today.  A thousand dollars of bitcoin bought in 2016 would be worth $3400 today.  It is true that if you bought at $19,000 you would have lost a lot of money, but I like to dollar cost average bitcoin.  I put aside 1% of my income into this bitcoin savings account every month.  You lose some months and you gain some months, but over the long run this dollar cost averaging has served me well.

Jack Dorsey is really the CEO of two communication companies.  Twitter is a microblogging platform that allows anyone in the world to speak through its platform. They have some rules that are sometimes controversial, and he even admits that the platform is not without its problems, but it’s based on this idea that everyone has a right to speak. It’s a first amendment thing. In the United States, we have the right to speak freely.  Our country was founded on this principle.  Twitter gives anyone with a cell phone that same right…for the most part. The Cash App also gives rise to a new kind of communication and the choice of currency that just wasn’t possible before 2009.

Money is also a form of speech, a different kind of communication allows people to communicate value to each other.  Therefore, the Cash app is also a communication platform. It allows people to communicate value either by using fiat or bitcoin. That’s a pretty radical idea.

Recently, an anon on Crypto Twitter that goes by the name of @hodlonaut started something called the Lightning Network Trust Chain.  The idea is to paste a lightning network invoice to your twitter feed and someone will send you a certain amount of satosis. (the smallest unit of bitcoin) then that person will send it to another ln invoice.  It is up to almost 29 million satoshis which I think is about $340 give or take @Jack was one of the people who was handed the torch.  Imagine if it were possible to send someone value as easy as liking a tweet.  It will take some time to make it user friendly, but that’s totally possible.  What if one like =1 cent?  What if you could earn more from a single tweet than the interest in your traditional savings account? What if your microblogging could earn you a living?  That’s how revolutionary this bitcoin thing is.