Blockwork Orange Reading Sample

Cash

Cash exists in the form of banknotes and coins. Banknotes are issued by the central banks of the respective countries (note monopoly). In Germany, this monopoly is held by the Deutsche Bundesbank. Euro coins are issued by the Eurozone countries. This right, known as coinage, is held in Germany by the Federal Ministry of Finance, which sells the coins to the Deutsche Bundesbank. The Deutsche Bundesbank is responsible for distributing cash to commercial banks, which make it available to their customers. The nominal value of the coins, i.e., the value printed on them, is higher than the production costs. Firstly, the state makes a profit from this difference, and secondly, it makes no sense to melt down the coins to sell their material. The central banks thus form the highest authority but do not grant accounts to private individuals. Commercial banks are responsible for this. Each commercial bank maintains an account with the central bank and can borrow against it to obtain cash for its customers (Figure 2.2). The cash is transported to the commercial banks and is available to customers. Excess cash is returned to the central bank and checked by it. Worn, damaged, or written-on money is destroyed. The amount of destroyed money is replaced 1:1 with new money. Identified counterfeit money is kept and reported to the police.

Figure 2.2 - Schematic representation of the authorities

Since the introduction of the euro currency in 2002, the amount of cash in circulation has more than septupled, reaching over 1.5 trillion euros by the end of 2022. Approximately 50 percent of the banknotes are 50 euro bills, which makes them a prime target for counterfeiting. The calculated total damage caused by counterfeit money in 2022 amounted to 2.7 million euros, which is 0.00018 percent of the 1.5 trillion euros. Germany is the largest issuer with 57 percent of the cash issued (reference year: 2022). The remaining 43 percent is distributed among all other countries in the Eurozone. Cash serves as a store of value but is limited in time due to inflation. With the cash you put in a safe today, you can ideally still buy the same amount of pasta next year. However, if you leave your cash in the safe for twenty years, things look different. An extreme example is cigarettes, which have not adapted to the targeted inflation of 2 percent and have an average inflation of 4.71 percent. In 2002, you could get about 63 cigarettes for 10 euros; in 2024, it was only 23. Or to put it another way, if you earned ten euros an hour in 2002, you would have to earn 27.55 euros per hour in 2024 to still afford 63 cigarettes. Now you can consider how high the average interest rate is on your savings or call money account and realize that it is below the 4.71 percent you would have needed to keep the 10 euros at a comparable value! This is one of the mechanisms available to the state and central banks to make saving unattractive and encourage citizens to spend money. Cash does not work as a long-term store of value, not even when it is kept in an interest-bearing call money account (Figure 2.3).

Figure 2.3 - ECB key interest rate since 1999 with a falling 2 percent average

The diagram shows the ECB key interest rate since 1999. The average interest rate corresponds to the annual targeted inflation of 2 percent. However, most commercial banks do not adhere to the key interest rate, and the interest on call money accounts is lower. One advantage that only cash truly has: It is 100 percent anonymous. Even though the banknotes are numbered, this numbering is not assigned to the customer who withdrew them.

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The Blockchain (Excerpt)

