Bitcoin Exposed: Today's Complete Guide to Tomorrow's Currency (2 page)

Best of all, our journey into the Bitcoin world brings benefits from all corners. Financially, we can spend less on transactions with Bitcoins while seeing our ability to buy products increase with the increase in Bitcoin's value. Value increases are not guaranteed of course. And our privacy will become almost impenetrable if we choose that route.

We can create an online business accepting Bitcoins with almost no hassle (such as fees and complications we would encounter trying to accept credit cards). Even dealing with the minor annoyance of learning new terms and concepts seems like a small price to pay for the mother lode of benefits Bitcoin delivers. Far off but critically important is the future treasure Bitcoin promises to deliver. Those future benefits will be covered in the last chapter because they are potentially earth shattering in scope, and there is much ground to be covered before we get there.

Bitcoin's story reads something like a Tom Clancy novel. There are secret agents. Trusted double agents try to sell out the cause. Murders happen, or something close to it. Prison time for innocent men. Fortunes made by criminals. Bigger fortunes lost by the risk takers. Geniuses, madmen, Libertarians, Socialists, government forces, and Anarchist hackers all working together, before fighting each other tooth and nail.  (Okay, even I'll admit this is a
bit
of an exaggeration, but you get the point!).

We would expect nothing less considering Bitcoin is battling the most powerful forces on earth. Based on the rapid growth from $0.06 to over $200 (and back down to around $100), Bitcoin is winning the battle.

David versus Goliath is playing before our very eyes with the same result expected. The little guys (us) are taking on the powers that control the money universe and government (PTB - powers that be), and knocking them for a loop. Welcome to the new, exciting world of Bitcoin. You will be absolutely glad you came.

What Is A Bitcoin?

Bitcoin is largely an imaginary piece of code, with no intrinsic value. Gold has intrinsic value for use as jewelry, some in electronics, for making teeth, for coating mirrors, and a host of other possibilities. Silver has even more intrinsic value for medical uses, in film, in coatings for bearings, for it's heat distribution and electrical properties, etc. Bitcoins, gold, and silver all share one crucial aspect in common. They are all relatively rare.

Bitcoins are like the rewards for a correct answer to a certain math problem. Both the problem and the answer are completely unique. There will be a limit of about 21 million (the eventual exact number is 20999999.97690000) of these special solution rewards known as the “Bitcoin.”

Those dabbling in the complicated technicalities of Bitcoin, such as programmers and promoters, call it a “crypto-currency.” This invented term refers to the form of mathematics that generates the rarity behind the solutions that earn the Bitcoin rewards.

Nuts and bolts for Bitcoin look like this:

Bitcoin is often represented as BTC, or 1 BTC is 1 Bitcoin.

We can also deal with 0.1 BTC, 0.01 BTC as we would with say, U.S. dollars. $0.01 USD is also known as 1 cent. Similar for Bitcoins though, it has software behind it that allows for a very small denomination of a Bitcoin that looks a tad scary:

0.00000001 BTC.

or 100 millionth of a Bitcoin

This smallest unit of BTC is known affectionately as a “Satoshi” in honor of the genius that developed the whole code framework. Not that the use is popular, but we use the same names from the metric system when describing Bitcoin denominations:

CentiBitcoin is also a bitcent and looks like .01 BTC or 1 cBTC

MilliBitcoin is either a bitmil or mbit: .001 BTC or 1mBTC

That is about all we will need for the foreseeable future. For the purists though, the smallest, fashionable BTC is the microbit or ubit with .000001 BTC or 1 uBTC.

If we find ourselves trading in uBTC's soon then let's hope we all stocked up on BTC's before the attack of the 5 zeros!

