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Kindle Notes & Highlights
by
Neel Mehta
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January 26 - February 7, 2022
But, because of exponential decay, the money supply will have effectively hit that plateau by the mid-2030s, when 99% of all available bitcoins will have been mined.
And we’re closer to that plateau than you might think: 85% of all available bitcoins had been mined by summer 2019.
The buzz theory
Btc demand 1
During this time, the primary limiting factor on Bitcoin demand was just that nobody had heard of it, so whenever the news media covered Bitcoin,[125] there was a predictable boost in the demand for, and thus the price of, Bitcoin.
But, as the saying goes, all publicity is good publicity; Bitcoin’s price skyrocketed from $13 in January 2013 to over $1100 by that December.
US took down SilkRoad
Indeed, the link between Bitcoin’s price and the public interest in the technology (as measured by the total number of Bitcoin trades) was crystal-clear until mid-2014:
The ease-of-use theory
Btc demand
The speculation theory
Btc demand 3
Meanwhile, a small, stable amount of inflation pushes people to invest — since they realize their money would become worthless if they sat on it forever — which helps keep the economy growing at a healthy rate.
This points to a key fact: the things that make an investment good are different than the things that make a currency good.
On the other hand, the US dollar is very stable, making it a great basis for transactions and the economy; you can trust that a dollar you spend or earn won’t dramatically spike or crash in value.
But investors don’t make dollars the centerpiece of their investment strategy, since there’s (by definition) no profit to be had and, indeed, inflation slowly eats away the value.
In other words, the thing that makes currencies good is stability, while the thing that makes investments good is growth. These are, of course, mutually exclusive. A financial instrument can’t be both growing and stable at the same time.
Bitcoin is a strange financial instrument that is both a currency and an investment. You can use bitcoins to buy and sell things online, or you can buy and hold (or hodl) bitcoins in the hopes of turning a profit. Bitcoin is like Venmo (or PayPal), but if you sent and received stocks. This makes Bitcoin a truly unique financial invention.
But, as we just saw, a financial instrument can’t be a good currency and a good investment at the same time; it has to choose one or the other. It’s technically a currency, but it behaves much more like an investment.
But perhaps the strongest evidence that Bitcoin users value it as an investment, not a currency, is to look at what happened when Bitcoin’s price stayed in a narrow band between roughly $3600 to $4000 from December 2018 to March 2019.
If Bitcoin users really wanted Bitcoin to take off as a currency, they would have celebrated this unusual patch of price stability. People could finally make trades with bitcoins without worrying that their money would become useless or that they’d thrown away a source or profit.
But most people didn’t celebrate that price stability. Instead, it was far more common to hear people saying that Bitcoin was “stuck”[198] or bemoaning that Bitcoin was being “rejected” and facing “resistance” as it tried to keep marching higher.[199]
These are the words of profit-seeking investors, not people trying to replace our current monetary system.
So while Bitcoin can be both a currency and an investment, it’s clearly chosen to be an investment. You can still use it as a currency, but it’s highly flawed — and the things that make it such a flawed currency are the exact same things that make it such an interesting investment vehicle. Bitcoin may not be the future of money, but it may well be a part of the future of investing.
He didn’t see Bitcoin as an alternative investment; he saw it as a payment system. The whole point was to “allow online payments to be sent directly from one party to another without going through a financial institution.”
Satoshi's vision
Remember that miners charge a fee on every transaction in a block. Each transaction specifies a fee it’s willing to pay to get into a block and then goes to the mempool of all unconfirmed transactions.
Note that the fee doesn’t depend on how much money you’re sending. The amount you’re sending doesn’t affect the transaction’s size (in bytes),[209] and miners want to maximize the number of transactions they can fit in a block, so they don’t care what’s in your transaction, as long as you’re paying well.
The bigger problem with fees comes when there’s a lot of congestion: when people are making transactions far faster than miners can bundle them into blocks (and remember that blocks can only be made every ten minutes), the increased demand will drive up the average fee.
