Protection against the “storm” Entry 12

In my previous entry, I talked about fiat currencies and the many problems they are facing. I was looking for clues as to what we should do with currencies in these times of global change and turmoil.

I mentioned Bitcoin and cryptocurrencies in passing. Now I am going to delve deeper into this, as I consider it an asset to be taken into account as one of the tools that will define the new world order that is emerging, as well as a refuge from the storm.

It is important to note that this is not financial investment advice. What I am trying to do is explain the fundamentals of Bitcoin. How each person uses it should be based on their own analysis.

Furthermore, I think it is a good time to talk about Bitcoin, as it is very popular these days due to its record high valuation.

Basics of Bitcoin.

I will try to explain the concept of Bitcoin in a colloquial and easy-to-understand way. For this reason, I will not go into technicalities, which make explanations much more precise but are more difficult for non-experts to understand.

For those who want to learn more, I recommend the book Bitcoinismo by my friend and great expert Adrián Bernabéu, whom I have also asked to review this article.

Almost everyone already knows that Bitcoin is a cryptocurrency, or a digital currency. Even if they don’t really know what that means. In fact, there is already a first mistake here, which is to think that all cryptocurrencies are similar. And to compare Bitcoin with other cryptocurrencies. I will try to explain the differences below.

I will talk about Bitcoin first, because it was the first to be developed. Then I will talk about the others.

The first thing to understand is that Bitcoin is digital property. By that I mean that the entire Bitcoin support system (its protocol and the mathematics it uses) is designed to make it very clear and indisputable who owns each of those Bitcoins (or each of their parts, which can have up to 8 decimal places) at any given time.

Later, we will see how this ownership is guaranteed. But if we accept that this is true (and it is), we have a system that says that a part of the bitcoins is mine. And I can do whatever I want with it.

If, in addition, the system is developed in such a way as to guarantee that the total amount of bitcoins in existence is finite (and it is), we come to the conclusion that it is a scarce property. Specifically, Bitcoin is designed so that there will never be more than 21 million units.

The fact that it is a scarce property is already of some interest. We still need to find a use for that property. Because if it has no use, it is of no value to me, even if it is mine or scarce.

At this point, another issue with its design arises. It is easily exchangeable. There are no authorization issues, and it can cross borders without difficulty. All of this is done digitally, without having to travel anywhere or transport anything, and without the need for third parties.

So, if there is someone who values these qualities, they may be willing to exchange something of theirs (their car, their house, their USDs, etc.) for my property, which is scarce and easily exchangeable, namely those bitcoins.

From that moment on, bitcoin is almost a “currency.” It will be completely so when many people accept it as a medium of exchange, and when those people accept a market that sets the value of that bitcoin at any given time. That is a matter of custom, adaptation, and sociology, not mathematics or computer science. And… it is happening.

That said, it must be noted that, for now, most people who buy bitcoins do not do so to use them as an immediate medium of exchange. Rather, they do so to hoard them, trusting that their value will rise in the future. In other words, they plan to delay the moment when they exchange them for something else. That is why they call it “digital gold.” The fact is that buyers are handing over their USDs to receive bitcoins, which means that they trust bitcoin more than the USD to hold their wealth, which says a lot.

Comparison with the euro, dollar, or other fiat currencies.

All banknotes of any currency have a number printed on them that is like their identity card. In other words, even though all USDs are worth the same, each USD is different from the others because of that number.

The same is true for bitcoins. Each one is different from the others. That’s why the system can tell which one is mine and which one belongs to someone else at any given time.

Sometimes we have a few USDs in our pockets. Those are clearly ours. However, most of our USDs are in banks. And we all know that the bank does not keep those USDs in an envelope marked “mine” until I claim them. What the bank does is dispose of them as it sees fit (within the limits of the law, …or not always). And when I claim mine, it gives me others that are available at that moment (if they can).

In the meantime, those USDs I have in the bank are actually owned by the bank. It is the bank that owes me, and we have to trust that it will pay up.

However, the bitcoins I have are directly mine. They are mine as long as I keep them and do not deposit them elsewhere (I will go into this in more detail later).

Therefore, from the point of view of ownership, my bitcoins are more mine than my USDs. I can also dispose of them more freely. For example, you can try transferring your USDs to Russia after the sanctions. There will be more than one problem. And there are none if you do it with bitcoin.

On the other hand, some people may be afraid of the idea that Bitcoin is digital. In response to this, it must be said that the balances that appear in your bank account are also digital. There is no physical safe where all those USDs are kept. It is all due to the bank’s computer systems. And we have to trust the bank, because we have no way of accessing the bank’s software to see if it is good.

