Understanding money and bitcoin: Part 2







By Deepak Machado (@dpkmac)


In the previous part of the series, we learned the basic qualities of money and how it evolves. In this part of the series I will explain,

* What is bitcoin?
* How bitcoin works?
* What gives value to bitcoin?

What is bitcoin?

Before getting into defining what is bitcoin, it is better to understand the background as to why bitcoin was invented in the first place. You definitely have heard about the 2008 recession that shook the biggest of the financial institutions throughout the world. But the fact that may not be known to most readers is that this was exacerbated by the aggressive risk taking by banks.

Banks by virtue of design operate on a something called fractional reserve system. For example, if you deposit 10,000 rupees (or dollars), banks would hold 1,000 ruppes with them or with central bank (depending on the cash reserve ratio) and lend the rest 9,000 rupees or invest it. If banks lend 9,000 rupees of your 10,000 rupees, your bank balance is 10,000 rupees and the bank balance of the borrower is 9,000 rupees; so the total money available now is 19,000 rupees. Now replicate this over millions of individuals.

Even many literate among us find it hard to comprehend this. I being an ex-banker, knew it only recently when I started reading more about monetary policies. Money is created with click of a button. This creation of new money coupled with the quantitative easing (just a jargon for free printing of money), gives rise to inflation. This increased inflation results in general increase in the price of goods and services. Your 1,000 rupees this year will lose its value in the coming years, precisely due to inflation. Just think, why is there general rise in the prices of goods and services every year? Why isn’t there a control on this?

Going back to our example, what if one fine day all the depositors landed up on the bank to seek their deposits back? This is called the bank run and this is precisely what has happened in many parts of the world, especially in countries like Cyprus, Greece etc. Governments guarantee deposits up to a certain amount. The situation becomes severe if the banks face defaults from borrowers, eventually going bankrupt with depositors losing their hard earned money. Thus creating a havoc in the economy and consumer confidence.

Lucky that India has a prudent governance model under RBI (Reserve Bank of India) that our monetary policies are closely monitored. But the lure of easy money is hard to let go. Despite this, look at the situation of public sector banks which are currently reeling under NPAs that have become a headache for the government and RBI. This kind of situation becomes a burden on taxpayer money, which would be routed to save these banks from collapse. The opportunity cost here is too much to talk about. Imagine incompetent governments like in Venezuela or Zimbabwe or Argentina. Their currencies are under hyperinflation taking down the savings, deposits and bankrupting the country. I recently read, if you had saved 1 million $ in Venezuelan Bolivar a year ago, it would be roughly 4 $ today. By printing more and more currency, the government is only reducing the value of the existing currency in circulation. Even the mighty US$ is not immune to this. In the first decade of its existence, US$ was 10 times more volatile than bitcoin today.

Fiat currencies are manipulated by governments as they wish, printing excessive amounts, controlling the circulation, controlling the interest rates and so on. These are controlled by one single entity. Too much power wielded by a single authority. When more money is printed, the existing units would be less valuable. This is true with anything for that matter, more so for currencies. The result of this is a high inflation leading to, as I have already mentioned, rise in the prices of goods and services plus, reducing the value of the existing units.

Gold, on the other hand had no central authority, it could not be created out of thin air and was most suitable as a form of currency and store of value. The new stock coming into circulation is limited. Nobody can influence the amount of gold that is available and it can not be inflated. It only makes sense why in India gold is revered as the ultimate store of value. We buy it, we gift it, it is part of our culture, our religious practices. In short, we believe in the inherent quality and scarcity of gold which makes for a great store of value over long periods of time.

But gold, has one important drawback. It is not practical to use it as currency. You can not walk into a store a say that you will pay in gold. That may create problems for you and the store owner. Since the end of gold standard, the importance of gold as a reserve has reduced although many countries still hold huge amounts of gold. Adding to this, the attempts to confiscate gold by by governments is well documents in the pages of history, including in India. Gold is not an effective currency for all practical reasons.

There have been calls from several front to move the control of money/currency from under government control. The value of a currency is quite dependent on the sovereignty of the nation issuing it. And many considered this a great risk.

What’s the solution?

The solution is something that is decentralised and which can store value. And I believe bitcoin suits the bill on all fronts. It is decentralised, meaning no one party, company, individual controls the protocol. No one can influence the circulation by printing more of bitcoin. It is a store of value, where the stock to flow is predictable over its lifetime. Bitcoin in simple words in the digital money best suitable in the internet era.

