I recently dipped my toes into the world of cryptocurrencies.
Cryptocurrencies are “a medium of exchange using cryptography to secure the transactions and to control the creation of new units.” *1
For my cryptocurrency of choice, I settled on the best known, Bitcoin.
Bitcoin is a “payment system invented by Satoshi Nakamoto *2, who published the invention in 2008 and released it as open-source software in 2009. The system is peer-to-peer; users can transact directly without needing an intermediary. Transactions are verified by network nodes and recorded in a public distributed ledger called the block chain. The ledger uses its own unit of account, also called bitcoin. The system works without a central repository or single administrator, which has led the US Treasury to categorize it as a decentralized virtual currency.” *3
So how does a cryptocurrency differ from traditional fiat (*4) currencies?
The main differences are cryptocurrencies are peer-to-peer systems – community controlled without the involvement of the traditional banking system and, crucially, they are finite and therefore not susceptible to inflation.
How does one acquire bitcoins?
There are essentially three main routes:
- Mining bitcoins - this is basically maintaining the Bitcoin block chain. Due to the value of bitcoins*5, this route to acquisition is now viewed as probably the least profitable option. Due to people investing lots of time and money into their efforts, and the volume of mining operations, the ROI has been described anecdotally as “probably just enough to cover the overheads involved”, with certain testers being able to generate approximately 0.00001220 of a bitcoin (BTC) *6 over a 24 hour period, using a pretty standard home PC.
- Trading Bitcoin - exactly the same as trading any other stocks or shares. Buy low, sell high.
- Fauceting - visiting websites that pay the user fractions of bitcoins for performing simple tasks, such as solving captchas, viewing websites, viewing adverts and even reading books online.
So, what do you need to do to start out in Bitcoin?
First of all, you’ll need a bitcoin wallet - a piece of software/hardware that contains the digital credentials necessary to transact bitcoins. The most common of these are Coinbase; Blockchain; Circle; Bitcoin Core but the one I chose was “breadwallet”.
Your wallet is like your own personal bank, with a public and private key. The public key is your Bitcoin address and it functions as an address for you to receive bitcoins, whereas the private key is to allow bitcoins to be spent. These keys are usually 128 - 512 bit numbers that have been encrypted using public key (aka Asymmetric) cryptographic methods: “The private key is mathematically related to the Bitcoin address and is designed so that the Bitcoin address can be calculated from the private key but, importantly, the same cannot be done in reverse.” *7
Your wallet address is usually given in the form of a string: e.g. 1QPYuhxfMmNXmu6aoxhz4qvMJcyaCLkVs and is often converted to a QR code:
This wallet address is actually fully functional and is the address of one of my own wallets. If you wish, you can send me money, for which I would be grateful but which I would not return!
Now you have your wallet and, crucially, your wallet address, you can start adding bitcoins to it via one of the methods detailed above.
If you wish to try Fauceting, a knowledge of the terminology used for describing bitcoin subunits is required:
The smallest unit of bitcoin is known as a satoshi, and is 10-8 (0 .00000001) of a bitcoin. A microbitcoin (μBTC) is a 10-6 (0.000001), and a millibitcoin (mBTC) is10-3 (.001) bitcoins respectively. Whilst most faucets pay out in the range of 50-20000 statoshis, some detail their payouts in formats such as 0.00229 mBTC (as opposed to the more common 229 statoshi).
Now you have acquired some bitcoins, what do you do with them?
The situation has changed considerably over the course of a year or two. No longer is bitcoin primarily used for notorious “dark web” sites, Barclays Bank recently stated “We are working with some charity clients in a ‘proof of concept’ to understand how bitcoin payments might help with their fundraising and fund disbursement needs”, and are looking likely to become the first UK bank to accept bitcoin directly.
Ebay have recently announced that they will accept bitcoin payments, and WordPress will also allow users to pay for upgrades using bitcoin. There are also a bunch of ‘real world’ places that now accept bitcoin, for example, here in Edinburgh, where 20/20 Productions have their European office, the entertainment exchange, CeX, and Umega Lettings agency now accept payment in bitcoins, as do various bars and cafes around the UK, with the list growing longer every day *8.
Bitcoins are secure – false. Credit card transactions are reversible, bitcoin transactions are not, thus making the currency more attractive to thieves. Business Insider *9 reports that approximately 1 in every 16 (approximately $500 Million) bitcoin has been stolen by one means or another. Dell estimate there are 140 viruses in the wild that have been designed specifically to steal bitcoin*10; the most prevalent being “Predator Plan”, a malware package found for sale from as little as £20. Another consideration is if someone was to gain 51% of the overall processing power of all bitcoin miners, they could, in theory, control the process by which bitcoins are created and could allow them to ‘double-spend’ and prevent transaction confirmations, amongst other potential abuses. This scenario almost came to pass in January 2014, when the mining pool ghash.io approached this ‘critical mass’ and caused widespread panic amongst the bitcoin community. Thankfully, in this case, users voluntarily left the pool rather than destabilise the entire currency and disaster was averted. However, the ‘51% Hash Attack’ remains a critical flaw in the system.
As bitcoins are finite, they must appreciate - while this may hold true in the long term, it’s not impossible that they will loose their value altogether and, indeed, due to it’s free market structure, the bitcoin market is even more volatile than ‘traditional’ markets. The value has dropped by £100 per bitcoin in the three hours it has taken to research and write this article so far!
Bitcoins are anonymous – false. As there is a public record of every transaction, bitcoins are NOT truly anonymous. Whilst many users may feel they are adequately obscured by the fact that only the bitcoin wallet address is entered in the block chain, once an address has been used, it is traceable to the extent that any other transactions that use the same wallet address are interlinked.*11 Having said that, there are various cryptocurrencies that bitcoin can be converted to that are anonymous, for example Zerocoin *12, and many “coin-cleaning” sites exist, although, due to the nature of these sites, I’d be somewhat wary of using these and would question the legality of using one of these services.
So what's the value of Bitcoin?
Well other than the ‘by the people, for the people’ aspect, any opinion I voiced would be precisely that; an opinion. So, here's the chart:
Let me make something clear: I have no interest in selling you Bitcoin, or engaging you in some other fashion about Bitcoin. I have nothing to gain from you, dear reader, entering cryptocurrency, or not.
Personally, my first fore into cryptocurrencies of any sort came three weeks ago, when I got my wallet for the purposes of writing this article. I then googled "get free Bitcoin", and got 100 statoshi for watching an advert.
I decided to start an experiment; to see if it was possible to amass an amount of money, from absolutely zero fiscal investment, and at what other cost.
Now, when I am at home watching TV with my good lady wife, I'm constantly solving captchas and my phone is constantly viewing adverts. The return? Well, so far, one annoyed and slightly bemused wife, and let's just say, not enough Bitcoin to cover the data charge, had I not been on Wi-Fi.
If you're interested, let me know - I'll write an article about that project!
*2 Widely believed to be an alias for a either a single person, or group of people – the real identity of the creator(s) of the system is still unknown
*4 Fiat money is currency which derives its value from government regulation or law. - https://en.wikipedia.org/wiki/Fiat_money
*5 1 Bitcoin is worth approximately £ 146.50 at the time of writing
*6 £0.002, or a fifth of a penny at the time of writing
*8 https://www.greycoder.com/where-can-i-spend-bitcoins/ , http://www.hongkiat.com/blog/places-to-spend-bitcoins/ , https://coinmap.org and http://spendbitcoins.com/ are all useful resources