The Bitcoin FAQ: What Newcomers Need To Know

bitcoinThe following is an excerpt from The Bitcoin Primer: Risks, Opportunities, And Possibilitiesmy new book on global digital currency Bitcoin.

I’m an early adopter of the technology, having become interested back in October 2012 when I had major Bitcoin angel investor Roger Ver on my podcast.

What is Bitcoin? What’s so novel about it?

Bitcoin is a peer to peer decentralized digital currency. It makes use of advanced elliptic curve mathematics and cryptography, as well as a globally replicated public ledger called the Blockchain.

There are several things Bitcoin accomplishes that was previously not possible with e-currency.

OK. What are those things?

Bitcoin makes it impossible (or near impossible) for double-spend transactions to occur — in other words, when money leaves your possession, it is no longer yours. This was a huge challenge with digital currency because when you send a friend a music file, for example, how do you make it so that the file no longer exists on your computer? When transacting in a digital currency, it is imperative that the money leave your hands and go to the receiving party’s — a user must not be able to spend their money more than once. This is part of the reason why Bitcoin is often described by the press as “digital cash” — the bearer has complete control of it, and permanently loses that control when they give it to another party. Transactions are irreversible.

Bitcoin also provides near instantaneous (within 10 to 30 minutes) undeniable confirmation that your money has been received or sent. No worrying about bounced checks.

Bitcoin also is impossible to counterfeit; a cash transaction or a transaction in gold could contain counterfeit bills or fake gold. There is no such thing as a fake Bitcoin.

Furthermore, there is no prolonged settlement period. Once the transaction is confirmed by an acceptable number of nodes across the network, that money is truly yours.

And finally, since all transactions are listed in a global public ledger known as the Blockchain, Bitcoin provides an invaluable defense against “big hat, no cattle” bullshitters. In other words, if you’re planning to do business with someone who claims to have X amount of money — rather than going on their word, or the kind of watch they wear or car they drive, or their credit history, etc. that individual can simply provide a public address for you to view their balance. Within seconds you know if the party has the money or not.

Bitcoin has no intrinsic value, why are people accepting it as currency?

Nothing in the physical universe has “intrinsic” value. Gold is a metal that humans have decided has transactional value due to its scarcity and interesting physical properties (doesn’t oxidize, nice and heavy, looks pretty, good conductor of electricity). The US dollar is a piece of paper or digital ones and zeros backed only by the “faith and credit” of the US government — in the public’s trust that the government can repay its debts and make good on any obligations.

When people claim Bitcoin has no intrinsic value, what they are usually trying to say is: “I don’t like Bitcoin.”

And it’s fine to have a personal preference on something, so long as you acknowledge that your personal belief does not coincide with the currency’s actual value.

Bitcoin has value because people are willing to buy and sell it at a certain price. That market is liquid thanks to a number of exchanges. As of writing this, one coin sells for more than $1,100. Bitcoin is also accepted by an ever growing number of businesses and workers as a form of payment.

I hear horror stories in the media about people’s coins being stolen, lost, etc. I thought this thing was secure?

Bitcoin is truly digital cash. If you were to leave a backpack filled with cash in the mall food court, and then if that backpack were to be taken by some stranger, it would no longer be yours. Similarly, if you were to put a million dollars under your kitchen floorboards and your home burned down, you would no longer have that money.

Whoever holds the private keys to a wallet’s coins controls those coins. When the private keys are lost or destroyed, that money is lost.

Well that doesn’t sound fun. Remind me why this is a good thing?

There is no central authority, no company or government in charge. When you buy something with a credit card, if you are not satisfied (the product doesn’t arrive as promised, for example) you can appeal to the card company and initiate a possible chargeback. This provides a layer of comfort for consumers, and that comfort is financed by high merchant transaction fees (as much as 2 to 3 percent of the total amount) as well as things like annual fees, high interest rates, etc. The bank needs to pay for the support costs as well as its financial liability (chargeback costs, unauthorized transactions, identity theft, and so forth). Also, the bank needs to pay marketing costs to remain profitable.

With Bitcoin, as with email, there is no company in charge. It is a global protocol for sending and receiving money. Transaction costs over the Bitcoin network are a tiny fraction of existing bank transaction fees. The irreversible nature of Bitcoin lowers costs since merchants bear no risk of chargebacks or fraudulent transactions.

Didn’t early adopters get a lot of coins with relative ease? How is that fair? How is that different from a ‘pyramid scheme’?

Yes, miners (those who run software on their computers to help keep the Bitcoin network operating) generate coins over time — at the beginning, these coins were produced with relative ease, and over time less and less coins are produced and the process becomes more difficult. Similarly, early adopters were able to purchase coins for as little as $0.01.

It’s worth noting that Bitcoin wasn’t always the golden standard of e-currency. As recently as May 2010, 10,000 coins could maybe buy you a pizza. And miners were regarded by many as gullible morons, giving away valuable computing resources in exchange for “fake Internet money” no one accepted or cared about.

It’s only natural, then, that those who took the risk of creating or owning Bitcoin early on in the process should see a return on their “investment.”

Many of these individuals did not hoard the coins, but rather used them to buy things online, or sold them at prices far below today’s market value. (When something cost you $0.01, a $10 price seems attractive.)

There is evidence that ownership of the coins is less concentrated than it was toward the beginning. Also, anyone could become a miner or buy the coins. It wasn’t a closed club of insiders — it’s just that most of the public didn’t believe in the idea.

Can you explain how this is fair? Some people still have a lot more than others.

