Saturday, March 02, 2013

Bitcoin: DO YOU SPEAK IT???



Bitcoin is something you should learn about.

Think it's just for nerds? Keep in mind, nerds created that thing called Facebook you probably use every day. Oh, and email. And the Internet.

Getting Started


www.weusecoins.com is a a great place to start. Go ahead and click through to the Questions & Answers section and read a few of those, such as "What is a good way to concisely explain Bitcoin?" As for getting started, I installed the original Bitcoin client mentioned there, but honestly, it's probably easier to create an online wallet at blockchain.info.

Once you have a wallet, what next? Well, I actually got started by looking at some of the "free Bitcoins!" sites. They are a huge waste of time, though bitvisitor.com did actually work (I think I got 0.00008 BTC by spending 5 minutes on a website). From there, I started doing more research about Bitcoin.

The Bitcoin wikipedia page is probably a good place to start and if you want to go deeper, dig into the Bitcoin wiki. If you're really, really brave, you can venture into #bitcoin on IRC, the bitcointalk.org forums or Bitcoin on Reddit. I'm actually really impressed with the community. They are primarily developers, cryptographers, hackers, day traders, and those interested in economic theory. Understanding Bitcoin can be tricky (try explaining mining in plain English... not easy to do).

You may be thinking, "This is some silly thing for hackers, thieves and black market users and will never turn into something I need to be concerned with." Well, a Wall Street Journey search returns a couple results and a Forbes search shows 80 articles on Bitcoin. There are already some real sites accepting it as payment (Reddit and Wordpress are two notable examples.) There are also quite a few stores accepting Bitcoin. There will be more in the future.

Recent Growth


So why did I get into it? Well... partly because of this:



I started looking at it when it was $17 per BTC and as of this posting, it's up over $34 per BTC. This all happened in about a month.

Could it be a big bubble? Sure. If you look back at the history, you'll see a HUGE dip in 2011.



(See http://bitcoincharts.com/charts/ for more awesome charts)

During that time, you can make a good argument for a bubble if you take a look at Google trends for "bitcoin":


But... that's not the whole story. The whole story includes a major hack of the primary exchange, mtgox.com which caused the price to drop from $17.50 to $0.01 on June 20th, 2011. They do about 80% of all exchange transactions, so the hack really hurt trust in the entire system. (Edit: it was pointed out to me that nothing actually traded at $0.01 as the hacked transactions were rolled back by Mt. Gox)

Scary to think your money could be hacked? Sure. But it didn't even need to happen. Bitcoin is a completely distributed system. There's no reason to leave your coins on an exchange. The Bitcoin system itself is strong and (apparently) robust. It survived.

This past month, I tested things out with a small purchase of coins at around $20 per BTC. Then another larger one around $27 per BTC. Then again at $34 per BTC. I did this by first putting money in my Dwolla account (5-7 business days) and then transferring to my mtgox.com account (1 day and I had to verify the account with a photo of a government ID). Could I lose my money if the price tanks? Sure. I wouldn't put more into it than I was willing to lose. That said, if I cashed out today, I could make some nice USD. Right now, I'd rather have the BTC. In the future, you might also.

How Does Money Actually Work?


Why could you want some BTC? Well, let's start with your local bank. Let's assume you're not the average American with $15k in credit card debt. Let's assume you actually have an emergency fund "safely" tucked away in your bank account.

Guess what? It's not actually IN your bank account.

Welcome to the world of fractional reserve lending. Banks create new fiat currency with the stroke of the pen as loans are created, and they use your deposits to do it. The bank only keeps a tiny fraction of what you deposit in their vault.

But that's OK, right? You're trusting the FDIC to protect your deposit. Sure. But with Uncle Ben Bernanke buying debt at $40B a month, how long before the USD has some more serious issues? The debt is spiraling out of control and the government can't do a thing about it.