Bitcoins In Use

We can now buy things with Bitcoins. No cars, planes, diamonds, or furry dinosaur feet are available yet with Bitcoins because it is too new, not fully understood, and somewhat risky. However, many retailers are coming around to Bitcoin; here is what a Bitcoin shopping payment looks like from a website called BitcoinIn:

Notice how the prices already use .001 BTC format. The reason is, Bitcoins exploded in value compared to other currencies. We value Bitcoins in our national currencies. If we live in the U.S., our national currency is the U.S. dollar or USD for short. Europeans, for the most part, use euros or €.

Out of the gates, Bitcoin was a 6-cent weakling with 1 BTC being priced at 0.06 USD. So the same items we now see priced at 0.294BTC would have been around .416 BTC in Bitcoin's toddler days of 2009-2010. Now that Bitcoin is a fast growing online option for payments, we can expect to see it continue to go deeper into the bitcent, mbit and even ubit prices.

Keep this impressive example in mind for a later section explaining why Bitcoin is one of the secrets to personal and financial freedom.

Where Did Bitcoin Come From And Why does it Matter?

Officially, Bitcoin started in 2009 by a mystery man (or group) with the Japanese name of Satoshi Nakomoto. His name has the same commonality as John Smith has in the U.S. In short, we do not know who started Bitcoin. He kept his identity secret for an important reason.

The domain name, Bitcoin.org was created in 2008 in Helsinki from whois.org. One common theory is that three programmers skilled in cryptography - none of them Japanese - developed the system.  The men behind one of the relevant patents #20100042841 are Neal King, Vladimir Oksman, and Charles Bry.  All three have filed several related patents in the encryption, and network management area.

A fantastic article making a strong case for the three man origin of Bitcoin appeared on Fastcompany.com (
http://www.fastcompany.com/1785445/Bitcoin-crypto-currency-mystery-reopened
)

Unsurprisingly, all three potential inventors strongly deny they are involved at all.

The Atlantic Wire has tagged a British coder named Michael Clear as the brain behind Bitcoin. He too denies it. (
http://www.theatlanticwire.com/technology/2011/10/race-unmask-Bitcoins-inventors/43535/
)

With nobody pinned as the founder of Bitcoin, this anonymity becomes one of its great strengths. There is no founder to throw in jail. There is no central Bitcoin bank to shut down. There is no one man, woman, or group controlling Bitcoin.

Bitcoins come from a distributed network of people running what are called Bitcoin miners. We will be discussing Bitcoin mining later on in this book. Having a central processing or controlling location for a currency presents a big problem. Governments, hackers, banks, or general criminals can all attack and often destroy that central authority.

Governments go after alternative currencies. A successful precious metal backed electronic currency called e-gold stirred the ire of government. The founder and head, Dr. Douglas Jackson, was nearly sent to prison for 20+ years.

Several ideas for currencies similar to Bitcoin have come and gone. Around 1994, Digicash was an early attempt at a central, online, digital currency using code-breaking math. Peppercoin was another code-based version of digital currency a bit later, but it also failed.

What these early attempts lacked was a way of spreading out the ability to generate the currency. As in the real world, we could all choose to go search for gold or silver. Some of us may even find a bit of precious metals. A few of us, very few, will find a mother lode. That describes what Bitcoin has offered.

The reason Satoshi Nakomoto is so brilliant, is that he discovered the secret to getting his idea adopted widely. Satoshi made several clever moves:

- Give everyone a piece of the pie by giving away the software to create more Bitcoins. This is Bitcoin mining.

- Have no central authority, or founder, that controls the currency.

- Make it operate like cash with irreversible transactions.

- Keep the whole system honest and transparent. Everyone has a record of all the Bitcoins, or what is known as the ledger.

If we move quickly, we can even acquire quite a lot of Bitcoin pie. Already, there are Bitcoin multi-millionaires. After reading this book, chances are many more will join those wealthy ranks. Bitcoin is still just beginning.

Why Should I Buy Or Use Bitcoins?

"Nations are not ruined by one act of violence, but gradually and in an almost imperceptible manner by the depreciation of their circulating currency, through excessive quantity."

