Wednesday 26 November 2014
MOTIVATIONAL BLOG: THE PERFECT YOU
MOTIVATIONAL BLOG: THE PERFECT YOU: Many are those who have wondered, and are wondering and will still wonder, how to come out of this seemingly engulfing menace of, for a la...
MOTIVATIONAL BLOG: THE SUCCESSFUL MIND.
MOTIVATIONAL BLOG: THE SUCCESSFUL MIND.: In this modern era, everybody wants to be successful, I think we all do from time to time. What’s interesting is that this limiting behavio...
MOTIVATIONAL BLOG: THE SUCCESSFUL MIND.
MOTIVATIONAL BLOG: THE SUCCESSFUL MIND.: In this modern era, everybody wants to be successful, I think we all do from time to time. What’s interesting is that this limiting behavio...
MOTIVATIONAL BLOG: THE SUCCESSFUL MIND.
MOTIVATIONAL BLOG: THE SUCCESSFUL MIND.: In this modern era, everybody wants to be successful, I think we all do from time to time. What’s interesting is that this limiting behavio...
BEGINNERS GUIDE TO BIT COIN MINING(MAKE MONEY ONLINE)
TRADING BIT COIN
The Bitcoin Economy The Psychology of Trading Bitcoin Trading Basics Live Bitcoin Market Charts Helpful Mobile Apps Forums and the Bitcoin Community Set your alerts and search for Info Daily Buy Low, Sell High
SPENDING, ACCEPTING AND PROMOTING BITCOIN Spending Bitcoin Online Donating Bitcoins Spending Bitcoins Offline Accepting Bitcoins as a merchant
MINING BITCOIN Thar’ be Gold in Them thar’ Hills! How Mining Works in a Nutshell Bitcoin Mining Hardware Bitcoin Mining Software Mining Pools
BUYING & SELLING BITCOIN How it’s Done The Bitcoin Wallet Paper wallets AKA “Cold Storage” Software Wallets Mobile Wallets Web Wallets Transferring Bitcoins between Wallets Buying Bitcoins Bitcoin Exchanges Selling Bitcoins
37 38 39 42 44 45 46 47 48 55
Forword Forword Forword Forword Foreword
i
The ‘Idiot’s Guide to Bitcoin’ provides you with an integral understanding of the digital currency known as Bitcoin which is revolutionizing the way we think about money. It explains everything you need to know to get involved, from beginning to end. Though this book is part of a larger movement towards economic freedom it focuses absolutely on making Bitcoin easy. At rst glance digital currency might seem like a small and exclusive movement on the internet that might not have uses beyond those of today’s laptop-investors and cyberpunks. The ‘Idiot’s Guide to Bitcoin’ aims to demonstrate how important this change in the way we think about money is and most of all to show you how easy it is for you to get involved. The book starts by discussing the main principles of Bitcoin as well as some of the more politico-economic implications of the revolution. These are covered in depth but the book is designed in such a way that these can easily be skipped in case you are more interested in getting to the nitty gritty of things right from the start. There are some technical parts to understanding Bitcoin and the book covers these in an easy to follow, step-by-step fashion. There are ten chapters in all and every chapter covers a different aspect of Bitcoin in the most appropriate fashion. Nothing is left out. The implications of a Revolution, and Bitcoin IS a revolution, is often uncertain and shrouded in rumour and conjecture. The Idiot’s Guide to Bitcoin deals with all the concerns surrounding Bitcoin on a factual basis and strives to inspire con dence in you by giving you a sound understanding of everything Bitcoin and provide you with resources that you can turn to when in doubt.
ii
I wrote the Idiot’s Guide to Bitcoin with you in mind. I’ve tried to best support the Bitcoin movement by making it easy and accessible for everyone. I want you to experience rsthand, as I have, the bene ts of Bitcoin as a currency as well as a commodity. I wanted to show you the freedom that Bitcoin offers and that the returns are nothing short of magni cent. I wanted to be the one to introduce you to our future! So I wrote the Idiot’s Guide to Bitcoin. What you read in these pages could set you free and give you con dence that the future of global economics is not dire. Not to mention the nancial gains that stand to be made as the relative young economy grows and its value increases. So I encourage you to grab this opportunity with both hands and join us in making the world a freer and wealthier place for everyone.
Wishing you freedom and prosperity Gustaf van Wyk
Bitcoin Bitcoin Bitcoin
(Chapter 3)
PART 2
What is Bitcoin?