This is the first time in the history that we are able to transfer value over great distances without relying on any trusted third party, such as banks, paypal, paytm etc. In the year 2008, Satoshi Nakamoto (no one knows whether he is male, or female, group of people. Some say he is alien from another universe and some say he is someone from distant future and has time traveled. Actually it does not matter.) solved a long standing problem within computer science, known as ‘Byzantine General’s problem.’ The solution provided by Nakamoto would result in transfer of value over distances, in a completely trustless way. Read the bitcoin whitepaper.

Bitcoin is akin to gold, but in a digital way. It can be called as ‘digital gold’, scarce and trustless. Pay real attention here: We generally know that something that is digital is never scarce. Think about the pictures, videos, PDFs you receive on WhatsApp or email. They can be replicated n number of times. Nakamoto’s solution in the creation of Bitcoin protocol solves this problem. For the person who invests in bitcoin, the invention of Bitcoin has created new scarce digital gold, bitcoins. Bitcoins are created through a process known as ‘mining.’ Bitcoin ‘mining’ derives its name from gold mining, which requires investment of time and capital. Gold miners employ mining equipment, labour and so on. Bitcoin miners invest in buying specially designed computers (known as Application Specific Integrated Circuits or ASICs) for mining and invest in electricity to power them. Bitcoin has a predictable production schedule and nothing can influence this whereas more gold can be mined as the demand rises.

What’s a blockchain?

You may have heard about this buzzword these days and how it could save the world of all the troubles.. Blockchain is the underlying technology of bitcoin. The blockchain is the ledger that contains the records of all the transactions that have happened on bitcoin since its inception. Each block holds information about transactions and these are attached to the previous block creating a chain and hence the name blockchain.

The ledger of transactions cannot ever be changed or edited. It is practically impossible to change the transactions once they are on the blockchain. If someone could tamper with this, the value proposition of bitcoin would not be justified. When a miner mines a block, independent nodes need to verify the transactions.

How bitcoin works

Explaining how bitcoin works may end up being very complicated and dry. It’s like telling people how combustion engine works or how internet works under the hood. All you want to do is drive the vehicle or use the Chrome browser.

Let’s simplify the things.

Let’s say we are in a garden. I have one mango, you have zero mangoes. I give my mango to you. Now you have one mango, I have zero mangoes. Simple. We both agreed to this. We did not need another person to verify that the mango exchanged hands. Now that I have zero mangoes, i can not give you or anyone else any mangoes.

Let’s say there is digital mango. Let’s say I send you the digital mango. How on earth would you know that I sent the digital mango only to you and not to another friend or friends? If you noticed, dealing in digital goods is tricky.

There is a term for this, it’s called ‘double spending’, meaning spending the same good twice. So, as a solution to double spending may be to create a ledger which tracks the balances and transactions, basically an accounting book. Some company would be incharge of maintaining this ledger. But this also creates problems. What if the company incharge creates more of the same digital copies and what happens when the company servers are down or get hacked?

This is where the Distributed Ledger Technology (DLT) comes into picture.

Under DLT, every participating node or computer keeps record of all the transactions meaning no one party can change the records and even if they change it, other computers on the network will not agree to this and may even distance themselves from the cheating node.

By virtue of being public ledger, it enables multiple aspects. It is open source and the quantity of mangoes are defined and it is scarce. It keeps accurate records of transactions which cannot be reversed or amended. Because it is DLT / public ledger it does not need trusted 3rd parties to verify transactions. Think of the possibilities of this technology in other spheres of life.

Apply this same thing to bitcoin.

Coming back to bitcoin, there mainly 2 parties to creation and maintenance of bitcoin. (There are users of course)

? Miners
? Nodes

New bitcoins are created with a process called mining. These are computer networks with massive computing power which create blocks. To create blocks the miners need to solve a mathematical puzzle, which incorporates hash power and cryptography. (more of this later). As a reward for their effort, a miner who solves the puzzle gets certain amount of bitcoins. This is the only way new bitcoin can be generated.

Nodes are independent devices which verify the transactions and this is a voluntary network and can be run on a decent computer. For a transaction to be valid, majority nodes on the bitcoin blockchain have to agree to this.

The production of bitcoin is controlled by the algorithm which says that the miner must find a specific answer to a given hashing function to create a block. The objective of the miner is to find the hashing solution in order to unlock fresh bitcoins.