However, Bitcoin’s software is open source. Anyone can read it. It takes knowledge to do so, but there are many people with that knowledge, and they haven’t found any problems.

In other words, Bitcoin is more transparent than USDs in the bank.

Blockchain: the Property Registry.

Blockchain is one of the tools used by Bitcoin. Although it is a little more complex, we can imagine it as a spreadsheet where all the bitcoins are listed in rows and the owners at any given time are listed in columns. A new column is created each time there is a new owner.

It is designed so that anyone can consult it and see the chain of historical owners of each bitcoin. However, the owners do not appear with their first and last names, but with a “pseudonym.”

Therefore, the claim that Bitcoin is anonymous and secret is false. With Bitcoin, there is total traceability. We can find out how many hands it has passed through in the previous 10 transactions. That is impossible with USDs banknotes.

What is true is that it is not so easy to convert these pseudonyms into names and surnames. That is a job for detectives, and there will be more and more experts in this field.

The blockchain is also designed so that no one can delete or change old data. And so that data from new transactions are only added to the network after being approved by the nodes as genuine transactions.

To understand it better, a good comparison is the Land Registry. It contains the transaction history for each property. No one can delete or change the past. And new information can only be added by authorized registrars. In reality, the Land Registry is a handmade blockchain.

The Bitcoin blockchain differs from the Land Registry in that the registrars are not always the same. And we don’t have to go to a specific place (the Registry), or take deeds, or go to a notary beforehand. Everything is digital. But there is a very reliable process for verifying that the transaction was genuine, for preventing double transactions of the same bitcoin, and for ensuring that the transaction will be incorporated into the blockchain’s history.

Public and private keys.

Another important system used by Bitcoin is that of keys. There are two types: public and private.

To understand this, it is best to compare them to the PIN on our credit cards. That PIN tells the bank that it is really us authorizing the transaction.

Bitcoin keys are used for the same purpose. That is, to guarantee that it is us. However, there are some aspects that improve their functioning compared to card PINs.

The first difference is that Bitcoin keys are much longer than the four digits of a card PIN. This makes them much more difficult for “bad guys” to hack. It is important to remember that much has been written about the risk to Bitcoin posed by the possible future development of quantum computers and the possibility that this could compromise the keys. The fact is that, if this happens, the access keys to our banks are at much greater risk than those of Bitcoin. In addition, work is already underway to use cryptography that will provide solid defenses against quantum computing in the future.

The other relevant aspect of keys is that there are two keys (public and private). As their names suggest, the public key can be seen by anyone, and the private key cannot. The system is designed based on sophisticated mathematics (the elliptic curve, detailed information about which can be found here). Thus, when I order a transfer, those who have to approve it (the miners) can deduce: a) that I am who I say I am; b) that there are sufficient funds in my account to cover the transfer; and c) that I am indeed giving the order. And it is important to know that all this is done without there being a central file of these keys, unlike in banks, where the bank does know my PIN (which is why it can approve the transaction). In the case of banks, if they are hacked, the “bad guy” knows my passwords and PINs. That is not possible with Bitcoin; they could only know my private key if I have stored it incorrectly or if I give it to the “bad guy.”

Bitcoin custody.

There are different ways to “store” bitcoins. The most common are called exchanges and wallets.

Exchanges.

An exchange is the equivalent of a bank. It is a place (the website of the company that manages it) where I can have accounts in my name in USDs, bitcoins, or whatever currency I want. It is mainly used to buy or sell bitcoins (hence the name exchange), but many people, for convenience, leave their bitcoins there for the long term.

It is important to know that if I have bitcoins in the exchange, in reality, for the central blockchain, those bitcoins belong to the exchange, not to me. It is the exchange’s internal software that recognizes them as mine (and owes them to me). This is the same as with USDs in the bank. Therefore, in this case, I do not have the private and public keys for my bitcoins. The exchange has them, and I have my access key to the exchange.

In recent times, more and more banks are being allowed by law to act as exchanges, selling and holding bitcoins. This removes the fear of “dark and marginal markets.”

It is important to understand that if the exchange goes bankrupt, is hacked, commits fraud, or is even blocked by the government, you will lose your bitcoins (again, just like with banks). This has happened several times, as in the case of the famous FTX (news here). Therefore, it is not advisable to leave your bitcoins there after purchasing them.

Wallets.

The other custody system is called a wallet. To understand it, it would be the equivalent of keeping my USDs “under the mattress.” There are many types of wallets, but the common idea behind all of them is that: a) only I have the wallet; and b) I am the one who has the public and private keys associated with that wallet.