How Bitcoin is Changing The World In the last two chapters of this book we covered brie y, but still rather extensively, what money is, how it obtains its value, and the place of our modern banking system with all of its inherent pitfalls. Not many economists looking back in time will say that the gold standard was not a stabilizing way to handle currency. Unfortunately, as we’ve already explained, it would be impossible to go back on the gold standard today despite so many people calling for it. In just 40 years of being completely off the gold standard, bubbles have been created and have burst causing insane in ation and tons of money shot into the global supply, crashing and burning banks, causing bailouts, nearly collapsing entire economies,
24
What is BitcoinIdiot’s guide to Bitcoin
and devaluing what we call money even more. The thing is, this is only going to get worse and there has been no solid idea on how to stabilize the world’s income, until now and it’s called cryptocurrency.
What is Cryptocurrency?
First of all, it’s important to understand that cryptocurrency is not something you can hold in your hand, which will inherently turn a lot of people off to it right away. So, let’s get something out in the open right now – remember that those dollar bills (those pieces of paper) that you hold in your hand are not actually worth anything and in fact, they’re not even real. The paper currency people are able to hold in their hands are just representations of worth, and the worth that is put on that oating at currency is based on nothing more than the faith people have in it paired with how much of it is in circulation.
Yes, paper money is printed, but it is still nothing more than digits and decimal points on a computer screen, as most of the money we use today is digitized. Furthermore, remember that the money you hold in your hand is not something that you truly own – the bank owns it because each dollar you have has been loaned to the government with interest, and in effect loaned to you on interest. So, in that sense, the idea of owning some form of tangible paper money is absurd – it’s just a faith- based at oating currency controlled by a private organization with its own best interests at hand.
When we talk about cryptocurrency we’re talking about a purely digitized currency. It is made using cryptography (we’ll get more into that later) making it nearly impossible to counterfeit, and the way in which cryptocurrency came about is most interesting indeed, because it was and still is a rebellion to the current monetary system that many people see as corrupt, but necessary.
Earlier we talked about how the American Revolution really came about – the colonies had their own money supply that was regulated by the public – it was decentralized and it was a currency of the people that was not subject to inationary moves by a central bank. It was when they attempted to force the colonies into accepting The Bank of England currency, that the nal tipping point for the revolution occurred.
25
What is BitcoinIdiot’s guide to Bitcoin
Cryptocurrency isn’t much different in that sense. In the 1990’s a movement known as “cypherpunk” emerged. Without going into too much detail, cypherpunk was a counter-culture phenomenon made up of hyper-intelligent tech-savvy young people who were taking advantage of the early World Wide Web. With this counter-culture came a lot of new ideas, one of which was known as cryptocurrency based off the modern mathematical theory and computer science practices of cryptography.
Cryptography is the practice of creating algorithms designed around computational hardness assumptions. Basically, it is blocks (think of a mountain made of rock) with information inside (think of the information as gold inside the mountain) and the cryptographic security surrounding it is what keeps the information secure (think about a huge wall surrounding the mountain with armed guards on top with rocket launchers). It is a way to encrypt information within secured blocks that are nearly impossible to break even by the most worthy of hacker adversaries.
The idea the cypherpunk movement had was incredibly innovative, and not much different from the idea the Americans had when they had set out to wage their revolution – what if we could create an alternative to traditional currency that required no central authority to administer it, that was easy to transfer, works across political boundaries, and belongs – once again – to the people on a public ledger?
The idea was so powerful, that it started gaining momentum as far back as 1995 when Seth Godin in his book “Presenting Digital Cash” wrote of Jon Matonis (a still popular contributor of alternative currencies for Forbes Magazine), “Matonis argues that what is about to happen in the world of money is nothing less than the birth of a new Knowledge Age industry: the development, issuance, and management of private currencies.”
Andy Greenberg in his book, “This Machine Kills Secrets” also recounts the history of the 1990s cyberpunk movement, which paved the way for resources such as WikiLeaks and righteous hacker groups such as Anonymous who seek to expose corruption within government entities, nancial institutions, and law enforcement. These early Internet crypto- anarchists saw a future world where widely available cryptography secured personal anonymity and privacy would be available to the point where it threatened the authority of the state. As Greenberg explains, their key insight is that anything that can be done cryptographically
26
What is BitcoinIdiot’s guide to Bitcoin
can be done without government oversight.
They imagined online markets for information where buyers and sellers transacted anonymously using untraceable digital cash – anything from state secrets to private credit reports would be able to be purchased at the right price.
From that time onwards, some small attempts have been made on behalf of individual developers to create this cryptocurrency. However, all of those virtual currencies relied on third party intermediaries, such as bank or credit card companies to prevent “double spending” (more on this later). It wasn’t until nearly 15 years later that somebody actually got it right and created the world’s rst usable cryptocurrency – Bitcoin – which relied on zero third party intermediaries and therefore became 100% decentralized.