Wallets: Let’s say Ramesh and Suresh have bitcoin wallets on their computer or mobile phone. Bitcoin wallets are specialised programs that help you hold your bitcoins. Under your wallet you have something called wallet address. You can have more than one bitcoin wallet address. A bitcoin wallet address is a string of numbers and letters. There are different kinds of wallets, hardware, mobile, computer, paper, brain etc

Bitcoin addresses: For example, following is one of my bitcoin addresses where anyone could send me bitcoins (just try ;):


The thing is this address is completely auditable and public. You can go to www.blockchain.info and check the history of transactions.

Go to this address: 1HB5XMLmzFVj8ALj6mfBsbifRoD4miY36v. This belongs to Wikileaks.org. Everything is transparent. Anybody, anywhere in the world can send you bitcoin and no one can stop this.. But what you can not do is to take bitcoin from this address without the corresponding private key.

Getting back to our example, let’s suppose Ramesh wants to send 1 bitcoin to Suresh. Ramesh asks Suresh for his bitcoin address. When Suresh creates the bitcoin address in his bitcoin wallet, it creates a new public address. Actually at the background, the bitcoin client is creating a key pair consisting of a Public Key and a Private Key. Public key is like email address and Private key is like the email password. You could share your Public address, but if your Private key is shared, anyone with access to the blockchain can compromise your bitcoins.

Verifying transactions (Proof of Work): Now, Ramesh instructs the bitcoin wallet to send 1 bitcoin to Suresh’s bitcoin address. At this point, the nodes will actually check the entire history of the transactions for Ramesh and check the balances of bitcoin under the address. Once they have been satisfied that there actually is balance, it instructs the wallet to carry on with the transactions. At this point miners, let’s call them Khaleel, Pavan, James, use their computers to bundle Ramesh’s transaction along other transactions in the last 10 minutes.

The objective of the miners is to create a block by solving a puzzle. The miners now compete to calculate the cryptographic hash function matching the previous block’s ‘nonce’. Let’s not get too technical here. The end result of mining is that whoever has higher computer power will be able to guess / calculate the cryptographic hash faster and as a result of their effort they are rewarded with bitcoins. At present whoever is successful in mining a single block is rewarded 12.5 bitcoins, at today’s rate is roughly $ 86000. So, at this rate, everyday roughly 1800 bitcoins are created. This rate halves every 4 years, making bitcoin a deflationary currency.

Congrats James, you’ve just mined the bitcoin block and here are your 12.5 bitcoins!

Suppose you say that someone may bring his super computers to mine the blocks faster. Well, the bitcoin algorithm is quite ingenious. If this is the case, the algorithm would adjust the difficulty level of finding nonce depending on the hash rate of the network to match with the block time of 10 minutes.

That was tedious even to write!

What gives value to bitcoin?

Now you might say, bitcoin is not backed by any physical commodity or backed by any government. So why does bitcoin have any value?

Unlike companies, real estate or stocks, bitcoins can not be valued using traditional valuations methods. Bitcoins for that matter fall into a totally different category of goods known as monetary goods. Its value is entirely dependent upon what the market participants are ready to pay for them given its inherent qualities of decentralisation, scarcity and immutability. In the part 1 of the series I mentioned about the origins of money.

At one point, humans valued many goods based on their unique characteristics like scarcity, utility. For example, feathers for their scarcity, salt for utility, gold for its chemical properties etc. Bitcoin on the other hand comes with double whammy. It is disruptive to several industries such as banking, exchanges, money transfer etc and it also disintermediates several industries. By being a currency as well as a protocol bitcoin is poised to disrupt and disintermediate.

The value proposition is not only these. Bitcoin is also a better standard than gold was because it is inherently scarce. It is a sound money (hard money) as against the easy money (fiat) that we are used to. By being open source technology, anyone could build new technology as second layer solutions (Segwit, Lightening network). At present due to its volatile nature, bitcoin does not seem like great store of value and is evolving. It may take decades before the price stabilises to become a great store of value as bitcoin is currently in the transition period between being a collectible and being store of value.

Understanding bitcoin is bit of a challenge and many are curious about diving into the depths of mining and how bitcoin works. Many get disappointed that they are not able to understand this part. But I would say, you need not completely understand the technologies reap the benefits. Many reading this, including me, would not understand how the internet or email works at the backend. But we still use them.

But I truly believe that bitcoin could rid us of many systemic problems and risks that have been injected into the financial system that we currently have. Further, blockchain technology (However, I am yet to see any successful implementation of any blockchain project in the real world other than bitcoin) which is quite revolutionary, can make many things more democratic, agile and straight forward. In no way I am discounting the importance of financial institutions or saying that bitcoin would replace them. The aim is to reduce dependence on the centralised institutes that wield negative effect on our lives and bitcoin very much enables this, a democratic, decentralised, immutable currency and store of value. Bitcoin is governed by mathematics and cryptography. And I believe mathematics is the truth. Bitcoin is truly currency of the people, by the people, for the people.