Some wallets are only digital. This means that the wallet is an application that I have on my computer or phone. It is convenient, but not recommended for significant amounts, as my devices can be hacked.

There are other wallets that are physical devices, very similar to a USB stick. In this case, the information is on the stick, not on my computer, and is more difficult to hack. As with everything, there are some with better and worse features, as well as different prices. For those who are interested, the expert Lunaticoin has a (long) video explaining all the different options available (you can watch it here).

I would like to clarify something about wallets. Many people ask, “What if the stick is stolen?” The answer is that nothing should happen. This is because bitcoins, in the blockchain, are not directly associated with the stick, but with the keys. And the thief cannot know the keys by connecting the stolen stick to their computer (provided that we do not have them written down on the stick itself, or keep the paper in the same box that was stolen, which would be the equivalent of the clumsiness of writing the PIN on the card itself).

That’s why you have to keep your keys safe. Preferably written down on paper, and never on anything that can be hacked. And keep them in several places to avoid loss due to fire, flooding, or similar. In fact, there are even systems for keeping them on a metal plate.

That’s why there’s a typical phrase in the bitcoin community that says: “not your keys, not your coins.”

The truth is that if you lose your keys, you have lost your bitcoins. And there are many cases of people who bought bitcoins when they were very cheap and forgot where they had the keys. They have been banging their heads against the wall ever since they realized.

The advantage of this system, besides the fact that you clearly own the bitcoins, is that you can cross borders carrying only the paper (or memorizing the keys). You can also leave your inheritance and property by simply handing over the keys (but be careful not to hand them over too soon, as not everyone will act politely). The disadvantage is that the responsibility for taking care of your assets is entirely yours.

There are other, slightly more sophisticated ways of holding bitcoins. It is possible to use wallets with a system called multi-signature. This means that, in order for a transaction to be authorized, several people (or the same person, but with several different keys) from among those with recognized signatures must sign. For example, it is common to require the signatures of two of the three authorized persons, but you can use any number you want. This provides greater security, as well as guarantees in the event of the death of one person without leaving the keys. It also means that transactions are less flexible. It can be useful for storing large amounts (as if they were in a secure safe) and keeping the usual amounts in simpler wallets.

Another way is to have your bitcoins “pledged.” This is a system whereby the bitcoins are yours, but they are held by a third party, who has the keys. This happens, for example, if you take out a loan in USDs secured by your bitcoins (there are systems for doing this).

There is no such thing as a Bitcoin company.

This is more important than it seems. Shatoshi Nakamoto, as the creator of Bitcoin is known, although no one knows who he is, decided to make the supporting software open source and not give control to any company. For the same reason, there is no CEO of that company who can make decisions.

Therefore, no government or authority can sue, imprison, seize, or do anything to the non-existent organization or its directors if they do not like what is happening with Bitcoin. Of course, they can take action against individuals who handle their bitcoins illegally (provided they can identify them).

It should be remembered that exchanges are companies. And governments can ask them for information about their customers.

Speaking of Shatoshi, no one knows who he is, but we do know that he may be one of the richest people in the world. The fact is that he mined many of the first bitcoins. As I have already said, the blockchain keeps track of all movements, so we know that Shatoshi’s wallets have never been moved. Shatoshi may have died without handing over the keys. It is less likely that he lost them (he is the designer and knows the importance of safekeeping). Or he may be waiting for the right moment to “unleash” his fortune.

For the curious, here you can see the funds that researchers believe belong to Shatoshi.

Halvings.

Bitcoin’s mathematical design is organized so that every four years a milestone called halving occurs. The most recent one occurred in April 2024.

What changes with halving is the reward given to miners, which is reduced by half. Since miners receive rewards for the blocks they validate, and since the mathematical design requires that a block be validated every 10 minutes, the consequence is that, after halving, and for the next four years, the amount of new bitcoins will be half that of the previous ones.

Therefore, at the beginning, many bitcoins were created each time, and in the end there will be very few. However, they will be increasingly valuable. The last bitcoin is expected to be mined in 2140.

It is not necessary to understand this issue in detail to be a Bitcoin user, but there is one important consequence to be aware of: halvings affect the value of bitcoin. This is not a foregone conclusion, but experience so far suggests that bitcoins rise sharply in value after halving, more or less in the year and a half that follows, and then fall sharply until the next halving. Therefore, if this pace continues, we are not far from reaching the maximum value of this cycle.

Source: Crypto Miner Bros.

