What is Bitcoin, and Why Should I Care?

Bitcoin and Blockchain are two terms to add to your list of potentially life-changing technologies. Let's take a closer look.

What's All the Fuss About?

So what’s all the fuss about? There are many reasons why more and more people are paying attention to “Bitcoin" and "cryptocurrency." The rise in valuation of Bitcoin over the past few months has been eye popping.

Advancements in technology are constant factors of the world. "Artificial Intelligence," "Internet of Things" and "geolocation" are just some of the buzzwords of our digital era.

"Bitcoin", "cryptocurrency" and "blockchain" are now three more terms to add to the list of potentially life-changing technologies.

This artilce provides a concise description of the top reasons that spending a little time with these ideas might pay off big in the future.

The Meteoric Rise of Bitcoin in 2017

The price of bitcoin jumped from $800 to $18,000 during the course of 2017. If you were lucky enough to buy at the beginning of January and sell at the end of December, you scored a 2100% gain (yes, that a 20X return). Spikes like this are exciting, but can also spook savvy investors. Some say it's a bubble heading for an enormous crash, while others see unlimited potential.

Will the price continue to rise or is this a speculative bubble?

Tour de Force

These Were the Most Expensive Pizzas Ever Purchased (with Bitcoin)

At the time of this update (Dec, 2017), a bitcoin was worth more than $15,000 USD. This represents more than a 60,000 percent increase in the price of Bitcoin since 2010, when the first bitcoin market was created. The value has increased more than 2,000 percent this year alone and has doubled in the past month.

One of the first trades was made by computer programmers experimenting with this new technology. Laszlo Hanyecz paid Gavin Andresen 10,000 Bitcoin in exchange for two Papa John’s pizzas. Today the value of those pizzas is approximately $150 million dollars.

At the time, the value of the pizza was less than $20.

Bitcoin May Someday Replace Banks

Like the Internet, Bitcoin relies on a decentralized network of users all across the globe. However, unlike the Internet, Bitcoin allows people to send people a scarce digital asset that cannot be counterfeited.

For the past seven years, Bitcoin users have been sending value to each other directly instead of using traditional banking services. With Bitcoin, international payments can be made 24/7 to any place in the world for a flat fee ranging from $2 to $4.

Instead of relying on centralized financial institutions, Bitcoin users are boldly adopting a new and decentralized way of transferring value.

Bitcoin is Accepted by Over 125,000 Merchants Worldwide

The list of firms that accept Bitcoin as payment is constantly growing.

The payment company BitPay works with more than 125,000 merchants worldwide that accept Bitcoin as a means of payment. Bitpay even allows Bitcoin users to stock a Visa credit card with Bitcoin, which allows users to spend Bitcoin anywhere that Visa is accepted.

Some of the large companies that accept Bitcoin include Dell, Microsoft, Virgin Galactic, and Tesla.

In addition to private companies, several non-profit charities accept donations denominated in Bitcoin. The BitGive Foundation supports several campaigns including earthquake relief in Nepal and clean water projects in Kenya.

Bitcoin is Pseudonymous

Bitcoin is not anonymous. Instead, Bitcoin enthusiasts use their wallet address as an alias on the network.

Since wallet addresses can be generated without providing identification, it is extremely difficult to determine the physical identity of the individual who owns the wallet address.

This feature allows users to send value across the globe without revealing who they are in real life.

Critics of the technology maintain that only criminals need a monetary system with this much privacy. Others believe that this level of privacy is a basic human right like freedom of speech.

No One Knows Who Created Bitcoin

On Oct. 31, 2008 a whitepaper mysteriously appeared online entitled, “Bitcoin: A Peer-to-Peer Electronic Cash System.” The paper was authored under the pseudonym, Satoshi Nakamoto.

After fixing several of the software bugs with programmers such as Gavin Andresen, Nakamoto disappeared. After eight years, the real identity of Nakamoto is still unknown. However, it is estimated that Nakamoto holds the private keys to 1,148,800 Bitcoin worth approximately $3 billion dollars.

Many people believe that Nakamoto was part of a group of cryptographers, known as the “cypherpunks,” that developed decentralized technologies for privacy protection. Prior to Bitcoin, several cypherpunks created open-source and decentralized cryptocurrencies that closely resemble Bitcoin.

I personally think Nick Szabo is Nakamoto. Although, some people claim that one mind alone would not be great enough to invent such a revolutionary technology. Instead, they claim that Nakamoto is actually a group of programmers.

Bitcoin is the Most Prominent Application of Blockchain Technology

The distributed ledger technology (DLT), commonly referred to as blockchain technology, is purported to reduce transaction costs and dependence on intermediaries.

A rule of thumb in cryptography is that anything that can be done with a trusted authority can also be done without a trusted authority. Distributed ledgers are being used to “disintermediate” elections, auctions, and social media platforms like Facebook.

For example, Bitcoin, which is an application of the distributed ledger technology, is competing with the minting service of central banks and the transmission service of banks. Smart contracts using the concepts of Bitcoin and blockchain may fundamentally change the way firms store data, exchange value, and enforce contractual agreements.

Forbes published an article last year claiming that blockchain was, “the most game-changing technology advance since the Internet.”

Cryptographic Achievement

Over 14 Million Bitcoin Wallets Have Been Created

Due to the pseudonymous nature of Bitcoin, it is impossible to tell how many people use Bitcoin.

The Blockchain.info chart shows the uptrend in the number of newly created wallet addresses since 2010. This number is the upper bound of Bitcoin users; however, the real number of users is much lower because most users have multiple Bitcoin wallets. The addresses are generated by an algorithm so that the number and letter sequences they consist of are random.