The Rise of Bitcoin
In June of 2011 Bitcoin soared in price value to a whopping $32, which means a single Bitcoin could be exchanged for $32 American dollars. It then fell promptly to $2. In fact, this rise/fall trend continued until February 2013 when it peaked again at about $30 and just kept rising. It rose so high, in fact, that it reached $266 by April 10th 2013, and at the time of this writing has stabilized at around $120. Right now, the total value of all Bitcoins hovers around $1 billion.
Why is Bitcoin suddenly becoming so popular, and why is it suddenly worth so much now, when it wasn’t worth barely anything before? Simply put, the reason is that it’s becoming more legitimate. Remember in the rst section of this book, we covered how people’s faith in money largely determines its worth. The thing is, people are losing faith in banks and their own paper currency, while notable names in investment are beginning to buy up Bitcoins, journalists are talking more about Bitcoins, and more and more venues are accepting Bitcoins as payment, causing faith in the cryptocurrency to rise, thus increasing its value.
Let’s look at some of the reasons Bitcoin is becoming more grounded as an acceptable currency:
27
What is BitcoinIdiot’s guide to Bitcoin
Legitimacy:
In May 2010 a US programmer swapped 10,000 Bitcoins that were then only worth about a cent each for two pizzas. That was the rst ever Bitcoin purchase. As of April 2013 those pizzas would have cost him $1.7 Million – if he had held onto those Bitcoins for three more years, he would have been an instant millionaire. In March 2013 a US citizen reportedly purchased a used Porsche Cayman using 300 Bitcoins. Later, we’re going to talk more about why Bitcoins go up in value and why they’re worth anything to begin with, but right now let’s talk about the big names in nance whose investments into Bitcoin are causing more and more regular consumers and investors to have faith in the currency.
Charlie Shrem – a 23-year-old entrepreneur out of New York – has just opened up the rst ever upscale lounges in NYC that take Bitcoins as payment. He is also one of the rst Bitcoin millionaires. He created a startup called BitInsant, which makes it easy for people to quickly transfer Bitcoin funds, and is thus contributing to the amount of people who are beginning to use Bitcoin regularly while also making it easier for the average person to pay with Bitcoin just as simply as they would with their bank debit card.
Wordpress, OKCupid, and Reddit have begun accepting Bitcoins as a form of payment. At the time of this writing, it’s been publicly noted that Ebay (and in effect PayPal, the online world’s most preferred method of Payment) are looking into accepting Bitcoins, which could be the biggest legitimizer yet.
Of ine, a gigantic variety of items are available to purchase using Bitcoins from cars to houses to Domino’s pizzas to the hotel chain Howard Johnson. A Class Limousine is a black car service in New York that takes Bitcoin payments.
In early April 2013 Cameron and Tyler Winklevoss – the famous Facebook- claiming twins – purchased 1 percent of all Bitcoin. At the same time Andreessen Horowitz, one of Silicon Valley’s most famous venture capital rms, announced its intention to invest in its rst Bitcoin company – OpenCoin.
Investors in Silicon Valley such as Lightspeed, Greylock, Union Square Ventures, and more are all clamoring to invest in Bitcoin-related startups.
28
What is BitcoinIdiot’s guide to Bitcoin
The more company’s that invest in Bitcoin startups and the more retail locations both online and of ine that start accepting Bitcoin as payment, and the easier Bitcoin becomes to exchange and use, the more legitimate the currency becomes and the more second-nature it becomes to use it.
Decentralization
It’s no coincidence that Bitcoin was created right on the heels of the sub-prime mortgage meltdown and all the bailouts and world economic problems that subsisted back in 2008. First of all, it’s nearly impossible at this point to understand who exactly created Bitcoin, as it was made under a the pseudonym Satoshi Nakamoto, which could have been an individual or could have been a group of developers. Regardless, it was in response to the increasing distrust the public was beginning to have in traditional currency and the way in which people’s lives and money were being treated by the banks.
Bitcoin is the world’s rst decentralized digital currency. It is tied to no country. It is not under the control of any central bank and it cannot be minted on plastic, paper, or metal. We touched earlier on the history of digital currency and how previous attempts could not be purely decentralized because they relied on credit card companies to prevent double spending. Let’s look at this deeper.
If you loan your friend a $20 bill, you will no longer have it. However, in the past, you couldn’t have been sure of that with digital currency. When the cash is in a digital le it can easily be copied. If I email an attachment of a document to you, there is another copy right on my computer. The solution was to entrust an intermediary to keep a ledger of balances and deduct a transaction’s amount from the payer’s account, and add it to the payee.