In other words, this is something to keep in mind when choosing when to invest.

Other cryptocurrencies.

Thousands of cryptocurrencies have been created following the success of Bitcoin. They attempt to imitate the system, but with different objectives. Of those thousands, most are worthless, or outright scams. There are a few others that may be of some interest.

Adrián sums this up very well in the following chart, which he uses in his lectures.

Cryptos can be classified into groups, which I will discuss below.

“Owned” cryptos.

Many of the Bitcoin imitations do have a company that owns the software or a known creator. This makes them more vulnerable.

That said, there are some very respectable ones. The good ones are usually designed to offer a service that they think Bitcoin does not cover well (in the creator’s opinion).

The best-known case is Ethereum. Its initial idea was to support smart contracts. In other words, a digital contract is created that states that if certain conditions (well defined and with a verifiable digital fingerprint) are met, the contract is activated without the need for lawyers or judges, and the transfer is made automatically.

Ripple (XRP) is also a special case. It is a currency “issued and supervised” by a group of traditional banks. Its aim is to facilitate international transactions between these banks, although it can also be used by individuals. The problem is that you never know if the banks are going to want to issue a lot of coins suddenly, which would lead to depreciation, as happens when they print a lot of dollars.

The fact is that its use is increasing.


	Coin Bureau ES⁦@CoinBureauES⁩‬‬‬ 🚨 IS SWIFT LOSING TRANSACTIONS TO RIPPLE? SWIFT’s transaction volume is down 15%, while #XRPLedger activity is increasing. Faster, cheaper, and on-chain, $XRP is quietly becoming the new pic.x.com/aOgUdYvKZ0 7/12/25, 10:20 p.m.

There are many others among the “serious” ones. Cardano and Solana are two examples. On this issue, it must be said that the line between the “serious” and the not-so-serious is not at all clear. Rather, it is a set of shades of gray.

Stablecoins.

This is a group of currencies that is proving very successful (in my opinion, for now, as I have doubts about their future).

What they do is that there is a company that issues the currency. The company says that it guarantees that it will only issue coins if it has something in its assets to back up the currency. The most important case is that of Tether (USDT). In this case, they say that each USDT means that the company has one dollar backing the currency. In other words, they try to imitate the old “gold standard”. That is why they are called stablecoins. They argue that a USDT will always be worth one dollar, and there will be no price fluctuations. This is very appealing to those who have to comply with international contracts. Above all, those who have to do so between countries subject to sanctions or blockades. For example, if an American company has to pay a Russian company, with the current embargoes it is difficult to send dollars through a bank, but it is very easy to send USDT.

There are many other stablecoins, which differ in the asset against which they claim to be stable.

The problem with all of them is that there are no guarantees that the company actually has what it claims to have. It can invest it badly and lose it, but not acknowledge that its backing has diminished.

The other problem, which I think is more important, is that I don’t consider them a good place to “keep your wealth.” If we think that the dollar is going to lose value due to inflation (which is a fact), then USDT will also lose value. In other words, it is not a way to become independent from the risk of the dollar.

What is a fact is that USDT is widely used. Today, it has more transaction volume than Bitcoin.

CBDCs.

In this case, these are cryptocurrencies issued by governments. The idea is to eventually replace normal fiat currencies.

For the government, there is a clear advantage. Since they have the absolute traceability offered by blockchain, and since they own and control the protocol, they can know absolutely everything that citizens do with them (in this case, unlike Bitcoin, the government does know our ID number). And they can prohibit a transaction or block a user for whatever reason they choose.

That same advantage for governments is a major disadvantage for users.

Many governments are currently studying them, and some are already in the implementation phase, as is the case in China.

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Final comments.

I cannot resist mentioning that I already said, in this entry of mine from May 2020, that I saw bitcoin reaching a value of $500,000. At that time, the value was around $9,000. We haven’t reached those figures, but we are already at $120,000, and many analysts are talking about very strong rises in the future (with volatility along the way). In other words, my analysis of the data to imagine the future may not have been too far off the mark. Although I must also say that I thought it was all going to happen faster than it has.

On the other hand, Michael Saylor gives a very good description of all cryptocurrencies in this video.

Obviously, there is much more that could be said about Bitcoin. It is also clear that there is not enough space here to do so. I am satisfied if what I have described about its basic aspects is useful to someone.

What is clear is that this is a real revolution in the world of currency. And it coincides with these times of creating the new world order, and turmoil, a coincidence that may not be accidental.

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As always, I welcome comments at my email address: pgonzalez@ie3.org