Nicholas Copernicus
 

There are 3 key reasons for getting involved with Bitcoins:

1. Transferring money or value from one Bitcoin user to another (one of the smartest Bitcoins uses)

Here is a comparison chart of the a few methods of sending money and their costs:

Paypal:

As a gift, the transfer is free and limited in amount. Depending on whether an account is verified, the length of time the account has been opened and other variables, the limits can range from about $100 to  $10,000 in one transaction. Fees will run approximately 2.5%. A $1000 transaction will net out to $975 transferred.

Western Union (WU):

Transfers range from $500 to $3000 for general transfers and up to $10,000 for foreign exchange transfers. Fees range from $5.00 to as high as $95 for cash pick-up in minutes. Medium range is about $50. The $1000 sent by WU will land as $950.00

Banks:

Wires will run roughly $30 outbound and $30 inbound. Sometimes that goes as high as $50 each way.

$1000 sent via bank wire will result in about $940.00 transferred.

There are several other digital online currency competitors including Pecunix, BullionVault, GoldMoney, and others. They are not generally used for buying things, but rather for electronic storage of wealth in precious metals.

Bitcoin:

Transfer $1000 in value through Dwolla.com or even directly through a person to person meeting, for almost no fee. The most a person might pay is approximately $0.25 when receiving over $10.

$1000 in BTC value (for today's date that would be about 9 BTC) would land in the recipients account as $999.75

2. Protecting our wealth by buying into Bitcoins.

This is not necessarily a profitable move. Bitcoins are highly unstable. Prices have risen over triple digits only to fall by 50% in less than 6 hours. (
April 10-11, 2013
)

Financial analysts use a term called “beta” for describing the range of an investment. Beta is also called volatility and relates to the risk of an investment. High beta investments include penny stocks, junk bonds, and some commodities. Low beta investments include treasury bonds, German bonds, etc. Bitcoins fall into the ultra-high beta category. Over time, the beta on Bitcoins will trend toward 1.15- 1.5 range. This estimate is based on continued acceptance and greater fungibility.

Variability happens across all markets, including currencies. Only when markets rise as fast as Bitcoin did, do they set-up for a steep fall just as fast.

Bitcoin was designed to offer a limited number of Bitcoins. Limiting Bitcoins through setting how many can be produced is supposed to create a currency that gains value over time.
 

Here is a chart showing the growth in $ value of BTC's:

This may be hard to see, but the values ranged from $.06 up to over $200.00. While this shows that huge profits are possible with trading Bitcoin, it also shows the possible downside. Storing wealth in Bitcoins at this stage of development is not, in my opinion, the best use of Bitcoin.

The chapter on “How to Trade Bitcoins” is probably a better way to work with Bitcoins. Increasing wealth by simply holding Bitcoins will work better later on. For now, Bitcoins are great for trading, not for storing wealth.             

3. Joining the free currency movement and accessing all the motivated customers within it.

Over 600,000 people per month are searching online for how to join the Bitcoin movement. These are potential customers for anyone in commerce. Only a few stores accept Bitcoins currently (see the list in the Appendix). Any store that offers products for sale using Bitcoins taps into a growing market. It does not mean that a store has to only use Bitcoins. They can still accept credit cards, Paypal, or any other form of payment we choose.

Using Bitcoins for commerce and offering products to the growing marketplace brings excitement to the site, creates back links for improved online rankings, and helps grow the free currency movement.

What Are Bitcoins Really Worth?

Bitcoins, like all currencies today, are worth what they are exchanged for. There is nothing backing Bitcoins. There is no gold, silver, or value of any kind supporting a bottom level for them.

One possible value for the lowest amount a Bitcoin’s worth is how much computing power and electricity is required to produce one Bitcoin. This value varies based on electricity costs where the mining computers - that do the work for a Bitcoin reward - are located. Electricity costs for mining a Bitcoin (calculated by PCPer.com here:
http://www.pcper.com/reviews/Graphics-Cards/Bitcoin-Mining-Update-Power-Usage-Costs-Across-United-States
) range.