The problem with this is that intermediaries are the choke-points where government can apply pressure. A great example of this would be when WikiLeaks released its State Department cables, and payment processors such as Visa and MasterCard gave into political pressure and refused to transmit donations to the group. Even PayPal froze accounts so the group couldn’t access their funds. However, people could still donate Bitcoin.
What sets Bitcoin apart is it has found a way to solve this double spending
29
What is BitcoinIdiot’s guide to Bitcoin
problem without using an intermediary – there is only ever the payer and the payee, which makes it literal digital cash. Bitcoin accomplishes this by a publicly distributed ledger of transactions across a peer-to-peer network. That means a record is kept on all transfers so that the same Bitcoin can’t be spent by the same person twice. Because this ledger is distributed, there’s no single central authority keeping it. Essentially, this makes Bitcoins TRUE digital cash just like dollar bills and euros – when you pay them to someone, you no longer have them.
The funny thing is that, while the American public is trying to pass bills to provide Congress with more oversight into the actions of the Federal Reserve (audit the Fed bills) Bitcoin’s ledger is public and you always know what’s happening with it. On the one hand, your traditional central bank does everything behind closed doors and effectively holds the entire future of our economy in their hands and under their discretion without accountability from any outside source, yet with Bitcoin this is impossible and it belongs to the people.
Because there is no third party regulating the ledger, there is no government, bank, or any one person or organization for that matter that can regulate it. That means, that if you transfer money into Bitcoins they can’t be touched, nor can they be affected by whatever economic conditions are affecting your bank. They will, in truth, be completely off the radar and untraceable by government or banks. In effect, the money actually BELONGS to you again, and not the banks nor the government – it’s 100% yours and no one else’s.
Due to this decentralization, people all over the world who saw their savings destroyed in the economic downturn of 2008 and have seen the constant scandals coming out such as the Libor scandal – the worst banking scam in history, in which we saw small groups of people xing interest rates across the board that affected nearly the entire developed world’s money like it was nothing more than a game to them – have begun to invest in Bitcoins.
For example, someone who had money in a Cyprus bank and didn’t like the idea of 10% of their earnings being taken out against their will during the EU bailout, could have taken that money and put it into Bitcoin where it was untouchable.
The idea of a currency that puts power back into the individual’s hands, where they can actually own their money again and spend it or invest
30
What is BitcoinIdiot’s guide to Bitcoin
it as they see t, while being able to transfer it across countries without worrying about it is incredibly attractive. The less faith people have in centralization, the more faith they put into the rst ever decentralized digital currency, which causes Bitcoin to become, yet again, more legitimate and trusted. This is what is making it increase in value.
It’s Like Gold, But Better
As we talked about in the rst section of this book – gold isn’t valuable because it’s shiny, it’s valuable because it’s useful as a currency. There is no particular point in which we need to ask ourselves if Bitcoin money is valid or if someone can lie to us by providing a true or false answer. Bitcoin is valid locally – like gold – and it subdivides as easily as any number on a computer. Just as gold is intrinsically gold, so is Bitcoin.
Later we’re going to talk about how Bitcoin is mined just like gold, but right now let’s just draw some simple comparisons to how gold is mined, because it’s essentially the same thing.
Gold grows naturally and it is naturally available throughout the world, it is also subject to demand. As demand for gold grows, the more people out there will want to mine for it. At the beginning, random miners used to be able to just show up at a stream and make a fortune panning for gold – it was the low hanging fruit of this precious metal, you just walked right up and picked one and didn’t need a lot of money to get started, nor did you need any special tools.
However, as demand for gold grew, the surface gold was taken up as more and more prospective millionaires went to seek their fortune. At a certain point, the demand for gold grows so high that more comprehensive mines have to be opened, the likes of which can only be organized by major corporate and state backers who are able to put the amount of people and capital together to acquire gold at that scale. Complicated machinery is then used to mine for the gold, and new innovative techniques must be used in order to bore into the earth and mountains to nd the deeper strains of gold. As demand grows, supply lessens, and it becomes more dif cult to mine for the gold.
Bitcoin adopts a lot of these properties. When pressure for gold allows
31
What is BitcoinIdiot’s guide to Bitcoin
new mines to be opened, thus increasing the supply, strong pressure for Bitcoin does the same. The difference, however, is that the supply doesn’t change with Bitcoin, only the distribution.
So, in the case of Pizarro, which we discussed in the rst section of this book, the fact that he opened his new mine in South America and started hauling all of that gold/silver back to Europe effectively caused in ation. But, with Bitcoin, opening a new mine in South America would be like reducing production of a mine in South Africa.