Merchants who accept Bitcoin are actually advised to wait for six more blocks to be mined after the transaction goes through to minimize the risk of fraud.
(The people most likely to fall victim to the ransomware were probably the least tech-savvy; why did the hackers expect them to be able to negotiate the confusing world of Bitcoin?)
Over the next few years, the attacker, now armed with Mt. Gox’s private keys, slowly drained the wallets of their bitcoins. Mt. Gox was totally unaware of the theft.
A Bitcoin wallet is only as secure as its private key, and if someone gets ahold of that private key, the money is theirs — and if they steal it, it’s practically irreversible.
But Mt. Gox’s inexcusable slip-up was storing private keys unencrypted on a shared server.
Cold storage takes one of two common forms. The first is a paper wallet, where private keys and addresses are printed on a piece of paper and kept in a safe place.
The other form of cold storage is a USB stick that stores your private key, called a hardware wallet.
It’s secure because your private key lives on the USB stick and never leaves it; transactions are signed on the private key, so you can send money without your (internet-connected) computer ever seeing your private key.
Alex Hern of the Guardian summed up Bitcoin’s proof-of-work mining algorithm well: “Bitcoin mining is a competition to waste the most electricity possible by doing pointless arithmetic quintillions of times a second.”
And, according to one estimate, the mining work required to verify a single Bitcoin transaction uses enough electricity to power an average American household for 22 days, generates the same carbon footprint as over 750,000 Visa transactions (that’s 300 kilograms of carbon dioxide), and generates two golf balls’ worth of e-waste.
The number of blocks you can mine is proportional to the fraction of the world’s total hash power you control,
One quick fix to the randomness of payouts is to join a mining pool, or a club of miners who share their hash power and split the proceeds from any blocks they mine.[324] A sufficiently large pool will mine blocks at pretty regular intervals, so you’ll earn a regular income proportional to the amount of computing power you contribute to the pool.
One newer alternative for more casual miners is cloud mining: you just rent mining rigs from a professional and collect a portion of the profits from whatever blocks your rented rigs mine.
Thus, places with cheap electricity, cold weather, and fast internet (in roughly decreasing order of importance) are great for mining.
No, the real money to be made in the Gold Rush was by selling goods to the miners.
Even more famous than Brannan was a German immigrant named Levi Strauss, who made his fortune selling clothing and fabric to miners.
The popular pickaxe theory argues that it’s hard to get rich by participating in the latest technological craze — but it’s very profitable to sell equipment to those who are.
Bitcoin’s blockchain is huge: at the time of writing, it’s over 250 GB and packing on about 50 GB a year.
For this reason, most Bitcoin users don’t store the entire blockchain on their devices. Instead, they only store a partial copy of the blockchain on their devices, making them what are known as lightweight nodes. They rely on other people to run full nodes, or computers that store the entire blockchain, to validate transactions and make sure they have the latest blocks on the blockchain.
This should worry any proponent of decentralization: the software that’s at the heart of Bitcoin is primarily owned and maintained by a small group of people that are employed and funded by a single company. The potential for conflicts of interest and user-hostile changes by Blockstream is high.
Mining independently, as we mentioned before, isn’t a very sustainable way to make money. So it should be no surprise that mining pools are the most common — and, indeed, the default — way to mine.
A powerful central government and a handful of big companies could control the future of Bitcoin. This is not the world that Satoshi envisioned.
Buterin’s big idea was that blockchains can do more than just record transactions: they can run code, host apps, store data, and really do any kind of computation.
Ethereum thus adds the concept of smart contracts, or mini-apps that live on the blockchain, to cryptocurrency.
If you use smart contracts, you don’t have to trust any humans or institutions like the notoriously shady bookies[438] who take bets or often-greedy insurance companies with confusing policies.[439] This takes Bitcoin’s idea of “cutting out the middleman” one step further.
You can bundle together smart contracts to make more sophisticated Ethereum-based apps, known as decentralized apps, or DApps
