Making Sense of Cryptocurrencies - Bitcoin and Tulips - Bitconomics 101

Have you notice that when someone tries to explain what a Cryptocurrency is starts by speaking of blockchain, distributed ledgers, Merkle trees (which sounds too much like certain German leader) and other concepts that are unknown to the average human?


Further more, even some influential and experienced leaders conclude that all of them (starting with Bitcoin) are "the fools gold" or Tulip bulbs just because they are trying to compare with what they know.


To really make sense of CC (Cryptocurrencies) we should start by ignoring completely the underlying technology an think in much more simple terms. Curiously, that will give us a hint for a correct economic model of Cryptocurrency and to understand all the fuss created last year.


The conversation between Mrs Newby Blue, Mr Sceptic Red and Mr Philosopher Black goes as follows (using a women character as a new-by is random, no intention behind).


- What is that thing I've heard 'bout...Cryptocurrency?
- It is SOFTWARE.


- Just that?? Seriously??
- Well, yes and no, it is software just in the same manner as PayPal is just software or the Java Virtual Machine is just software or Wassap is just software.
- I told you, all this is just nuts and "tulip mania" you will loose all your money if you buy crypto.


- But then it must be a very complex and sophisticated software with exclusive technologies?
- Nope, most of it is open source and not very complex as per todays standards.
- See? Nonsense and speculation.


- Then... why do cryptocurrencies have huge market value (market capitalization or market cap if you preffer)? Are people crazy by throwing their money in a simple software.
- Exactly
- Well, time will tell, but people are not buying software. They are buying UTILITY.


- What do you mean by UTILITY?
- Different cryptocurrencies offer different use cases.
- Yeah... the main one is being scammed and robbed.


- So if I buy Bitcoin for example, what do I buy?
- You are buying the ability to transfer value within a NETWORK of users.
-  Oh, comm'on we all know that is just for pot sellers and fraudsters.

- Well, that is true, it does have the utility to hide your money and transfer it internationally with little restriction at the moment.
- But that's illegal!
- It is, but nonetheless, it is an utility.


- But if the software is simple, open source, anyone can create a new "coin"
- Yep! They are worth nothing!
- The key to understand the value lies in NETWORK and ACCEPTANCE. Bitcoin has a huge acceptance. Its value as a "branding name" is inmense because lots of people have at least heard about it. Bitcoin has a huge network of people that move it and accept it.


- So, If I create a different currency I would need to start from zero and build a brand and a reputation right?
- That would be right. In fact, most of the new tokens and "cryptos" out there understand this fairly well and create bounty and affiliate campaigns during their launch.
- Oh oh oh... this is clearly a Ponzi scheme in which people buy because others buy!!

- And also, I would need to run a network, right?
- You would need to involve a sufficient number of nodes and users. They value of a network is exponential to the number of users.


- Sorry?
- If two people use a network is not very useful because I can only interact with one other. If 10 people are on a network I can interact with 9 people, so it is x9 more useful, etc...


- I see, so Bitcoin is the best currency, right?
Bitcoin is not technically the best currency out there, the network consumes lost of electricity, it is not fully anonymous like Monero or Bytecoin, the miners have a huge control over the community and does not incorporate extra utilities like other cryptos such as Ethereum, XEM, etc... However, it does have the largest network of acceptance.
- Bitcoin will fall, it is just a matter of people realizing that it has no intrinsic value!!


- Fiat money is coloured paper (de facto, not even that, but an electronic note on a bank's ledger), in fact governments play with its value constantly by using inflation and printing at their will.


- So bitcoin will rise forever?
- Long term speculators hold bitcoin because they believe that the ACCEPTANCE and NETWORK effects will increase exponentially, thus the value will also increase exponentially.

- They are just fools!
- I do not think they are fools. It think they have made an educated guess of the future and made a bet on it. For the moment, it is a good bet.


- But there must be surely drawbacks....
- Oh, if you mean there is risk, of course there is! Technological risks, competing currencies, regulatory risks (laws), ... But if you think that the reward is greater than the risk, buying long term makes sense.


We will continue this conversation here