More paper and columns have been devoted to reporting on cryptocurrency than I can count. I am also less of a finance person, though that’s actually the degree I hold from college. I spent two years on Wall Street when I was 18 to 20, but I still struggle with certain financial concepts and markets. But as I find this a fascinating confluence of IT and finance, I would be remiss if I didn’t take a shot at explaining Bitcoin.
Over the past few months, a single Bitcoin trading value has increased significantly, becoming a regular day-to-day business news headline. Despite all the press on Bitcoin, there remains confusion about what Bitcoin is and how to use it. So here is my attempt to explain this in one weekly column.
If I had one Bitcoin for every time I was asked “What is Bitcoin?” I would be rich myself! I am seeing big companies like Dell embrace Bitcoin; even yeshivas are trying to figure out if there will be a day that a parent will pay in Bitcoin as opposed to a check, bank transfer or credit card.
I am blessed with a close friend who has a Bitcoin ATM machine right outside his office here in Teaneck. All other explanations of Bitcoin have come from various online guides and I welcome any corrections from readers.
What is Bitcoin?
Bitcoin is a peer-to-peer kind of stock exchange of many computers connected to a Bitcoin network. This all falls under the term “cryptocurrency,” which doesn’t rely on trusting one central monetary authority and allows for anonymous non-taxable transactions. The idea was discussed by tech gurus and then became a real system—which used a distributed database spread across the nodes of a peer-to-peer network, similar to what we 90s tech dudes called Napster or Torrents, that could keep track of transactions secured by cryptography. All of this was described in detail by a programmer named Satoshi Nakamoto in a paper in 2008. The Bitcoin network itself was built in 2009.
For a layman’s version, imagine if all of your neighbors had a potluck dinner. Each person’s home would be where the food is made and stored. The end result is a bunch of delicious food that everyone can eat. If each person’s home would cook “mine” Bitcoin, the potluck dinner would be the “mined Bitcoin.”
Bitcoin is a mashup of a stock exchange and commodities exchange. The commodity value of each Bitcoin is linked to its currency value, but the more they become like a commodity, the less useful they are a currency.
How do you mine Bitcoins?
Anyone can install Bitcoin mining software, which then uses the computer’s processing power to carry out complex calculations—you can think of it like trying to search for prime numbers. If you head out to MicroCenter you will notice that a lot of soccer moms and hockey dads are in line with the gamers for higher-end PCs and laptops. You need an expensive video card that can handle the mining. The hardware vendors are sending marketing every day trying to pitch our clients high-end video cards.
To continue with the example above with the potluck dinner, everyone’s home would have a Vulcan oven with all of the high-end utensils and chefs. It’s not microwave pizza; they are putting out Chicken Kiev and prime rib.
Lots of people might be working on the same Bitcoin mining unit—a computationally complicated problem. The aim is to find a certain sequence of data, called a “block,” that produces a particular pattern when the Bitcoin “hash” algorithm is applied to the data. Whoever’s computer manages to do that will win Bitcoins.
The network is used to monitor and verify the creation of new Bitcoins and all Bitcoin transactions, which are filed in a log. There is a cap on the number of Bitcoins that will be produced, which is 21 million, and a predefined schedule of how quickly they are released up until 2040. There are around 11 million Bitcoins in the market today, which is why you will find that many big Bitcoin players want to purchase Bitcoin and avoid the whole hassle of mining.
Can I mine at home?
You can try, but you are unlikely to have significant success. Because of how hard mining is now, it could take more than three years to generate any coins, running up huge electrical bills and PC hardware that you will need to purchase to make Bitcoin. You are better off joining a mining pool; then you can share the the Bitcoins depending on how many Bitcoins your hardware mined.
How do I purchase Bitcoins?
You can exchange regular currencies for bitcoins using an exchange like Mt. Gox, which handles around 80 percent of Bitcoin trade. My research uncovered the fact that half of Bitcoin currencies fail. The buyers lost their money or were hacked. If it were that easy, we would all have Bitcoins.
Why would hackers hack Bitcoins?
This is a pretty crazy way of looking at why hackers are doing this. Since Bitcoin purchasers are looking for the cheapest possible way to get Bitcoin, if hackers start to penetrate these exchanges, people who own Bitcoin will think the sky is falling! Then sell their Bitcoin for the cheapest price. The hackers would then be able to purchase Bitcoin cheaper to hold, to sell it at later time at a higher price.
Where can I spend Bitcoins?
As I wrote, Dell accepts Bitcoin; I feel that adds a lot of legitimacy. Many online stores are taking Bitcoin. PayPal may start to accept Bitcoin. I don’t want anyone to read this column and be discouraged from using Bitcoin. We all use cash at times and are using cash in a legitimate way to purchase items or services. I think it should generally be seen as the same as cash.
Are Bitcoins secure?
Bitcoin maintains that because all transactions are trackable they are secure. Can it be stolen? As with all electronics, eventually a hacker will get in. I assure you this isn’t your neighbor’s son playing MineCraft. To date, some Bitcoin has been taken, but none of it has been used, as it’s totally trackable by the Bitcoin logs.
Since mining Bitcoin is much harder than it used to be, fewer people are mining and fewer people can be hacked.
Bitcoin has risen to $1,100 and dropped down to $76 very quickly. This is mainly due to the fact for now you can’t just run to the bank to cash it, or like a stock, call your broker and sell sell sell. There is no Bitcoin Federal Reserve or Bitcoin stock exchange, per se, or even a Bitcoin board that can monitor the supply and demand.
Some hacks to the biggest Bitcoin network, Mt. Gox, were enough to make Bitcoin drop in price.
I am not going to discourage anyone from trying to mine Bitcoin, but I am also no expert. I do compare this to a stock that everyone heard of and didn’t invest in, then talks about how rich they would have been if they purchased the stock when others invested. I can’t deny I heard of Bitcoin mining early and even tried to mine, but gave up as it was that difficult. At the time, I didn’t see this as becoming anything near as legitimate as it is today. My loss.
One thing I will say is that I should have seen Bitcoin coming. Most people will use credit cards or electronic banking. PayPal used to be an “eBay” term. It’s rare someone has never used or made a PayPal (or the newer-to-the-market Venmo) transaction. Paypal is a currency exchanger and is, in essence, a bank, even though there is no PayPal branch one can visit. PayPal has exceptional support and is pretty amazing and helpful if you ever have trouble.
My summary of Bitcoin is if you didn’t get into Bitcoin mining at the beginning, you are unlikely to make any money now—your energy and infrastructure costs will be too high. You can invest in Bitcoin and hope to sell the Bitcoin at a higher price down the line.
If I can give my two cents for now, Bitcoin really has to be for the super-savvy investor, both technically and financially. Otherwise I say stick to the financial markets you know; you have to have a strong heart for Bitcoin.
Mark my words, in the near future I foresee 7-Eleven, ShopRite and other retail stores taking Bitcoin.
By Shneur Garb
Shneur Garb is the CEO and founder of 1to1Chromebook.com and The Garb I.T. Consulting Group. Comments and questions can be sent to [email protected].