Bitcoin is better than gold in that gold doesn’t have a good enough distribution process. It’s just a commodity traded on electronic networks. People can lie about how much stuff they really have, and they do it all the time. There is no way to tell – sometimes they know they’re lying with “naked shorts” sometimes they don’t with “proven reserves” but the supply can always adapt to meet the demand – not with Bitcoin.
With Bitcoin everything is backed by cryptographic keys. One can actually prove they have access to a certain amount of it. You either are assigned messages linked to private keys or not. That’s why the Winklevii twins said, “We have selected to put our money and faith in a mathematical framework that is free of politics and human error.”
Again, will get more into how Bitcoin works on a speci c level (how new Bitcoins are created and mined and how many can ever be in distribution) later, but suf ce it to say that they are like gold, only better.
TRADING BIT COIN
The Bitcoin Economy The Psychology of Trading Bitcoin Trading Basics Live Bitcoin Market Charts Helpful Mobile Apps Forums and the Bitcoin Community Set your alerts and search for Info Daily Buy Low, Sell High
SPENDING, ACCEPTING AND PROMOTING BITCOIN Spending Bitcoin Online Donating Bitcoins Spending Bitcoins Offline Accepting Bitcoins as a merchant
MINING BITCOIN Thar’ be Gold in Them thar’ Hills! How Mining Works in a Nutshell Bitcoin Mining Hardware Bitcoin Mining Software Mining Pools
BUYING & SELLING BITCOIN How it’s Done The Bitcoin Wallet Paper wallets AKA “Cold Storage” Software Wallets Mobile Wallets Web Wallets Transferring Bitcoins between Wallets Buying Bitcoins Bitcoin Exchanges Selling Bitcoins
37 38 39 42 44 45 46 47 48 55
Forword Forword Forword Forword Foreword
i
The ‘Idiot’s Guide to Bitcoin’ provides you with an integral understanding of the digital currency known as Bitcoin which is revolutionizing the way we think about money. It explains everything you need to know to get involved, from beginning to end. Though this book is part of a larger movement towards economic freedom it focuses absolutely on making Bitcoin easy. At rst glance digital currency might seem like a small and exclusive movement on the internet that might not have uses beyond those of today’s laptop-investors and cyberpunks. The ‘Idiot’s Guide to Bitcoin’ aims to demonstrate how important this change in the way we think about money is and most of all to show you how easy it is for you to get involved. The book starts by discussing the main principles of Bitcoin as well as some of the more politico-economic implications of the revolution. These are covered in depth but the book is designed in such a way that these can easily be skipped in case you are more interested in getting to the nitty gritty of things right from the start. There are some technical parts to understanding Bitcoin and the book covers these in an easy to follow, step-by-step fashion. There are ten chapters in all and every chapter covers a different aspect of Bitcoin in the most appropriate fashion. Nothing is left out. The implications of a Revolution, and Bitcoin IS a revolution, is often uncertain and shrouded in rumour and conjecture. The Idiot’s Guide to Bitcoin deals with all the concerns surrounding Bitcoin on a factual basis and strives to inspire con dence in you by giving you a sound understanding of everything Bitcoin and provide you with resources that you can turn to when in doubt.
ii
I wrote the Idiot’s Guide to Bitcoin with you in mind. I’ve tried to best support the Bitcoin movement by making it easy and accessible for everyone. I want you to experience rsthand, as I have, the bene ts of Bitcoin as a currency as well as a commodity. I wanted to show you the freedom that Bitcoin offers and that the returns are nothing short of magni cent. I wanted to be the one to introduce you to our future! So I wrote the Idiot’s Guide to Bitcoin. What you read in these pages could set you free and give you con dence that the future of global economics is not dire. Not to mention the nancial gains that stand to be made as the relative young economy grows and its value increases. So I encourage you to grab this opportunity with both hands and join us in making the world a freer and wealthier place for everyone.
Wishing you freedom and prosperity Gustaf van Wyk
Bitcoin Bitcoin Bitcoin
(Chapter 3)
PART 2
What is Bitcoin?
How Bitcoin is Changing The World In the last two chapters of this book we covered brie y, but still rather extensively, what money is, how it obtains its value, and the place of our modern banking system with all of its inherent pitfalls. Not many economists looking back in time will say that the gold standard was not a stabilizing way to handle currency. Unfortunately, as we’ve already explained, it would be impossible to go back on the gold standard today despite so many people calling for it. In just 40 years of being completely off the gold standard, bubbles have been created and have burst causing insane in ation and tons of money shot into the global supply, crashing and burning banks, causing bailouts, nearly collapsing entire economies,
24
What is BitcoinIdiot’s guide to Bitcoin
and devaluing what we call money even more. The thing is, this is only going to get worse and there has been no solid idea on how to stabilize the world’s income, until now and it’s called cryptocurrency.