Bitcoin is mathematically pure and anyone can read the source code that makes the system operate. It isn’t proprietary and no person or entity can inflate the market by creating new coins out of thin air (as a central bank would do). The creation of Bitcoin follows a mathematical “schedule” and will top out at 21 million coins by the middle of the next century. This scarcity ensures that an individual’s purchasing power and stored value is not diluted by a politician’s decision to print more currency (that’s the idea, at least). No one can decide to print more Bitcoins.

Will early adopters become rich?

Based on my research, it is certainly possible that very early adopters will become billionaires — if Bitcoin becomes the global standard for digital transactions in the same way that email became the global standard for digital communications, such an outcome is not ridiculous. It is also possible that early adopters will lose up to 100% of their “investment” if Bitcoin becomes compromised in a critical way or if the public’s interest rapidly switches to an as-yet-unknown alternative protocol.

This is part of an FAQ from an e-booklet I wrote about Bitcoin. Aside from the rest of the FAQ, the booklet discusses the origins of Bitcoin, best practices for business owners and freelancers to accept Bitcoin successfully, where to buy/sell coins safely, as well as a wide range of security considerations — how to store your coins safely, create offline paper backups, prevent theft, etc. Read a free sample on Amazon’s Kindle Store.

  • Reasor

    My favorite part of the article was where you acknowledge the existence of the question, “what’s the difference between Bitcoin and a pyramid scheme,” without actually bothering to answer it. Sure, the ones who got in early have essentially financed their retirement and the late adopters who fail to get out before the bubble pops will get burned, but that’s totally different, somehow.

    I remain unconvinced that Bitcoin’s value as a currency derives from anything other than the willingness of new Bitcoin collectors to exchange real money – which is to say, dollars – for them. Buying illicit goods from the Internet’s gutters is all well and good, but the real scam is the sale of Bitcoins for real money. Hence the response to the publication of a couple of articles here, hence your sale of a digital book through Amazon – you’re doing damage control, trying to delay the inevitable, either to buy yourself time to mine more before the funny money collapses, or to buy yourself time to unload the inventory you have.

  • VaudeVillain

    The real BitCoin FAQ:

    Q: Is this legit?
    A: Nope, it’s a total scam.

    Q: Can I have my money back?
    A: Fuck no.

    • Tony

      Care to elaborate how is this a scam and why you can’t have your money back if you buy and sell bitcoin on an exchange?

      • VaudeVillain

        In order:

        Not particularly, the ways in which BitCoin is a scam are well-documented, easily found, and fairly obvious to anyone who isn’t a complete idiot.

        Because once you’ve lost your money investing in BitCoin, it’s gone. Maybe you can recoup some of your losses by selling out on an exchange… have fun with that.

  • Johnny Utah

    If enough people value anything the value of it goes up. The only reason you would pick the dollar over the bitcoin is pure belief and confidence in it. The dollar could crash and burn just as hard as the bitcoin…and all this money being printed is to keep that from happening while at the same time driving down the value of each individual dollar.

    We could all decide to print are own pieces of paper and give them value and if we never created more than the initial pressing they would actually perform better over time than the dollar.

    Being able to print as much as you want of a currency doesn’t seem logical or valuable(unless you have a huge amount of people who believe in it) and Bitcoin doesn’t do that.

    At the same time I will sit back and watch what goes down because logic doesn’t seem to be a good trait to have these days.

  • Kalitor Mensa

    Nothing in the physical universe has “intrinsic” value. Gold is a metal that humans have decided has transactional value due to its scarcity and interesting physical properties (doesn’t oxidize, nice and heavy, looks pretty, good conductor of electricity). Oh what a bullshitter.

    Gold has intrinsic value because it is nobody’s liability. Bitcoin’ s only value is that it not a fiat monetary instrument. It simply a medium for exchange not OF, since it does not enjoy full convertibilty.

  • Juan

    Fucking great, another bubble that I failed to into and out of in time to actually make some fucking money. Damn!

    • InfvoCuernos

      I have been kicking myself for a week now. Every time I see how much this electronic monopoly money is worth, I want to scream.

      • Juan

        I feel your pain, man.

    • The Well Dressed Man

      yep. once again. watched them go from $30 to $100 and figured it was close to the top and checked out. oops.

  • drokhole

    Isn’t scarcity sort of meaningless when value is limitless? 1 BTC can be $0.01, $1, $1,000, or, by some accounts, $1,000,000. And it changes constantly. How is that different than just printing cash?

    And, from what I understand, Bitcoin is designed to be infinitely divisible (“If necessary, the protocol and related software can be modified to handle even smaller amounts.” ; “The Bitcoin protocol uses a base unit of one hundred-millionth of a Bitcoin [“a Satoshi”], but unused bits are available in the protocol fields that could be used to denote even smaller subdivisions.” ; “Bitcoin, however, offers a simple and stylish solution: infinite divisibility.”). Right now, it can be divided 8 decimal places behind the zero. So whats to stop it from going to 10, 20, or 50 places back (or more)? And how, too, is that different than printing more money?

  • echar

    Was ist los??

    https://litecoin.org/

  • Juan

    Ok, I just talked to a person who does IT for a major university. When I asked about Bitcoin, I was told that the university has asked people who use their systems not to have anything to do with Bitcoin because all the tracking and reverse cookies attached to all Bitcoin traffic use up so much band width that it slows down everything. Using Bitcoin is to essentially flag yourself for all kinds of survailence.
    I was also told that if you are considering either investing in or mining Bitcoin, the best way to do it is to get yourself a cheap, blank, throwaway machine with a different email address and use that strictly for Bitcoin.
    I am not a computer guy, at all, so I have to go by what people I deem credible tell me.
    Be careful out there.

    • echar

      A couple years back, I read about an IT guy at a college that used all or a large portion of the universities computers to mine. I have also read that there are companies that have made processors/computers strictly for mining. I don’t know the particulars, but according to what I read, certain processers are more effective at mining.

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