The blockchain is the actual technology behind Bitcoin and forms its foundation. Bitcoin, or cryptocurrencies in general, are merely a function that can be represented with blockchain technology. It is a bit like the internet. The internet is the technology, and Facebook is just one of many different applications within the ecosystem. While Facebook is a social media platform, Amazon is an online retailer, Ebay is an auction platform, and Netflix is a streaming service, they all use the internet as their basic technology. Cryptocurrencies like Bitcoin are also just an application on the blockchain technology. Patient records, supply chain documentation, secure elections, asset management, fraud prevention, identity management, and smart contracts (see chapter: Bonus: Smart Contracts) are other applications for the blockchain. But how exactly does the blockchain work, and what makes it so interesting? To answer that, one must understand the underlying idea behind decentralization. Peter has some money, of which he gives 100 euros to Sandra. Both Peter and Sandra now know that Peter has 100 euros less and Sandra has 100 euros more. Neither of them knows how much the other person has otherwise. If a third person observes this transaction, they also only know that 100 euros have changed hands. Let's expand this transaction with a central entity that acts as a referee (trusted third party). Peter knows his account balance of 1,000 euros, and so does his bank. Sandra and her bank know her account balance of 500 euros. If Peter transfers 100 euros to Sandra, the bank, as the central entity, checks if there is sufficient capital in Peter's account and carries out the transaction if the condition is met. Peter now has 900 euros and Sandra has 600 euros in her account. The bank is the central referee that ensures that only existing capital can be transferred. The bank also ensures that Peter cannot transfer the money twice. To understand this, one must realize that digital media can be duplicated indefinitely. If you take a photo with your digital camera, you can send this picture to any number of people, as a copy is always sent, and you keep the original. The blockchain is a technology that makes the central entity superfluous, as the individuals using it do not need to know or trust each other to trade. The system assumes that no one is trustworthy and controls every transaction through the network. The chronologically maintained, decentralized ledger contains all transactions and knows the amount of available coins, which solves the double-spending problem. To illustrate this, another example. If 1,000 coins were mined in a blockchain, the blockchain provides a maximum of 1,000 units, which, for this example, are in Peter's wallet (see chapter: The Wallets). The first line of the ledger contains the timestamp, the wallet address, and the amount (greatly simplified, computer scientists may forgive me). Peter's name does not appear, as it is pseudonymized by his wallet. However, for the blockchain system, the amount of units and where they are located is important. If Peter sends 500 units to Sandra, this is possible because he owns 1,000 units. The next ledger entry describes the new ownership ratio of 500 units in Peter's wallet and 500 units in Sandra's wallet. The sum of both wallets still makes up the 1,000 units. Sandra is now curious, wants to check the ledger as well, and downloads it. Peter now sends 250 units to Tom and writes this in his ledger. The entry appears for Sandra, and she checks it. 500 units in her wallet, 250 units in Tom's wallet, and 250 units in Peter's wallet, which still totals 1,000 units. The transaction is legitimized, and the ledger is updated accordingly. On the blockchain, this task is performed by an algorithm. The more people download the ledger and function as nodes (see chapter: The Nodes), the more decentralized and secure the network becomes.

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Private Key & Public Key (Excerpt)

The keys are elementary for interacting with the blockchain and must be managed securely. It is important to understand their structure and functionality to be able to assess the underlying security. For a better understanding, the function of the keys is described without going into programming details. The Private Keys represent your personal access to the crypto assets. Like the login details for your bank account, the Private Keys must be protected from any access. A Private Key is a combination of 2^256 possibilities, which is the same as the 16^64 possibilities of the SHA-256 hash function. A 256-character long string of 1s and 0s (binary system) with the highest possible entropy must be created. This can be generated using a random number generator or, to illustrate the principle of entropy, you can write a 1 on 1,024 slips of paper and a 0 on 1,024 slips of paper. These 2,048 slips are folded to hide the number, placed in a closed container, and mixed thoroughly. Then you empty the container and draw 1,024 slips from the pile. The remaining slips go back into the container, and in the second round, 512 slips are taken out. After the third round, 256 slips remain, which are laid out in a row and unfolded. Now you have a sequence of 0s and 1s with high entropy. This sequence of zeros and ones can be converted into a hexadecimal sequence, and you get your Private Key.

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Bitcoin and the Altcoins

Bitcoin stands out from all other crypto assets, not only in terms of market capitalization but also in what Bitcoin aims to be. The term Altcoins stands for alternative coins and refers to all assets besides Bitcoin. There is no company behind Bitcoin; it does not need to be profitable and is decoupled from any economic performance. Its acceptance, security, and relevance have been established since 2009 and are now attracting large, established, institutional financial intermediaries. Many of the altcoins can be seen at most as a tribute to Bitcoin, as they desperately try to copy it without truly understanding it. Bitcoin does not need to function as a direct payment network, serve every smallest transaction, and be scaled for it, because Bitcoin can be scaled arbitrarily on the second layer, and smallest transactions also work off-chain. Bitcoin can thus work as an on-chain settlement network and remains unchanged. Other altcoins pursue other goals, such as creating additions or their own ecosystem. Behind them are companies, startups, and communities that want to be profitable, have recognized the value of the blockchain, or simply want to profit from the hype. What they all have in common is a whitepaper that can be viewed by anyone and describes the technology and goals behind the projects.