What is Cryptocurrency?
First of all, it’s important to understand that cryptocurrency is not something you can hold in your hand, which will inherently turn a lot of people off to it right away. So, let’s get something out in the open right now – remember that those dollar bills (those pieces of paper) that you hold in your hand are not actually worth anything and in fact, they’re not even real. The paper currency people are able to hold in their hands are just representations of worth, and the worth that is put on that oating at currency is based on nothing more than the faith people have in it paired with how much of it is in circulation.
Yes, paper money is printed, but it is still nothing more than digits and decimal points on a computer screen, as most of the money we use today is digitized. Furthermore, remember that the money you hold in your hand is not something that you truly own – the bank owns it because each dollar you have has been loaned to the government with interest, and in effect loaned to you on interest. So, in that sense, the idea of owning some form of tangible paper money is absurd – it’s just a faith- based at oating currency controlled by a private organization with its own best interests at hand.
When we talk about cryptocurrency we’re talking about a purely digitized currency. It is made using cryptography (we’ll get more into that later) making it nearly impossible to counterfeit, and the way in which cryptocurrency came about is most interesting indeed, because it was and still is a rebellion to the current monetary system that many people see as corrupt, but necessary.
Earlier we talked about how the American Revolution really came about – the colonies had their own money supply that was regulated by the public – it was decentralized and it was a currency of the people that was not subject to inationary moves by a central bank. It was when they attempted to force the colonies into accepting The Bank of England currency, that the nal tipping point for the revolution occurred.
25
What is BitcoinIdiot’s guide to Bitcoin
Cryptocurrency isn’t much different in that sense. In the 1990’s a movement known as “cypherpunk” emerged. Without going into too much detail, cypherpunk was a counter-culture phenomenon made up of hyper-intelligent tech-savvy young people who were taking advantage of the early World Wide Web. With this counter-culture came a lot of new ideas, one of which was known as cryptocurrency based off the modern mathematical theory and computer science practices of cryptography.
Cryptography is the practice of creating algorithms designed around computational hardness assumptions. Basically, it is blocks (think of a mountain made of rock) with information inside (think of the information as gold inside the mountain) and the cryptographic security surrounding it is what keeps the information secure (think about a huge wall surrounding the mountain with armed guards on top with rocket launchers). It is a way to encrypt information within secured blocks that are nearly impossible to break even by the most worthy of hacker adversaries.
The idea the cypherpunk movement had was incredibly innovative, and not much different from the idea the Americans had when they had set out to wage their revolution – what if we could create an alternative to traditional currency that required no central authority to administer it, that was easy to transfer, works across political boundaries, and belongs – once again – to the people on a public ledger?
The idea was so powerful, that it started gaining momentum as far back as 1995 when Seth Godin in his book “Presenting Digital Cash” wrote of Jon Matonis (a still popular contributor of alternative currencies for Forbes Magazine), “Matonis argues that what is about to happen in the world of money is nothing less than the birth of a new Knowledge Age industry: the development, issuance, and management of private currencies.”
Andy Greenberg in his book, “This Machine Kills Secrets” also recounts the history of the 1990s cyberpunk movement, which paved the way for resources such as WikiLeaks and righteous hacker groups such as Anonymous who seek to expose corruption within government entities, nancial institutions, and law enforcement. These early Internet crypto- anarchists saw a future world where widely available cryptography secured personal anonymity and privacy would be available to the point where it threatened the authority of the state. As Greenberg explains, their key insight is that anything that can be done cryptographically
26
What is BitcoinIdiot’s guide to Bitcoin
can be done without government oversight.
They imagined online markets for information where buyers and sellers transacted anonymously using untraceable digital cash – anything from state secrets to private credit reports would be able to be purchased at the right price.
From that time onwards, some small attempts have been made on behalf of individual developers to create this cryptocurrency. However, all of those virtual currencies relied on third party intermediaries, such as bank or credit card companies to prevent “double spending” (more on this later). It wasn’t until nearly 15 years later that somebody actually got it right and created the world’s rst usable cryptocurrency – Bitcoin – which relied on zero third party intermediaries and therefore became 100% decentralized.
The Rise of Bitcoin
In June of 2011 Bitcoin soared in price value to a whopping $32, which means a single Bitcoin could be exchanged for $32 American dollars. It then fell promptly to $2. In fact, this rise/fall trend continued until February 2013 when it peaked again at about $30 and just kept rising. It rose so high, in fact, that it reached $266 by April 10th 2013, and at the time of this writing has stabilized at around $120. Right now, the total value of all Bitcoins hovers around $1 billion.