In the upcoming part of the series, I will cover common misconceptions about bitcoin.

Important note: Kindly note, bitcoin is highly volatile and I would not recommend you buy bitcoin. Even if you do, do not buy more than you can afford to lose. I have heard several people taking huge personal loans, mortgaging house to buy bitcoin. Please do not borrow to buy bitcoin.

Additional information

Bitcoin hash rate, visit: Blockchain.info 

Bitcoin network hash rate is currently at 51.5 terra hashes (51.5 million trillion, or more than a trillion powerful laptops). In comparison, Google’s network hash rate is approximately not even 3% of this. This hash rate is the one which protects the bitcoin protocol. The network has never been compromised by hackers or anyone for that matter. Additionally you may have a look at various charts related to bitcoin on blockchain.info.

Cryptographic hash functions

Bitcoin uses SHA 256 hashing algorithm originally developed by NSA (National Security Agency). Hash functions are one way functions where it is easy to find output for a given input but it is almost impossible to find input value given the output.

For example, for the sentence, ‘i love daijiworld’, hash is bf31ee4fa1ce13b3d5e950dc304ba0274683b7ad66562f34295f7ee0f075c2e6, but given this hash, it is impossible to know what’s the seed word. Even if there is a small change in the input the output completely changes. This is an integral part of bitcoin protocol. If anyone is able to break this algorithm, they can virtually steal your bitcoins. (SHA 256 related, visit: Xorbin)

The contents of the article are gathered / referred from various sources, are for information purposes only and are not to be considered as financial advice. The opinions expressed are that of the author and do not necessarily reflect that of Daijiworld Media Pvt Ltd.


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Comment on this article

  • Deepak Machado, Belman / Dubai

    Sun, Sep 09 2018

    Thank you for the great discussion and comments, both ways. I have myself learnt a lot through valuable comments and feedback. As understood by few, I am not a bitcoin expert and never have I claimed this!! Very few people in the world really are experts in this ever evolving technology. You are most welcome to disagree or agree to what I have to say. There has been lot of coverage in the media mostly negative, sensational news about bitcoin. I only would request you to read more and understand the tech. There is so much to read, watch. All the best.

    DisAgree Agree [1] Reply Report Abuse

  • Dina Pinto, Germany

    Sat, Sep 08 2018

    Deepak, I fully understand Bitcoin and its related concepts such as decentralisation is etc. It is late 2018, and I believe most people have read many articles on this topic! I think you don’t know the answer to my question- which is if Country Risk is a concern then a Cryptocurrency which is decentralised and not backed by anyone cannot be much better as it then becomes a more significant risk!
    I never said Bitcoin ‘behaved’ like a penny stock. My analysis demonstrated as an investment, bitcoin most closely resembles a penny stock: i.e. the stock of a failed company that has no assets, no products, no contracts etc. It has nothing to with nascent technology, if you understand Finance, it has to do with the nature of the non-revenue producing asset (please read it again).
    Speculation is the only thing it is used for LOL. Including the Futures market and if an ETF is launched :-) Why do you think people buy and sell Bitcoin as a cryptocurrency? Before you harp on about Blockchain, let me educate you in a simple way: In fact, there is no obvious link between the ‘adoption of bitcoin’, either as a currency or as an investment instrument, and the ‘growth and adoption of Blockchain applications’ For one thing, Blockchain applications are not bound to use the Bitcoin chain; they can use the Blockchain of any other thriving cryptocurrency or a so-called permissioned Blockchain. Second, such services would not incur in any significant consumption or sequestering of Bitcoins. Bitcoin as a cryptocurrency and Blockchain are mutually exclusive.
    Look, I think these concepts are a bit beyond you, and it is not fair for me to ask questions and make comments that are in reality very complex for an average reader to grasp. So I will leave the conversation here.

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  • Deepak Machado, Belman / Dubai

    Sun, Sep 09 2018

    Thanks for your inputs Dina.

    I would guide your attention to countries such as Venezuela, Zimbabwe where the usage of cryptocurrencies including bitcoin have increased significantly due to the failed state of the fiat. I presume you have already read about these articles. I believe, it is ok those of us living in 1st world countries where we have stable economic governance and stronger central banks. The use cases of cryptos would be much better proven.

