Bitcoin Exposed: Today's Complete Guide to Tomorrow's Currency (4 page)

Compared to previous digital currencies, and standard currency, Bitcoin has several amazing advantages:

1. Anybody can get involved in mining Bitcoins or creating currency. This is almost like being a gold or silver miner. It costs money to get set-up mining Bitcoins, and it gets more difficult every day, like the real world of mining.

2. Every node in the Bitcoin network knows about all Bitcoin transactions and keeps the ledger of the currency. This transparency keeps the system honest. No one can spend the same Bitcoin twice because each Bitcoin is checked throughout the system.

3. Bitcoin availability is limited. Earlier we saw how the central banks around the world (i.e. JCB) can create trillions in national currency in an instant. Money creation at that level makes national currencies become worth less over time. Bitcoins get created at a steady and diminishing rate. This results in a currency that gets more valuable over time.

4. It is possible to operate completely anonymously with Bitcoin. This is getting harder and harder to accomplish. We cover this in detail later in the book. It is a good idea to get set-up as an anonymous user as soon as possible. The anonymous window will close - and soon. Do not worry about setting up a Bitcoin account tied to your identification. We can do that any time. We can also set up as many Bitcoin accounts or identities as we want.

While some other currencies, notably e-gold, offered some privacy, all the records could be tracked back to the e-gold website. Additionally, all the ID's of users stayed on the e-gold servers. They were eventually confiscated during the federal raid. Many of the records for supposedly private, anonymous parties were turned over willingly by e-gold. Short version: centralized currencies cannot guarantee privacy completely. Bitcoin makes a good attempt at this, by distributing all transactions without needing one clearinghouse or one central database.

5. Bitcoin has no counter-party risk. It is mathematically proven and backed. Counter-party risk comes from someone or something backing a currency or certificate.

The US dollar has the definition in the constitution of:

24.057 grams or 371 4/16 grains of pure silver as set out by Secretary of the U.S. Treasury Alexander Hamilton in 1792.

Now, the dollar cannot be turned in to a U.S. bank for silver. The counter party for the value of the U.S. dollar is the U.S. government. Our government has broken it's own law and will not give the value defined by the dollar.

Bitcoin has no counter-party backing it. There is no risk of default on what a Bitcoin is worth. Almost all other digital currencies that are backed by gold or silver, have a significant counter-party risk.

6. We can store Bitcoins in our brain, by memorizing key codes that define our access to Bitcoins. Other currencies prevent this because there is a central clearing house. Even a correctly memorized code will not work if the central clearing house or controlling monetary authority denies access to the account.  This denial of account status just happened in Cyprus, and even occurred with the U.S. bank holiday during the depression. As long as the Bitcoins check out as legitimate against the Bitcoin ledger, they are valuable for Bitcoin transactions. No one can stop the spending of them.

7. Bitcoin is robust and resilient. Software programmers apply words such as robust, resilient, error tolerant, and self-healing when referring to code or systems that are hard to break. Bitcoin can only be stopped for good by destroying all networks, computers, and exchanges. When and if that happens, no one will be worrying about Bitcoins; we'll be in much deeper trouble.

Spread out across the globe, across all computer networks, with a steady up trend in use, and proven code, Bitcoin has staying power. This chart from Blockchain.info shows the general up trend in Bitcoin transactions. Nearing 80,000 transactions per day currently; when it tops 100,000, there will be a sudden upsurge.

8. Bitcoin creates businesses. None of the other alternative currencies created sites with as much traffic as MtGox.com. Bitcoin has already surpassed every prior virtual or digital currency with its popularity and price increases. While e-gold grew to over 5 million accounts, the number of significant stores accepting it never grew over the 100 mark. Bitcoin already has a steadily increasing list of merchants that accept Bitcoin; one list of merchants working with Bitcoin is here:

http://www.Bitcointrading.com/forum/spend-Bitcoins/online-stores-accepting-Bitcoins/

9. Bitcoin transactions are irreversible. Unlike credit cards, a buyer who transfers funds to a seller cannot reverse the transaction getting their money back. Once we send Bitcoins, they are now gone. Getting our Bitcoins back, or reversing our spending of them, requires the seller or receiver of the Bitcoins to start a new transaction for sending back the purchase amount.

While we might consider this bad news, it shares this characteristic with cash. When we hand over cash buying something, we cannot reverse the transaction. The receiver of the cash has to agree to return our money.

