Technology

So, Explain This To Me Again: What is Bitcoin?


Looking to purchase Bitcoins? Maybe the money from that African prince who emailed you might be able to help out. Bitcoin has everything that appeals to me. A mysterious inventor, who may actually be Bruce Wayne, considering how well he has hidden his identity (or simply refused to take ownership of it- Satoshi Nakamoto). An online currency exchange built on a website created to trade Magic: The Gathering cards. The same site being shut down after hackers (… well, someone…) stole around $473 million, causing the website to apply for bankruptcy protection. Flexcoin Inc., a bitcoin bank in Edmonton shut down their site after losing $670,000 to hackers. Bitcoin has been linked by the FBI to an online black market of drug dealers, with the agency seizing millions of dollars in the digital currency.

Exchange CEO Autumn Radke was found dead, apparently taking her own life days after the theft at Mt Gox was revealed. Whoever writes the first book about all of this is going to make a whole lot of Bitcoins. In a world that appears to be getting stranger and stranger every day (Ukraine, Syria, …whatever Justin Beiber was trying to prove in his deposition), the beleaguered currency exchange has had minimal coverage by the media, and is strangely still greatly supported by its own community. Because we are all witnessing what appears to be a real time Martin Scorsese film unfold, I decided to find out what exactly Bitcoin is, and more importantly, why? I decided to visit Bitcoin.org to learn more about the currency. Here I learned from a cartoon video Bitcoin is the “first decentralized digital currency”.

I can send my digital coins through the internet, and apparently, there are six advantages to this. Luckily, these advantages are shown to me through stylish minimalist cartoons (because, you know, when you think financial risk-taking, you’re going to want to trust in a cartoon. It’s the same reason I am trying to invest $200,000 into ACME- I saw this cartoon where this coyote spent a TON of money on product from this company, and apparently, ACME has better delivery times than Amazon). So, the first point is this- Bitcoins are transferred person to person, via the ‘net. There are some advantages to this (which are, of course, pointed out to us)- low to no transfer fees, Bitcoins can be transferred in any country, your account cannot be frozen… this all seems to make sense (thank you cartoon with xylophone sound effects). Unfortunately, this is when the wheels start coming off the train for me. Even the cartoon doesn’t seem to help. In the next part- how they work, apparently, there is something called Bitcoin mining.

Mining Your Own Currency

I have no idea what any of it means. I watched the cartoon of a pick-axe mining a rock, and a coin coming out- but there was what appeared to be the oldest hard drive in existence to the side of the rock, that appeared to be about to blow up. The result is that apparently, Bitcoins are created at a predictable and limited rate. Next, I have a digital wallet, where my money is stored. When I transfer, Bitcoin miners verify the transaction, and my information is anonymously stored on the internet. Now that we know how it works (I still don’t know how it works, but it seems to be sort of like file sharing? With money?), the introduction video tells me all the code is open source, and I get samples of all of the things I can purchase with, and how it is going to change the world. Having viewed an under two minute video to explain such a complicated system, I feel confident I am ready to buy me some digital coins. My choice of smartphone was made pretty much the same way- all I need is 2 minutes and moving pictures.

But why would I buy them? Who buys them? It appears there are three camps of Bitcoin investors. These camps offer a great deal of overlap, so some may fit into more than one category. Techno-hipsters. Come on! It’s the currency of the future! We live in a digital age, and we will continue to live this way for quite some time. This renaissance of technology has changed how we communicate, how we process information, how we learn, and how we acquire. Speaking at SXSW on Friday, Nico Sell, CEO of the app Wickr said “These currencies are 100 percent of the future but we are in the beginning of figuring this all out, but crypto-currency is stronger than paper, but we are early on in the process.” Though Sell used more buts than a Sir-Mix-A-Lot song, it makes sense there should be a future currency. I, of course, would be happy with the more generic term “credits” which appears in numerous science fiction movies and television programs, or “space monies,” the emphasis being on the plural. Anti-Banking Types. As long as there have been banks, there have been people who don’t trust them. Banks have done a pretty decent job of ensuring the lack of trust is justified. Ideas like Bitcoin offer citizens of the world the opportunity to bypass banks- to not be controlled by service charges, or the dollar rate of any specific country, and most importantly, to not be burdened by regulations.

The Appeal of Levelling the Field

One of the immediate successes in Bitcoin history was the fact money could be moved around without a paper trail, offering online black markets the perfect opportunity to succeed, without threat of discovery. Silk Road, an online black market was shut down by the FBI in October, closing the door to money laundering, and drug and weapons sales through the site. In total, the FBI seized $3.5 million in Bitcoins, with another $2.7 million being stolen through hacking, once the site attempted to revive the site. So, you know, there’s that part, if you are interested. There are some recognizable benefits to the average user in the case of a currency like Bitcoin. There is no conversion between currencies, which allows those in countries with strong economies to get more value out of their Bitcoins. At the same time, those with a weaker currency are able to purchase at par. For those well above my lifestyle (anyone who owns a suit, or a couple of suits, or a store that sells suits), money invested in Bitcoins are untraceable, allowing the taxman a greater challenge to track you down (especially if all those suits you are buying, or selling, are being purchased using Bitcoins- deals made under the virtual table, if you will). Those Looking for the Big Payout. If there is one thing this technological revolution has taught us, it is that there is money to be made, and if you do it right, you can make a LOT of it! I believe pretty much the majority of my generation wishes they had invested in Apple fifteen years ago, and people like Mark Zuckerberg are heroes to those dreaming of making huge money in the digital world.