    I concur with your pointer on resembling a penny stock. (behaving was my way of putting it)

    For that matter, most of the goods traded on could be considered speculations. I feel that permissioned blockchains could easily be targeted by enforcement agencies and hence may quickly lose value if a country deems it dangerous.

    Sorry, I never termed myself an expert in bitcoin or cryptos, neither is the article a thesis; as you say, these are complex subjects and are also controversial.

    Thanks again.

    DisAgree Agree [1] Reply Report Abuse

  • Shravan, USA

    Wed, Sep 05 2018

    As an Investment Banker, I feel I need to point something out. You have talked about the ‘characteristics of money’ but failed to state just its primary 'functions' with clarity.
    Money is supposed to serve three primary functions: it functions as a medium of exchange, a unit of account, and a store of value. Bitcoin arguably satisfies the first criterion, because a growing number of merchants accept it as payment (the majority on the good old Dark Web!). But it performs poorly as a unit of account and a store of value. No lenders use bitcoins as the unit of account for consumer credit, car loans, or mortgages, and no credit or debit cards are denominated in bitcoins. During 2017 its volatility was approximately five times higher than that of a typical stock, and its exchange rate with the Dollar was about 10 times more volatile than those of the GBP, Euro, Yen, and other major currencies. This makes it an inferior store of value. To quote Lloyd Blankfein the current CEO of Goldman Sachs Group Inc. on Bitcoin “Something that moves up and down 20 percent in a day does not feel like a currency, doesn’t feel like a store of value”.
    So if it cannot serve the three primary functions of money effectively then how it is supposed to supplant what is already established?
    (nb: there is fourth primary function: Standard of Deferred Payments. But for the purposes of illustration I have kept things simple here).

    DisAgree Agree [8] Reply Report Abuse

  • Deepak Machado, Belman / Dubai

    Fri, Sep 07 2018

    Hi Shravan, I believe, I covered this point in the part 1. Bitcoin has been here roughly 9 years. In that sense, it is just evolving from being a collectible to store of value and to some extent, unit of account+mediium of exchange in some countries (Japan, Australia mainly).

    Volatility is one of the main issues, and this may be due to its nascency. USD has lost most of its value compared to when it came into existence. Gold which is much of a sound money than even bitcoin, also experienced great volatility in the days when it started trading on exchanges.

    I believe with the increase in the market capitalisation of bitcoin over few decades, the volatility would reduce.

    DisAgree [5] Agree [1] Reply Report Abuse

  • Shravan, USA

    Fri, Sep 07 2018

    You miss my point. For something to be classified as 'money', it needs to fulfil all three functions: as a medium of exchange, a unit of account, and a store of value. Merely being a store of value is something Gold with its Market Cap of $7.8 trillion compared to the total cryptocurrency Market Cap of about $202 billion) and low volatility can fulfil much better!

    Also, why would increased Market Cap reduce Volatility? Are there no other reasons why Bitcoin is volatile in nature? Can you explain the economics behind your comment?

    Can you give also give us solid examples where Bitcoin is a medium of exchange without it being tethered to and cashed out in some Fiat currency by a business? For that matter an example of it being a sole unit of account.

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  • Deepak Machado, Belman / Dubai

    Sun, Sep 09 2018

    Thanks Shravan for your inputs. I am of the opinion that money evolves through different stages. For any commodity to be considered as medium of exchange, it needs to prove it is a worthy store of value. And bitcoin exhibits these qualities of sound money through its features such as decentralisation, immutability etc. There are more than few reasons for bitcoin to be volatile, such as, high speculation, ownership with few hands, no regulation, not being mainstream etc. When we have these sorted out, we could see less volatility in bitcoin. It's quite early for any prediction as usecases and understanding is just evolving. It is also fair to give chance to new and evolving technologies. Right now, not many individuals know or are aware of things like bitcoin or cryptocurrency.

    The network effect is yet to build out for bitcoin or any cryptocurrency to be unit of account. When more and more merchants start denominating their goods, services in bitcoin or any other cryptocurrency, there may no longer be requirement to convert it into fiat. But as of now the truth is, as you said, we still need fiat as a cash out medium.

    I would highly recommend you to get hold of a book called, Bitcoin Standard by Saifedean Ammous, who is an economist and has great inputs.

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  • Daniel, Zurich, Switzerland

    Tue, Sep 04 2018

    Dear Deepak,

    I was sent this link by an ex-student of mine for my opinion as I am a retired Professor of Economics.
    I have read both this and your previous article with interest, and it has provided me with amusement and some concern.

