Bitcoin Price, Gold, and Nonsense – How Not to Value Bitcoins

Important note: If you own more than $1,000 worth of cryptocurrency then you should definitely be using a hardware wallet instead of keeping coins on exchanges.  I recommend a Trezor which you can buy for €89 directly from their website.


Every few days I hear the argument “If x% of the money in gold (or other asset class) moved into bitcoin, a single bitcoin should be worth $y”.  This article explains why this argument is utter nonsense.

The (flawed) reasoning is as follows: the total value of gold in circulation is estimated at US$8 trillion.  If some small fraction of the people holding gold (say, 5%) sold their gold for US Dollars (releasing $400 bn), and the USD proceeds were used to buy bitcoins, the total value of bitcoins (commonly referred to as “market capitalisation”) would increase by that amount of dollars ($400bn), and because we know the total number of bitcoins in circulation, we can derive a price per bitcoin.

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Three common misconceptions about smart contracts

There is a lot of misleading commentary about smart contracts, leading to confusion about what they are and what they can do. Here are three of the most common myths that I have noticed. This builds on a previous piece, a gentle introduction to smart contracts.

Myth: Smart contracts are self-executing bits of code

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In a nutshell: Ian Grigg’s Ricardian contracts and digital assets prehistory

I enjoyed listening to Episode 151 of the podcast “Epicenter” (previously “Epicenter Bitcoin”) featuring Ian Grigg, inventor of Ricardian Contracts and blogger at Financial Cryptography. Here are my notes – part transcription, with some edits. This one is a goldmine and covers many topics: bonds, contracts, cash, Chaumian e-cash, DigiCash, financial cryptography, Ricardian contracts, digital signatures, smart contracts, dispute resolution, Ethereum, triple entry book-keeping, oh my!

Misunderstandings and paraphrasing errors are entirely mine.

This gets fairly technical; if this is hard to follow, it may be helpful to read my introduction to smart contracts first.  Hmm, if it’s still hard to follow, also read about blockchains and bitcoin and Ethereum, and digital tokens.

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A gentle introduction to Ethereum

Introduction

Ethereum builds on blockchain and cryptocurrency concepts, so if you are not familiar with these, it’s worth reading a gentle introduction to bitcoin and a gentle introduction to blockchain technology first. This article assumes the reader has a basic familiarity with how Bitcoin works.

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The emergence of blockchains as Activity Registers

This post tries to describe two very different uses for blockchain technology: Digital Token Ledgers that record ownership changes of digital tokens, and Activity Registers that record timestamped proofs of existence of data or agreements about data.  Bitcoin is used for both.

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In a nutshell: Eris (Epicenter Bitcoin interview – Jan 2016)

I enjoyed listening to episode 112 of the podcast “Epicenter Bitcoin” where Casey Kuhlman, CEO of Eris Industries was interviewed. Here are my notes on parts that I found particularly interesting. Misunderstandings and paraphrasing errors are mine.

If this is hard to follow, it may be helpful to read my introductions to blockchains, bitcoin, digital tokens, and smart contracts first.

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A gentle introduction to smart contracts

What are people talking about when they talk about smart contracts?

In the context of blockchains and cryptocurrencies, smart contracts are:
pre-written logic (computer code),
stored and replicated on a distributed storage platform (eg a blockchain),
executed/run by a network of computers (usually the same ones running the blockchain),
and can result in ledger updates (cryptocurrency payments, etc).

… In other words, they are little programs that execute “if this happens then do that”, run and verified by many computers to ensure trustworthiness.

If blockchains give us distributed trustworthy storage, then smart contracts give us distributed trustworthy calculations.

Smart contracts are one of the functionalities that sets Ethereum apart from other blockchains.

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Big wow for blockchain collaboration amongst banks

I love it.  R3 brings eleven major global financial institutions together on a cloud based distributed ledger 

This is a win for collaboration, blockchains and the frequently-bashed banking industry.  It’s exciting enough to write about at 3am.  It’s exciting because it paves the way for collaborative innovation.  It’s not a major triumph for technology or blockchains, yet, but it’s by far the best that I’ve seen so far.

It is significant in itself that individuals in nine of the eleven banks have cleared blockchain-related comments with their respective communications departments.  That in itself is “positive for blockchains”.  Internal processes make it difficult for staff to make even hand-waving vague comments in the real press.  So that’s a win.

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