The number of addresses automatically gives us an upper limit for the number of Bitcoin users. In September of 2016, Andreas Antonopoulos, the Bitcoin technologist, estimated the real number of users to be between 2 and 4 million. That is quite impressive considering that word-of-mouth marketing is the main way this technology is advertised.

Several Universities Are Now Offering Classes on Bitcoin

Every year more and more universities are offering courses that cover Bitcoin and the Blockchain.

My favorite course is Bitcoin and Cryptocurrency Technologies offered by Princeton University. The course is free and available online at Coursera.com. In addition to Princeton, Stanford University also provides free learning materials for their course Bitcoin and Cryptocurrencies.

In Europe, the University of Cumbria was the first university in the world to accept Bitcoin for tuition and fees. In addition to accepting Bitcoin for tuition, the University of Nicosia in Cyprus offers an entire master’s degree program on digital currency.

I teach the course, "Is Bitcoin the Future of Money?" at the University of Liechtenstein in the Alps. The Massachusetts Institute of Technology, New York University, and Duke also offer courses for students interested in Bitcoin.

Volatility

Criminals Can Use Bitcoin to Evade Taxes, Buy Drugs, and Money-Launder

The pseudonymous nature of Bitcoin allows users to hide their true identities. The privacy features of the Bitcoin protocol were designed to obfuscate the IP address of Bitcoin users. For additional privacy, Bitcoin users can use the Tor network and Bitcoin mixing services to further hide their identity.

Criminals and tax-evaders have been exploiting the Bitcoin network since its inception.

The most famous crackdown on Bitcoin-related crime was the arrest of Ross Ulbricht, who operated an online drug exchange known as the Silk Road. Ulbricht was sentenced to life in jail for his involvement with this website.

Recently, the IRS subpoenaed the largest Bitcoin exchange in the U.S., Coinbase. The IRS wants the account records of all Coinbase users between 2013 and 2015. The IRS is pursuing Coinbase because they suspect that Bitcoin users may not be paying taxes on gains made from trading Bitcoin.

Historic Price Rise Fuels Debate

For a short time on Nov. 29, the value of a Bitcoin hit a (then) all-time high, topping $11,000, and then fell to end the day at $9,772.

Joseph Stigliz, former chief economist of the World Bank, was among a growing chorus of voices expressing grave concern that day about the growing popularity of the currency. He called for Bitcoin to be declared illegal, dismissing the currency as mainly useful for illicit purposes.

"Bitcoin is successful only because of its potential for circumvention, lack of oversight," he said during a Nov. 29 interview on Bloomberg Television.

Stigliz, now a professor at Columbia University, added, "It seems to me it ought to be outlawed. It doesn’t serve any socially useful function."

He called the current value of Bitcoin the product of a bubble that, while giving investors an exciting ride over the past few months, would ultimately burst and bring unhappiness and financial disater to many.

Stigliz said he supported the idea of digital currency but such an effort should be under goverment control.

In Some Countries Bitcoin is Illegal

Warning: Check your passport before using Bitcoin!

Five countries have officially banned Bitcoin: Kyrgyzstan, Bangladesh, Vietnam, Bolivia, and Ecuador.

According to the Central Bank of Bolivia, “It is illegal to use any kind of currency that is not issued and controlled by a government or an authorized entity.”

Ecuador banned Bitcoin while simultaneously creating their own virtual currency. In Kyrgyzstan, Bitcoin is also illegal. According to the government, the only currency that is legal tender is the Kyrgyzstani Som (KGS).

Bangladesh has the most draconian laws pertaining to Bitcoin. If a person is caught using Bitcoin, they can be sentenced to three to twelve years in jail. In fact, even talking about Bitcoin in Bangladesh can get you in trouble with the authorities.

Last but not least, Vietnam outlawed Bitcoin because it can be a conduit for money laundering and criminal activity.

People Are Buying Bitcoin as an Investment

As I wrote for the 2017 Edition of In Gold We Trust, Bitcoin and cryptocurrencies may become an integral part of wealth management from the perspective of portfolio diversification.

This is because Bitcoin represents an entirely different asset class, with different risks and different benefits. Several studies have found that adding Bitcoin to a traditional portfolio with stocks, bonds, and currencies can increase return without adding risk because Bitcoin’s correlation with other asset classes is low to slightly negative.

It's Entering the Mainstream

Bitcoin and the Blockchain technology are slowly becoming household words.

Bitcoin’s 2017 price hike from $1,000 to over $15,000 has propelled global interest in this technology. Even my relatives are asking me, 'What does Bitcoin mean?'

Everyone must decide for themselves if investing in Bitcoin is the right thing to do or not. Although, there are several reasons to learn about Bitcoin, the impact that Bitcoin will have on the world is still unknown.

The open source nature of the Bitcoin software means that anyone can use Nakamoto’s ideas to develop new technologies. On the other hand, if governments decide that Bitcoin is a bit too revolutionary, they may try to limit further innovation.

Bloomberg Added Cryptocurrencies to It's Terminal

As a sign of the times, Bloomberg recently added more cryptocurrencies to it's financial temrinal. The service now offers traders a realtime view of activity for Bitcoin, Ripple, Ethereum, and Litecoin.

Get Involved

For those that think the benefits outweigh the costs, there are several easy ways to get more involved.

The largest exchange in the U.S., Coinbase, is licensed and regulated by U.S. government authorities. Making an account takes a few minutes; however, full verification can take up to two days.

New account openers need a state-issued identification card or license and a bank account or credit card. Coinbase charges 1.49% of each Bitcoin purchase if you use your bank account to buy Bitcoin via ACH transfer. If you buy with a credit card, the fee is 3.99%.