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South Africa

When you start thinking about Africa, you land on a continent with 1.4 billion people, 55 countries, over 2,000 different languages, about 41 central banks, and just as many currencies. Most currencies have double-digit inflation rates, and the banking system is generally described as fragile. Even though Bitcoin is currently a volatile means of payment, its development over the entire period has been positive, which has led many people in Africa to invest their money in Bitcoin. What started as a surf school in 2010 developed into a Bitcoin ecosystem, with the Bitcoin Ekasi in Mossel Bay, South Africa. Bitcoin Ekasi provides education, as many people have fallen victim to scams, and helps people gain access to the blockchain. More and more shops have a poster at the checkout with a QR code that can be used to scan the public key, and the shop owner is paid directly in BTC. The surf instructors at the school are also paid exclusively in BTC, which gives them the opportunity not to have to spend their money immediately, as the depreciation of the official currency (Rand) is too high. Mossel Bay is no exception; in commercial establishments, such as the second-largest supermarket chain Pick 'n Pay, you can also pay with BTC. If you go shopping in Cape Town, you will find very few shops where payment with Bitcoin is not possible. The high volatility is particularly problematic for companies, as it can affect their daily cash flow. To counteract this, the company Kotani Pay was founded, which works not with Bitcoin but with non-volatile stablecoins. These coins, mostly pegged to the dollar, are suitable for everyday use and stable in value. According to the Global Crypto Adoption Index, Nigeria ranks 2nd with the highest acceptance and implementation of Bitcoin and cryptocurrencies. This illustrates that cryptocurrencies have a different meaning for the Western world, with its stable reserve currencies and low inflation, than for countries that cannot fall back on them. The question is therefore no longer whether cryptocurrencies are just a temporary phenomenon, but how long it will take for them to spread to a large part of the population. The run on Bitcoin has long since begun and will not be stopped.

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Investment

"I can't tell you how to get rich quickly; but I can tell you how to get poor quickly: by trying to get rich quickly."

>> André Kostolany (1906-1999) <<

Whether you should invest in Bitcoin depends on your personal time preference and your goals. If your focus is on short-term goals, you have a high time preference. Long-term investments make no sense, as you prioritize immediate consumption and gratification. People with a high time preference usually also have less wealth (cost runway), as this also describes a period into the future. Wealth describes the liquid assets and how long the running costs can be covered with them without new capital coming in. If you have a low time preference, short-term consumption is less relevant than long-term planning, which has a positive effect on your wealth balance. In psychology, this is called delayed gratification, when a small reward can be forgone to receive a larger reward in the future. This self-control manifests itself already in childhood, as the Austrian personality psychologist Walter Mischel was able to prove in a long-term study. In the 1960s, Mischel and his students conducted an experiment with preschool children. In a room free of distractions, the respective child could choose between various sweets such as marshmallows, cookies, pretzels, and more. The child was given the choice to eat one marshmallow immediately or to wait until the experimenter returned and get two marshmallows. Then it was left alone with the one marshmallow and a bell. The experimenter let the children wait for up to 20 minutes and then returned. If the children had neither eaten the marshmallow nor stopped the experiment with the bell and could wait patiently, they received the promised double reward. This experiment, known as the Marshmallow Test, was followed up, and it turned out that the preschoolers who could wait also performed better in college aptitude tests later on, and their cognitive performance was rated higher. Between the ages of 27 and 32, they pursued their goals more consistently, were better able to cope with stress and frustration, and had higher self-esteem. In middle age, it was found that they had a lower affinity for addictive behavior and obesity. The ability to cope with stress and frustration is also relevant for investment strategies, as the uncertainty of what will happen in the future always hangs over you like a sword of Damocles. This affects not only the financial market; investing in a home must also be well considered and calculated, as the financing period can extend to retirement depending on income, savings, and purchase value (10 to 40 years). Think about your personal time preference, your goals, and the time you are willing to spend on them. This is not investment advice; there is sufficient literature from the major players for that. I just want to show a general introduction, explain the first terms, and provide access to further literature. The focus of this book is on Bitcoin as a sovereign store of value, as it has proven this for over 16 years. All other crypto assets are risky, volatile, and suitable for trading. The following chapters can be understood as a workshop to accumulate your first BTC and get a small introduction to trading. If this sparks your interest in trading, I strongly recommend using further literature to delve deeper into this topic.

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