The Single Dude’s Guide to Bitcoins

BitcoinThe existence of Bitcoin is something I’ve know about vaguely for years but I always dismissed the idea because it was just to weird for my tastes and also seemed inherently insecure. I wish I had simply spent 5 minutes googling “How does Bitcoin work” because actually it is quite simple to understand conceptually and quite secure. This turned out to be a costly mistake because Bitcoins have skyrocketed to a value of over $70 USD (edit: now over 100) at the time of this writing and it seems as though the clusterfuck in Cyprus and the EU at large has been driving some of the recent meteoric rise in the electronic currency. I’m not going to reinvent the wheel by summarizing how it works but you can either read the Bitcoin academic paper, watch the short video below or do some googling yourself.


http://www.youtube.com/watch?v=Um63OQz3bjo

Now that you have at least a vague notion of what a Bitcoin is, let’s look at some of the advantages such a “virtual currency” might offer, particularly during these tumultuous and uncertain times we live in:

  1. It’s peer to peer. There is no central authority like the IMF, the EU or the European Central Bank to confiscate (or push for confiscation) of your savings to bail out criminal bankers when they inevitable fuck up with their phony fiat Ponzi money.
  2. There is not much regulation. Until recently there was essentially none but the US has recently made a ridiculous bid to attempt to regulate Bitcoin but due to Bitcoin’s distributed, peer to peer nature I believe these feeble attempts will most likely fail miserably. In any event given that Bitcoin is online, world wide, distributed electronic currency many will be able to avoid dealing in Bitcoin/USD transactions and just use other currencies through currency exchanges located out of reach of the US. (If you live in the US this may be problematic but we’ve been advocating getting out of the US for years).
  3. Bitcoins do not need to exist in the physical world. This means you will never have trouble moving Bitcoins across borders and nobody can take your Bitcoins from you by confiscating them physically, a risk which remains for gold and other precious metals. You can store Bitcoins physically on paper or with Casacius Coins if you like.
  4. Bitcoins cannot be inflated or hyper-inflated out of existence. The algorithm used to create Bitcoins hard limits them at 21,000,000. Right now there are almost 11,000,000 Bitcoins. The pool of available Bitcoins is projected to expand slowly until it eventually stops at 21,000,000 around the year 2040. Bitcoins are infinitely divisible to deal with the problem that the supply will eventually become fixed. Although the current iteration of the Bitcoin client supports division up to 1/100,000,000th the code can be adapted to allow infinite divisibility in theory.
  5. Bitcoin accounts (aka “wallets”) can be created quickly, easily and freely.
  6. Bitcoin can potentially be anonymous. Every transaction in Bitcoin can have a unique address with no way to determine who is actually behind that address as long as proper precautions are followed such as using Bitcoin only through Tor, creating a new payment address for every transaction and using anonymous email such as TorMail (now defunct) to communicate.
  7. Bitcoin is open source. Unlike the rest of the global financial networks Bitcoin is open and transparent while banks use very opaque private technologies to conduct transactions. Although it would be possible to add features to the code that would be against the best interests of those that would use the fact that the code has been open source since day one virtually eliminates this possibility.

All in all Bitcoin offers a lot of very unique advantages for someone that doesn’t want to put all their eggs in one basket with precious metals and other commodities. The few drawbacks that I can think of are as follows:

  1. Uncertain security. Although the concept seems very safe and secure at present there are no guarantees about what the future of technology will mean for Bitcoin security. The advent of Quantum computers is one thing that could dramatically disrupt or even destroy Bitcoins
  2. A superior alternative could replace Bitcoin at any time. Bitcoin is one of the first of its kind (if not the first?) and therefore, its creator, while widely regarded as a genius, may not have thought of everything. Nobody knows how long Bitcoin will last.

  3. Bitcoin exchange rates can be extremely volatile due to the limited size of the market and the uncertainty of the currencies future.
  4. The powers that be hate Bitcoin and will do everything they can to destroy. However, much like P2P file sharing, if they don’t shut down the internet entirely it will likely be virtually impossible to stamp out Bitcoin entirely.

I’m still relatively new to Bitcoin myself so I may have missed some important points. I encourage anyone reading this to leave a comment if you disagree with anything in this article or if you have something of value to add. One thing I’m purposely avoiding is Bitcoin mining; Bitcoin mining is always changing, there are plenty of forums and websites dedicated to it and at this point it’s not really profitable anymore without specialized hardware. If you’re interested in that topic you need to check ASIC (Application-Specific Integrated Circuit) Bitcoin mining hardware as that will surely be the future of this cottage industry. It may be possible to make a small amount of money with huge arrays of special integrated circuit boards called FPGAs (Field-Programmable Gate Arrays) but that window of opportunity is rapidly closing. Newer ASIC hardware is orders of magnitude faster which will trigger the algorithm to create higher mining difficult levels which will render the older hardware useless. Many of these FPGA “rigs” may never even payoff due to the huge amount of ASIC hardware that is poised to flood the market.

As to the value of Bitcoins themselves, personally I think a huge run up in Bitcoin can be possible, however, I think there will be a huge correction in the near future before this bull market continues. But again nobody knows. I think having a couple of Bitcoins as a speculative investment may be a good idea and also that Bitcions have a potentially to help you get out of a jam that may be impossible or nearly impossible any other way due to the unique properties of Bitcoins.

Bitcoin Infographic

If you want more technical details checkout this Bitcoin infographic (click for a larger version)




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