Irreversibility turns out to be a positive for buyers, though they may not recognize it. When businesses accept credit cards and payment forms such as Paypal, they have to add somewhere between 5%-15% to each price for return allowances and scams. This fee is on top of the 3%-5% that credit cards, Paypal, etc. charge for their service. Total punishment that most buyers do not consider, but nonetheless pay for: about 8%-20%.

Cash-like transactions - irreversible ones - can result in reduced prices (
can
, but not necessarily will).

For sellers, usually businesses accepting Bitcoin, this irreversibility property solves one of the biggest problems with credit cards and Paypal.

For buyers, sometimes the lack of reversing transactions may not be a good thing. Some creative entrepreneurs realized this buyer concern was an opportunity for an escrow service.

Here are a few Bitcoin escrow services:

http://www.btcrow.com/

http://www.thrucoin.com/

http://www.clearcoin.com

Escrow services hold funds until the buyer agrees that the seller delivered. There are also dispute settlement operations included, though not where a seller wants to get involved if at all possible.

Other digital currencies have offered irreversibility, though without the convenience of escrow services. If we send a Western Union payment, it is gone essentially. There are no integrated Western Union escrow services.

10. Bitcoin's entrenched user base with about four years of operational proof gives it market dominance. There are other digital currencies, such as Pecunix, PerfectMoney, Liberty Reserve, etc. that have been around longer. However, none of the competitors have the explosive user base, nor do they have the growth trend of Bitcoin:

Globally, there are about 900,000 searches per month on Google for Bitcoin. While the crash in April 2013 slowed search traffic, there are still well over 800,000 unique searches per month, with over 50,000 new mtgox.com accounts added per day at the peak. Mtgox is the biggest Bitcoin exchange and a good indicator of BTC popularity.

There are many other differences between Bitcoin and other digital currencies. Understanding these differences requires going into the intricacies of how Bitcoin operates.We will venture into more of a technical look at Bitcoin in the remaining chapters. When we learn how Bitcoins get created, spent, saved, and circulated it will give us the keys to creating our own
wealth with Bitcoin.

How To Use Bitcoins

“Tell me and I'll forget. Show me and I may remember. Involve me and I will understand.”

Chinese Proverb

This chapter will get our Bitcoin running shoes on and get us into the race.  We will examine where and how to get set-up with Bitcoin, and look at best practices when doing so. We can set-up multiple Bitcoin accounts and wallets. If we make a mistake or want to create a separate Bitcoin wallet or key, we can do that easily.

Getting Your First Bitcoin

Mining is one way to acquire Bitcoins, but not practical for getting them immediately. There are a few sites we can use for setting up our Bitcoin money system.

There Are 3 Basic Needs When Starting Out:

1. A Bitcoin Wallet

We can hold our Bitcoins or Bitcoin codes on our computer, USB drive, SIM card, or our iPhone or Android phone.  If we lose the computer or device somehow, those coins are gone also. Not desirable.

We can secure our Bitcoins by signing up for a Bitcoin wallet that resides in the Internet cloud. We then back-up the information to our phone and/or computer with encryption, and then distribute that encrypted information. Only we will hold the key, or those we trust, for unlocking our Bitcoin wallet information. This will all become clear when we get through the simple, almost instant process.

A Bitcoin wallet gives us a Bitcoin address. When we buy or sell Bitcoins, we use this address. Here is a Bitcoin wallet address set-up with Coinbase.com, one of several Bitcoin exchanges and wallet providers:

1Lez1wcwPLWNmPtcfGXtSy8F34ZF45fwYh

We will probably end up having many wallets and many bitcoin addresses. Recommended practice is to have one wallet address for buying Bitcoins and one for selling them.

Here is a view into the account of this new Bitcoin wallet with no Bitcoins. This is a new Bitcoin wallet without any bank account attached to it, or fully operating. We could receive Bitcoins with this address, but we will need to link a bank account to transfer money in for buying Bitcoins.

Here is just a partial list of Bitcoin wallet providers that store our Bitcoins in the cloud with back-up options:

- http://www.Instabit.com

- http://www.Blockchain.info

- http://www.Coinbase.com

- http://www.walletbit.com/

- http://instawallet.org/

- http://www.dwolla.com

- http://www.myBitcoin.com

There is another alternative way of getting a Bitcoin wallet - though it is much more than that. One can sign up with OkPay.com, which offers more of a banking-like service level and direct transfers of funds to a debit card. The risk with OkPay.com is that it has more financial liabilities than the other Bitcoin wallets mentioned.

Setting up an account with OkPay.com is good for getting funds out of Bitcoins more easily. It is not the most secure place for getting a Bitcoin wallet because of the financial liabilities inherent with their wide transfer offerings.