I'm not saying anything new here. A lot of people I've talked to recently dumped their investments back in 2007 and moved to precious metals. I'm happy for them and somewhat sad I didn't do the same. Having worked at Dave Ramsey's for almost 4 years, the idea of buying gold hasn't really been in my thought process. Dave continually rips on those who buy gold. If you bought it in 1980 ($850, much higher if you adjust for inflation) and sold around July of 1999 (around $250), you'd probably agree with him. Over the past 100 years, gold appears extremely volatile compared to the stock market.

Some say it only looks that way because the USD is volatile and the actual buying power of gold has been quite steady for hundreds or even thousands of years. I'm not sure about all that, but one thing I do like about BTC is that I can buy a stick of gum with it. A single Bitcoin can be divided into 100 million Satoshis. For diversifying some of my savings, I like having a completely liquid and useful format.

Another interesting thing about gold is it can be faked with Tungsten. Private key encryption can't be faked.

So where will this go? Who knows. Some in the Bitcoin forums seem to believe it will go up quite a bit more. Others thought it was way overpriced at $10. If you believe the USD is headed for hyperinflation and the debt treadmill is about to breakdown... it might not be a bad idea to look into BTC.

Bonus: Learn About Fractional Reserve Lending and the Federal Reserve System


If you're curious about how I've come to my current thoughts on the USD, the Federal Reserve, and Fractional Reserve Lending, check out some of these videos.

These ones are actually cartoons, but they are easy to understand. I first found out about them a year or two ago.
Money as Debt 1 (0:46 hours)
Money as Debt 2 (1:17 hours)
Money as Debt 3 (1:02 hours)

A new friend turned me on to a book by G. Edward Griffin so I found this:
The Creature from Jekyll Island (1:47 hours)

This next one is long and rather poor production quality. I listened to it in the background while working. I liked how much it focused on the history of money.
The Money Masters (3:29 hours)
They also did a sequel which discusses some interesting symbolism in the Wizard of Oz:
The Secret of OZ (1:57 hours)

The part I really found interesting was on the Jewish Shekel. It was the only currency allowed to be used to buy animals for required Jewish sacrifices (all other currencies had pictures of pagan gods on them). The Shekel market got cornered and exploited. That's bad. So bad, in fact, Jesus got violently opposed to it and overturned the tables of the money changers.

I also thought it was interesting how TN's own Andrew Jackson fought hard to kill the central bank in America. Someone tried to assassinate him, but failed. Some say there are connections between the assassinations of Lincoln, Garfield, and Kennedy and their opposition of the central bank. Either way, those who control the money supply have a lot of dangerous power.

In addition to these and other videos, I've been turned on to some books and other resources. Interesting stuff indeed. It could all be a bunch of alarmist hogwash. Or, it could be yet another historical example of a fiat currency eventually coming to an end.

If we are in for a change, as with every other one in history, technology will play a role. BTC may be part of the story.

Please, don't make any investment decisions based on what you've read here. Do your own research and make up your own mind.

If you have any questions, please leave a comment below, and we can start a nice discussion.