Why is Bitcoin suddenly becoming so popular, and why is it suddenly worth so much now, when it wasn’t worth barely anything before? Simply put, the reason is that it’s becoming more legitimate. Remember in the rst section of this book, we covered how people’s faith in money largely determines its worth. The thing is, people are losing faith in banks and their own paper currency, while notable names in investment are beginning to buy up Bitcoins, journalists are talking more about Bitcoins, and more and more venues are accepting Bitcoins as payment, causing faith in the cryptocurrency to rise, thus increasing its value.
Let’s look at some of the reasons Bitcoin is becoming more grounded as an acceptable currency:
27
What is BitcoinIdiot’s guide to Bitcoin
Legitimacy:
In May 2010 a US programmer swapped 10,000 Bitcoins that were then only worth about a cent each for two pizzas. That was the rst ever Bitcoin purchase. As of April 2013 those pizzas would have cost him $1.7 Million – if he had held onto those Bitcoins for three more years, he would have been an instant millionaire. In March 2013 a US citizen reportedly purchased a used Porsche Cayman using 300 Bitcoins. Later, we’re going to talk more about why Bitcoins go up in value and why they’re worth anything to begin with, but right now let’s talk about the big names in nance whose investments into Bitcoin are causing more and more regular consumers and investors to have faith in the currency.
Charlie Shrem – a 23-year-old entrepreneur out of New York – has just opened up the rst ever upscale lounges in NYC that take Bitcoins as payment. He is also one of the rst Bitcoin millionaires. He created a startup called BitInsant, which makes it easy for people to quickly transfer Bitcoin funds, and is thus contributing to the amount of people who are beginning to use Bitcoin regularly while also making it easier for the average person to pay with Bitcoin just as simply as they would with their bank debit card.
Wordpress, OKCupid, and Reddit have begun accepting Bitcoins as a form of payment. At the time of this writing, it’s been publicly noted that Ebay (and in effect PayPal, the online world’s most preferred method of Payment) are looking into accepting Bitcoins, which could be the biggest legitimizer yet.
Of ine, a gigantic variety of items are available to purchase using Bitcoins from cars to houses to Domino’s pizzas to the hotel chain Howard Johnson. A Class Limousine is a black car service in New York that takes Bitcoin payments.
In early April 2013 Cameron and Tyler Winklevoss – the famous Facebook- claiming twins – purchased 1 percent of all Bitcoin. At the same time Andreessen Horowitz, one of Silicon Valley’s most famous venture capital rms, announced its intention to invest in its rst Bitcoin company – OpenCoin.
Investors in Silicon Valley such as Lightspeed, Greylock, Union Square Ventures, and more are all clamoring to invest in Bitcoin-related startups.
28
What is BitcoinIdiot’s guide to Bitcoin
The more company’s that invest in Bitcoin startups and the more retail locations both online and of ine that start accepting Bitcoin as payment, and the easier Bitcoin becomes to exchange and use, the more legitimate the currency becomes and the more second-nature it becomes to use it.
Decentralization
It’s no coincidence that Bitcoin was created right on the heels of the sub-prime mortgage meltdown and all the bailouts and world economic problems that subsisted back in 2008. First of all, it’s nearly impossible at this point to understand who exactly created Bitcoin, as it was made under a the pseudonym Satoshi Nakamoto, which could have been an individual or could have been a group of developers. Regardless, it was in response to the increasing distrust the public was beginning to have in traditional currency and the way in which people’s lives and money were being treated by the banks.
Bitcoin is the world’s rst decentralized digital currency. It is tied to no country. It is not under the control of any central bank and it cannot be minted on plastic, paper, or metal. We touched earlier on the history of digital currency and how previous attempts could not be purely decentralized because they relied on credit card companies to prevent double spending. Let’s look at this deeper.
If you loan your friend a $20 bill, you will no longer have it. However, in the past, you couldn’t have been sure of that with digital currency. When the cash is in a digital le it can easily be copied. If I email an attachment of a document to you, there is another copy right on my computer. The solution was to entrust an intermediary to keep a ledger of balances and deduct a transaction’s amount from the payer’s account, and add it to the payee.
The problem with this is that intermediaries are the choke-points where government can apply pressure. A great example of this would be when WikiLeaks released its State Department cables, and payment processors such as Visa and MasterCard gave into political pressure and refused to transmit donations to the group. Even PayPal froze accounts so the group couldn’t access their funds. However, people could still donate Bitcoin.