    Amusement at how you have addressed the issue of ‘money and bitcoin’ and grave concern that you are doing this at a time when the SEC and CFTC in the USA are about to give decisions on bitcoin-related financial instruments. Their decision is predicted to impact the price of bitcoin negatively, and your article, let's face it, is tacitly encouraging people to invest in this speculative line of code.
    Yes, you have put a nice disclaimer and claim not to provide financial advice. However, in the comments below, you are actually advising people where to buy bitcoin.

    I also do not fully believe you have understood what and why ‘Quantitative Easing’ is used (an unconventional monetary policy) alongside conventional monetary policies. Jan Tinbergen the Dutch Economist would turn in his Grave reading your comment.

    You also state: “But I truly believe that bitcoin could rid us of many systemic problems and risks that have been injected into the financial system that we currently have”. Can you elaborate on what these systemic problems are and how bitcoin will free us from them?

    Deepak, going forward you need to do three things: 1) don’t be derivative. There are thousands of articles just like this available with a simple Google search. Be original, 2) if you are going to make assertions then back them up with robust referencing and 3) write an article which provides a balanced view so as not to encourage individuals from going out and speculate (a simple disclaimer does not let you off the hook for an article that maximises your own utility).

    I hope you take my views in the spirit they are intended in.

    DisAgree Agree [11] Reply Report Abuse

  • Deepak Machado, Belman / Dubai

    Fri, Sep 07 2018

    Thanks for your great notes, Daniel.

    My view: But I truly believe that bitcoin could rid us of many systemic problems and risks that have been injected into the financial system that we currently have.

    I will try to answer: Quantitative Easing makes life easy at one end while inflating the money supply on the other hand. I believe some governments take quantitative easing as a solution to the existing debt problems and print more and more money, diminishing the value of the currency in circulation. While majority of the population which save in these currencies unknowingly are victims of the QE. Add to that the control of interest rates! While I am not an economist, I am of the opinion that this short term solution is not an answer for the systemic creation of easy money. This era of easy money would need to stop for us to again experience the positive effects of sound money.

    I have taken your points with great appreciation.

    DisAgree [8] Agree [2] Reply Report Abuse

  • Daniel, Zurich, Switzerland

    Fri, Sep 07 2018

    Dear Deepak,

    Feedback on your response:

    Positives- You have thanked me for my comments which is always a positive and correct thing to do. It should be done for all comments and feedback you receive which is a chance to improve and grow.

    Deltas or Improvement Opportunities-

    a) You have not satisfactorily answered the question of your assertion of what the “systemic problems and risks that have been injected into the financial system” are and how bitcoin can help us get rid of these problems. Your opinion or ‘view’ without the backing of a reference from an authoritative source means absolutely nothing.

    b) You have tried to educate someone who has taught Economics all their life about Quantitative Easing. It also demonstrates something you said which is correct- you are not an Economist and demonstrate a rudimentary understanding of the topic. As I have already stated all assertions should be backed up with a reference from an authoritative source.

    c) I noticed from your responses to other comments. You are very combative and don’t seem to address their points without re-iterating the same points from earlier comments. I would expect the responses to be discussing what is being asked not what you think you should be saying.

    d) Finally, as a writer, you will get criticisms and negative responses. How you respond defines your character and demonstrates your subject matter knowledge. Remember, the topic of Money and Bitcoin was not invented by you. Stay objective and take the feedback as a learning opportunity.

    For the benefit of the readers and yourself here is a link to a Key Note Lecture by a Member of the Executive Board of the European Central Bank on “Conventional and unconventional monetary policy”:

    Good luck with your future writing.

    DisAgree Agree [5] Reply Report Abuse

  • Deepak Machado, Belman / Dubai

    Sun, Sep 09 2018

    Dear Daniel, thanks once again for your inputs and area of improvements suggested.

    a) I would highly recommend you read and follow a gentleman named Andreas Antonopoulos on YouTube. I found real value from his views.

    b) I would be delighted to read and understand your research on similar topics of finance and economics.

    c) My intention was never to be combative; if I have come across as such, I apoloise.

    d) Thanks for the reminder.

    Thank you for sharing the links.

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  • V.K. Bhat, NY/USA

    Mon, Sep 03 2018

    Hello Sir,

    I would like your insights on the criticisms as Bitcoin as Money.