Edit 2013-03-10: To keep this post fresh, I'll be adding some links to interesting articles I'm reading about Bitcoin. Also, since the prices mentioned here will undoubtedly grow stale, here's an image of the current price:
Recent Mainstream Articles of Interest:
March 4th The Guardian: Bitcoin: more than just the currency of digital vice
March 6th Business Insider: Suddenly, Everyone's Talking About Bitcoin...
March 6th CNN Money: Why cyber currency Bitcoin is trading at an all-time high
March 7th Business Insider: The Rise Of Bitcoin Teaches A Tremendous Lesson About Global Economics
March 8th Forbes: First Bitcoin Hedge Fund Launches From Malta
March 13th Bloomberg: Bob's Daily Buzzword: 'Bitcoin'
March 14th Huffington Post: Is Bitcoin Money?
March 18th Wired: Ring of Bitcoins: Why Your Digital Wallet Belongs On Your Finger
March 19th Forbes: New Money Laundering Guidelines Are A Positive Sign For Bitcoin
March 19th The Daily Dot: Venture capitalists take a chance on the "Bitcoin revolution"
March 21st Bloomberg: Bitcoin Fever: The World's Largest Online Currency
March 21st The Wall Street Jounral: Web Money Gets Laundering Rule
March 22nd Salon: A libertarian nightmare: Bitcoin meets Big Government
March 22nd Fox Business: As Cyprus Implodes, Bitcoin Interest Explodes
March 23rd ABC News: Cyprus Crisis Boosting Unique Currency, the Bitcoin
March 24th New York Post: Coin of the Net realm
March 24th Forbes: Cyprus Goes Cashless The Hard Way
March 25th CNN Money: 'Funny money' has officially entered the real world
March 26th Washington Post: Why reports of Bitcoin’s death may have been greatly exaggerated
March 26th Life Hacker: What Is Bitcoin and What Can I Do With It?
March 26th BBC Newsnight (video): Bitcoin on BBC Newsnight
March 26th The Motley Fool: A Short Guide to Understanding Bitcoins
March 27th International Business Times: Bitcoin Digital Currency Booming In Cyprus Amid Banking Crisis, Virtual Money Surging In Popularity
March 27th CNBC: Bitcoin Bonanza: Cyprus Crisis Boosts Digital Dollars
March 28th Business Week: Bitcoin May Be the Global Economy's Last Safe Haven
March 29th Fox News: Digital 'bitcoin' currency surpasses 20 national currencies in value
March 29th Huffington Post: Does the Internet Depend on the Survival of Bitcoin?
March 30th The Spectator: How Bitcoin could destroy the state (and perhaps make me a bit of money)

EDIT: Great new articles are coming out daily and it takes up too much time for me to add them here. If you want a good list of articles as they come out, check the Bitcoin forum press section.

Other "Fringe" Articles of Interest:
March 6th Falkvinge.net: The Target Value for Bitcoin is not Some $50 or $100. It is $100,000 to $1,000,000

7 comments:

mattg said...

i'm curious about your assertion that bitcoin is a completely liquid format?


Let's say that the USD does tank. If it goes down in flames, your bitcoin investment is safe, but it's not that usable. If a crash of the USD were to happen how are those who have bitcoins going to access them, or if they can access, use them at the local store? Once our primary currency goes down, people can't get paid to keep networks up, which bitcoin depends upon. Not only that, but what would you transfer bitcoin into?

ubermusaic said...

1) Select online and physical businesses are starting to accept bitcoins directly.
2) A crash of the USD doesn't necessarily mean no more internet / network.

BladeMcCool said...

real simple ... everyone just starts accepting bitcoin and it becomes the global de-facto standard currency.

mattg said...

You are right, a crash of our primary currency doesn't necessarily mean no more internet. But it does have serious systemic implications which could affect our ability to connect to networks that contain transaction logs

Luke Stokes said...

I've heard this argument before. "The internet will be gone by then!" That's possible. If you take an extreme view, there wouldn't be any power, fuel, water, food, etc... it would be chaos.

I personally think that's a bit far-fetched. Or maybe I should say I hope it is. I also think the Internet is more robust than that. The first LAN party I had was between two computers connected directly via serial cable. Then BNC NIC cards after that. If we have electricity (wind power, solar, etc), we can have a network.

We've already seen examples of governments trying to shut down the Internet and failing. Even if only a handful of P2P nodes of Bitcoin clients and servers were around, it's feasible to think the system could survive as a whole. Keep in mind, every client has the transaction logs. If a single standalone client with a relatively up-to-date blockchain was available (even disconnected), it's feasible to think a merchant would accept a paper wallet amount if it could be verified as unspent.

I was reminded by my father-in-law that even Rome took 100 years to fully decline. We may see a slow transition over time.

Or not.



Thanks for your comments, all. Definitely appreciated.

Luke Stokes said...

CNN published what I think is a well balanced article today: http://money.cnn.com/2013/03/06/technology/innovation/bitcoin/

They mention the speculation driving the price and also the potential value as a valid alternative to cash. It went as high as $49 already today.

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