What sets Bitcoin apart is it has found a way to solve this double spending
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problem without using an intermediary – there is only ever the payer and the payee, which makes it literal digital cash. Bitcoin accomplishes this by a publicly distributed ledger of transactions across a peer-to-peer network. That means a record is kept on all transfers so that the same Bitcoin can’t be spent by the same person twice. Because this ledger is distributed, there’s no single central authority keeping it. Essentially, this makes Bitcoins TRUE digital cash just like dollar bills and euros – when you pay them to someone, you no longer have them.
The funny thing is that, while the American public is trying to pass bills to provide Congress with more oversight into the actions of the Federal Reserve (audit the Fed bills) Bitcoin’s ledger is public and you always know what’s happening with it. On the one hand, your traditional central bank does everything behind closed doors and effectively holds the entire future of our economy in their hands and under their discretion without accountability from any outside source, yet with Bitcoin this is impossible and it belongs to the people.
Because there is no third party regulating the ledger, there is no government, bank, or any one person or organization for that matter that can regulate it. That means, that if you transfer money into Bitcoins they can’t be touched, nor can they be affected by whatever economic conditions are affecting your bank. They will, in truth, be completely off the radar and untraceable by government or banks. In effect, the money actually BELONGS to you again, and not the banks nor the government – it’s 100% yours and no one else’s.
Due to this decentralization, people all over the world who saw their savings destroyed in the economic downturn of 2008 and have seen the constant scandals coming out such as the Libor scandal – the worst banking scam in history, in which we saw small groups of people xing interest rates across the board that affected nearly the entire developed world’s money like it was nothing more than a game to them – have begun to invest in Bitcoins.
For example, someone who had money in a Cyprus bank and didn’t like the idea of 10% of their earnings being taken out against their will during the EU bailout, could have taken that money and put it into Bitcoin where it was untouchable.
The idea of a currency that puts power back into the individual’s hands, where they can actually own their money again and spend it or invest
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it as they see t, while being able to transfer it across countries without worrying about it is incredibly attractive. The less faith people have in centralization, the more faith they put into the rst ever decentralized digital currency, which causes Bitcoin to become, yet again, more legitimate and trusted. This is what is making it increase in value.
It’s Like Gold, But Better
As we talked about in the rst section of this book – gold isn’t valuable because it’s shiny, it’s valuable because it’s useful as a currency. There is no particular point in which we need to ask ourselves if Bitcoin money is valid or if someone can lie to us by providing a true or false answer. Bitcoin is valid locally – like gold – and it subdivides as easily as any number on a computer. Just as gold is intrinsically gold, so is Bitcoin.
Later we’re going to talk about how Bitcoin is mined just like gold, but right now let’s just draw some simple comparisons to how gold is mined, because it’s essentially the same thing.
Gold grows naturally and it is naturally available throughout the world, it is also subject to demand. As demand for gold grows, the more people out there will want to mine for it. At the beginning, random miners used to be able to just show up at a stream and make a fortune panning for gold – it was the low hanging fruit of this precious metal, you just walked right up and picked one and didn’t need a lot of money to get started, nor did you need any special tools.
However, as demand for gold grew, the surface gold was taken up as more and more prospective millionaires went to seek their fortune. At a certain point, the demand for gold grows so high that more comprehensive mines have to be opened, the likes of which can only be organized by major corporate and state backers who are able to put the amount of people and capital together to acquire gold at that scale. Complicated machinery is then used to mine for the gold, and new innovative techniques must be used in order to bore into the earth and mountains to nd the deeper strains of gold. As demand grows, supply lessens, and it becomes more dif cult to mine for the gold.
Bitcoin adopts a lot of these properties. When pressure for gold allows
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new mines to be opened, thus increasing the supply, strong pressure for Bitcoin does the same. The difference, however, is that the supply doesn’t change with Bitcoin, only the distribution.
So, in the case of Pizarro, which we discussed in the rst section of this book, the fact that he opened his new mine in South America and started hauling all of that gold/silver back to Europe effectively caused in ation. But, with Bitcoin, opening a new mine in South America would be like reducing production of a mine in South Africa.
Bitcoin is better than gold in that gold doesn’t have a good enough distribution process. It’s just a commodity traded on electronic networks. People can lie about how much stuff they really have, and they do it all the time. There is no way to tell – sometimes they know they’re lying with “naked shorts” sometimes they don’t with “proven reserves” but the supply can always adapt to meet the demand – not with Bitcoin.
With Bitcoin everything is backed by cryptographic keys. One can actually prove they have access to a certain amount of it. You either are assigned messages linked to private keys or not. That’s why the Winklevii twins said, “We have selected to put our money and faith in a mathematical framework that is free of politics and human error.”
Again, will get more into how Bitcoin works on a speci c level (how new Bitcoins are created and mined and how many can ever be in distribution) later, but suf ce it to say that they are like gold, only better.
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