WhatsApp, the messaging service app was recently purchased by Facebook for $19 billion. To give this a bit of perspective, on the first day of trading when Facebook went public, the company raised $16 billion, and that was less than two years ago. We painfully live in a world where the have-nots are suffering, while a small percentage of individuals hold the majority of the wealth. Sure, people want to dig themselves out from the bottom. Sadly, we also live in a time where many would prefer to simply accumulate wealth, without putting the effort in. Bitcoins seem like a sure thing- the value is based (partially) on the demand, so investing in them when they are at a low price assures when more and more go into circulation, your original Bitcoins will be worth a great deal more. In 2011, you could purchase a single Bitcoin for US$0.30. The current bid price, at the time of this writing, on the website itbit.com is $608.55. Well, now that we know what Bitcoins are (sort of), and we know why we are buying them (oh yeah, you can purchase stuff with them, as well, but it doesn’t seem like you have many options- want to fly into space? Virgin Galactic is accepting them. WordPress, where my blog presides, started accepting them in 2012.

Want to support illegal downloading- sorry, file sharing? Pirate Bay will gladly use your Bitcoins to fight for internet freedom. Don’t plan to buy anything on Amazon, iTunes or pay for your Netflix subscription using Bitcoins, though). So, let’s get rich! And there’s the rub. Based on the history of this currency, you may stand a better chance of getting a good return from collecting soda cans. The number of times Bitcoin has been hacked, and large quantities of money have been stolen are staggering. A brief look includes Bitcoin Savings and Trust ($1.8 million), MyBitcoin Theft ($1.1 million), Allinvain Theft ($502,750)- plus the latest theft at Mt Gox ($475 million). These are not the only hacks- between 2011 and 2013, there were around 30 major hacks, with thefts going from $1000 to the aforementioned Bitcoin Savings and Trust. Even worse, there have been some very questionable security issues beyond hacking-Stefan Thomas, an early developer of Bitcoin lost $128,000 when all three copies of his digital wallet were wiped out.

The Good, The Bad, & The Risks of an Unregulated Currency

In July 2011, Bitomat.pl lost $236,000 after a server restart wiped out their wallet (though in this case, Bitcoin bailed out the site, and no customers lost money). When an upgrade to the BTCGuild mining pool forced all Bitcoins into one wallet, the wallet was stolen. June 2013 saw users passwords hacked, and their money stolen. Even Bitcoin’s website points to the risk involved. On their “Some Things You Need to Know” page, they point out Bitcoin pricing is volatile, payments are not reversible, instant transactions are less secure, and Bitcoin is “still experimental.” There is also the matter of how legitimate the system is. The Huffington Post (one of many news sites) has looked into the idea Bitcoin is a Ponzi scheme. Whereas a country’s currency is regulated based on financial factors, the health of the country’s economy, and how it trades, the price of a Bitcoin is set by Bitcoin. By increasing the price of the coins, it attracts more investors, as these individuals look to earn a greater return. By manipulating the price, Bitcoin allows itself to be more attractive to investors.

Lastly, there is the confusion about who actually created the currency. This controversy seems to be centred around who created the original code- A gentleman by the name of Satoshi Nakamoto is credited as writing the original proposal in 2008, and the code the next year. When Newsweek tracked down Satoshi Nakamoto, and published an article last week as to the location of the alleged creator, the media leapt at the opportunity to expose the man behind the digital currency’s curtain. Nakamoto, after literally being cornered by the press, claimed he was not the founder, and has continued denying the fact, including having a two hour interview with The Associated Press to insist he is not responsible. I always find it odd when people who insist they are innocent spend a great deal of time insisting they are not. A two hour interview? How many “reallys” did he use? “I really, really, really, really, really… am not the creator of Bitcoin.”

A couple of years ago, we all had our in-boxes filled with passionate pleas from African princes. For most of us, we figured it out, and we created in our heads our own rules about these sorts of things: Easy money doesn’t work that way. Investing money, no matter how sweet the return requires trust, due diligence, and security. So what happened to those rules? Surely the individuals who have invested in Bitcoin are not the same people who fell for the African princes of the internet. So, why is it, when everything within the Bitcoin system suggests it is a really, really bad idea, there are still so many supporters? Part of this has to do with people truly believing in the product. Still seeing it in its infancy, Stephanie Wargo, the vice-president of BitPay told The Huffington Post “The tipping point for Bitcoin will be when consumers stop thinking of it as a thing they can buy, and more as a currency that can be used to buy things.”

Digital Currency and the Future

There is some truth about growing pains. Often, when a new system is in place, there are setbacks, as well as advances. Is it possible for Bitcoin to move past this, and become the future of currency, as its investors believe? The problem for the future of Bitcoin has everything to do with their selling points- non-regulation means anything can happen. Open sourced coding means people are able to know how to infiltrate your system. A decentralized currency means no accountability- even though banks are barely punished for their questionable conduct- at least they are, on paper, made accountable. A system which offers instant transactions is based on very little bookkeeping. It is more akin to trading, well, Magic the Gathering cards. With the lack of bookkeeping, clients continue to lose money, with no paper trail to ensure security. Offering a currency enveloped in security, and promising users accountability would be a wonderful thing for Bitcoin. Creating a transparent market value would be even better.

Already, the digital currency is slowly starting to grow with retailers, with these three things in place, I am sure many more retailers would feel more comfortable with the risk, and would be interested in doing business. In the end, it is your money, and you are free to do with it what you want. If you are willing to give up your savings in the belief an African prince is going to return the favour by showering you with millions of dollars, you are free to make that investment. Alternatively, if you believe in Bitcoin, and the potential return to you in the future, best of luck.


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