    Bitcoin is said to be a “commodity money”, which cannot be a store of value without having its own value established before becoming money. So in plain English for Bitcoin to become money it has to be associated with something so: “1 Bitcoin today costs $7,280 or ‘xyz’ INR/JPY/GBP”.
    Furthermore, Bitcoin itself is said not be an effective form of ‘money’ in itself for many reasons. E.g. Its extreme fluctuations undermine any useful function for it to succeed in this role. Even if volatility subsides and the currency finds a place in the world payments system, it has another fatal economic flaw. Only 21 million units can ever be issued (also taking into account its divisibility in Satoshis), and a fixed money supply is incompatible with a growing economy.
    The argument goes that in a bitcoin-dominated economy, workers would have to accept pay cuts every year, and prices for goods would gradually fall. Such conditions might lead to public unrest reminiscent of the late 19th century’s free-silver and populist movements—an ironic consequence of a currency known for its futuristic cachet.
    Therefore many Economists argue Bitcoin is not a solution to our problem with Fiat currency. The answer is with how to control government debt and how to maintain the value of your respective government.

    Your thoughts would be much appreciated.
    V. Bhat

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  • Anita, Mangalore/LA

    Tue, Sep 04 2018

    It is refreshing to see someone define the type of money we are dealing with and actually know the free-silver and populist movements! I enjoyed reading your comments very much!

    DisAgree Agree [1] Reply Report Abuse

  • Deepak Machado, Belman / Dubai

    Fri, Sep 07 2018

    While you are correct in thinking it, I would like to highlight that bitcoin is yet to be unit of account in many countries. If you visited Japan, more than 90000 business establishments denominate prices in bitcoin as well. So, I believe it may be matter of time. If I understand correctly, you are saying, bitcoin has value because it is denominated in other currencies? That would not be the right way to look at things. Everything that is tradeable needs to be denominated in some form or other.

    Yes, fluctuations are quite high; it's because of it is a quite new and it is too early. Also there is a huge speculative market running.

    Could you let me know why gold derives value? (some of it is through its industrial use). It's because it is limited in supply and stock to flow is quite low. You can only introduce little new quantity than already produced. Also it requires lot of investment and is labour intensive. I too am of the opinion that bitcoin is not a solution to or replacement of fiat. I believe, it will primarily be store of value for time being. A sound money has features such as scarcity, decentralisation and few others as I have mentioned in the article.

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  • Dina Pinto, Germany

    Mon, Sep 03 2018

    Hi Deepak,

    Interesting article.

    You talk about ‘Country Risk’ at the start of your article. If this is a concern then Bitcoin which is backed by no entity and commonly known to be highly manipulated please do enlighten us then how this is a better option?

    In your article, you have not addressed several vital points which readers need to understand, for example:
    As an investment instrument, Bitcoin is fundamentally different from traditional investments because it has absolutely no source of revenue other than the money provided by the investors themselves. Stocks have dividends; bonds have legally binding promises of redemption with interest; commodities have final consumers who buy them for their intrinsic utility, not for investment. Bitcoin has none of those things.
    Thus, as an investment, bitcoin most closely resembles a penny stock: i.e. the stock of a failed company that has no assets, no products, no contracts etc., and no expectation of ever having any of those things at any time in the future. When one buys such shares, one gets only the right to trade those abstract tokens, nothing else — just like when one buys bitcoins. Like the investor in a penny stock, the bitcoin buyer cannot recover his investment, except by taking that amount from some other bitcoin investor. Whenever some bitcoin investor takes money out of the “game,” some other investor must put that same amount into it. Like investing in a penny stock, investing in bitcoin is not a positive-sum game.
    Therefore Bitcoins price is fictitious since there is no source of revenue that would repay investments in bitcoin, there is no way to make a rational estimate for its value (above zero). There is no explanation for why the price is now 7200 USD/BTC, rather than 0.73 or 70,000. Therefore, the price of bitcoin is mostly determined by speculative traders, who buy and sell without having the faintest idea of why the price is what it is, why it moves, and where it may go next.

    Many Thanks

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  • Anita, Mangalore/LA

    Mon, Sep 03 2018

    Very significant points Dina!!! As a Finance Student, I frequently think people overlook the ugly truth behind Bitcoin, don't do the Math and get their fingers burnt believing they are actually 'investing' when in fact they are actually gambling with their livelihood!

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  • Deepak Machado, Belman / Dubai

    Fri, Sep 07 2018

    HI Anita, would you kindly enlighten us on the 'ugly truth' about bitcoin?

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  • Anita, Mangalore/LA

    Sat, Sep 08 2018

    My sincere apologies- No ugly truth really as Bitcoin is going to bring fairies, unicorns, elves, all things magical into the world and solve world hunger by the end of 2019 :-) OK sarcasm aside and as you are the "expert" and I assume you have done a thorough research into the subject before writing about it- what FACTS do you believe I have based this comment on?

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  • Deepak Machado, Belman / Dubai

    Fri, Sep 07 2018

    Hi Dina,

    bitcoin not being backed by any entity is not a bug, it's a feature. And that feature is called 'decentralisation', which I believe is the most important aspect of any commodity, currency to be called 'sound money.' A sound money only evolves through time, from being a collectible, store of value, medium of exchange and unit of account.

    Bitcoin indeed behaved like penny stock in the first few years of its existence. This is the function of its nascency. Any one party with substantial money could seriously affect the prices by buying huge quantities or selling large quantities.

    If you looked at US$ when it came into existence, it was much volatile than bitcoin these days. Even gold, when it started to trade on exchanges, the volatility was similar to bitcoin.

    With regards to your points on returns on bitcoin, it's been just around for 9 years now and market is just evolving, usage is just getting started. Bitcoin is in a transition period between being a collectible to being a store of value. There are already bitcoin futures, bitcoin ETF introduction is hugely debated these days, there are platforms that will lend you based ob bitcoin as collateral, few states in US already are collecting taxes in bitcoin and so many other features are being worked at as we speak. For you to term it just speculation is not the best description.

    The price of bitcoin is simple economics, supply and demand, nothing else. There are some people who only hold bitcoin for its newness, some are pure traders, some others are speculators who believe that price will rise, some are bears, some are bulls, some are shorters, some are avid fans etc.

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  • Rudy D Soua, Omzoor/Kuwait

    Mon, Sep 03 2018

    Hi Deepak
    An interesting Article !! Many many congratulations!
    What are the factors determined Bitcoin Price? How can we decide on the price going high or low while dealing? Any tools, Formula, calculations, strategy or ideas help us to decide on buying or selling?

    DisAgree [5] Agree Reply Report Abuse

  • Deepak Machado, Belman / Dubai

    Fri, Sep 07 2018

    Hi Rudy, bitcoin price is determined by simple economics: Supply and Demand. Like any asset, commodity, currency, bitcoin price is affected by news (both positive and negative/false).

    DisAgree [1] Agree [1] Reply Report Abuse

  • Vivian Pinto, CALGARY/CANADA

    Sun, Sep 02 2018

    Hay Deepak this is Vivian from Canada how are you tell me is it possible to trade or deal in B C in U A E ?

    DisAgree [1] Agree Reply Report Abuse

  • Deepak Machado, Belman / Dubai

    Mon, Sep 03 2018

    Yes, it is possible Vivian to buy bicoin in UAE through BitOasis. Please contact me over twitter (@dpkmac) for more info and if you need any help.

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  • Jossey Saldanha, Mumbai

    Sun, Sep 02 2018

    I will invest my entire Rs. 15 Lacks in Bitcoin provided I get the same ...

    DisAgree [8] Agree [6] Reply Report Abuse

  • Deepak Machado, Belman / Dubai

    Sun, Sep 02 2018

    Hi Jossey, if the bitcoin exchanges are not accepting payments, you could use localbitcoins.com

    DisAgree [6] Agree [2] Reply Report Abuse

  • sri_elder, Karkala

    Sun, Sep 02 2018

    Good article...

    Article says depositing 10,000 rupees.. Actually this 10,000 comes to person when he earns it.. In other words when employer pay salary. But from where does employer get it? It is actually by raising loans...

    Loans born first and deposit came later.. Today economies are very complex. Worth of money depends on many external factors..

    DisAgree [5] Agree [13] Reply Report Abuse

  • Deepak Machado, Belman / Dubai

    Sun, Sep 02 2018

    Agreed to this. Economy is a giant circle.

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  • Anita, Mangalore/LA

    Tue, Sep 04 2018

    sri_elder...... you are absolutely right. The worth or value of money depends on many Economic and Historical Factors.
    If you study the history of money across the world, intrinsic value cannot be reduced merely to the statement 'just because people give money value' (as many argue when arguing for bitcoin).
    For example, in the US the Federal Reserve Notes History can be traced back to 1861 to the Demand Note. It was issued interest-free, together with many other notes bearing interests. All the notes issued then were government debts, so every note issued then had its intrinsic value almost identical to its face amount. (Going through some changes to what it is today).
    So like this, every Banknote in the world has a genealogy with Intrinsic Value.

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Title: Understanding money and bitcoin: Part 2

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