What To Know about Bitcoin

Transcript

I’ve been asked about Bitcoin a lot this year.  My friends know that I’m a certified C++ programmer and that’s the computer language that the Bitcoin code is written in.

I’m also a real estate investor and I’ve traded stocks and options through my own brokerage account.

I’m an IT management consultant, I get paid for my perspective.  However, they never asked me about two phased commits, cryptography or the other technical knowledge I have.  The rapid rise in the price of bitcoin is why they, and you, are interested in it.  I’m recording this on Dec 31, 2017 and it’s risen 14 fold this year alone.

The story of money is a complicated subject, but you don’t have to know that story to use money.

I’ve done my homework and researched bitcoin.  I’ll try to make cryptocurrency less cryptic for you.  It’s complex and not yet as easy as cash to deal with.

What’s the difference between an investment, a lottery ticket and bitcoin?

An investment is something that you EXPECT to make money for you.

A lottery ticket is something that you buy all your life, HOPING it makes you money, even though you’ve don’t know anyone who won big.

A bitcoin is something that interests you because it’s price has risen so high, so fast.  You WONDER if it will make you money, even though you’re not sure what it is.

As you continue to watch, you’ll learn what to do to protect yourself.  I’ll show you how to get $25 for free, if you want to.

I’m not qualified to give financial advice.   To be fair, SMILE, I don’t know what the price of bitcoin will be tomorrow and neither does anyone else.  I’d feel horrible if I told you to buy and the price dropped to 0.  If I told you to not buy and it goes to a million that would be even worse.  Personally, I’d buy Bitcoin before I’d buy a lottery ticket, but to be clear I’m not advising you on what to do with your money.

Bitcoin was designed to give you something to trade with another person, to put your money fully within your control without requiring anyone else involved.

You know how to use cash,  but the story of money is complicated.  How did we get to the point where the government issues money and we all agree on it’s worth?  You can use cash without knowing anything about how it came to be.  We don’t think about what happens to make it all work, all the institutions, the checks and balances, the regulations, which is complicated.

When we think of cash, debit cards or credit cards we know how to use them.  Bitcoin is not yet that simple.

Did you buy Bitcoin in 2013, when it was in the news and cost $25.  Probably not.  Do you feel like you missed out? This might make you feel better.  Would you do a thought experiment with me?  Pretend that you bought 40 coins for $1,000 4 years ago.   They’d be worth over $700,000.  That’s more money than most people ever have.

Ask yourself these questions.

If you had 40 bitcoins for the last 4 years, would you feel like a genius for buying it?  Or would you feel lucky?  Would you hold it or sell it? Would you have sold some of it when it had went up to 10,000 or 100,000 or 500,000?  I imagine I would have.

Would you have lost your keys?  It’s estimated that the keys to over 3 million bitcoin are lost.   That money is unusable, forever.  it’s like burning 50 BILLION dollars.

If you didn’t sell it or lose it, would it have been stolen.  As the price of bitcoin rises, more people are trying to steal it or cheat you out of it.  When you hear of bitcoin hacks, it’s not bitcoin itself that was hacked.  When a bank is robbed we don’t call that a money hack.  It’s the centralized exchanges which are the main entry points where money is transferred and the wallets where it’s stored, that get hacked.  Would you have stored your money in an exchange?

Check out this clip from American Gods.

That was a bank robbery.

Would you hand your money over to some guy on the street?   That’s effectively what people are doing with central exchanges.  Mt. GOX is one example, it sounds like a solid mountain fortress, but it was more like that TV clip. A guy with a website saying  I’ll take your money and tell you how much bitcoin you have. Mt. Gox actually stood for Magic The Gathering Open Exchange, a repurposed card trading website.  Millions of dollars were stolen and that’s just one of over a dozen exchanges that have disappeared.  People send money to exchanges where they have no idea who runs them or where they’re located.  Trying to get your money out of them is more difficult than sending them money.  The exchange websites crash as they can’t keep up with demand.  If your banks website crashes, you can always use an ATM or go to a branch.  You don’t have that option with exchanges, they’re not banks, you can’t walk into them and they do not yet offer deposit insurance.  Do not store your bitcoin on a exchange.

Many popular wallets have been hacked.  In some cases, programming is done by amateurs who don’t follow normal code review procedures.  This has resulted in millions of dollars being accidentally locked away.

There’s also market risk that you can’t do much about.  Half the bitcoin in the world is controlled by around 1,000 people.  It’s possible for them to move the price by placing a large sell order, then buying it back at a lower price.

Lots of experts are making predictions for what price Bitcoin ought to be.  Some say that it will go back to 0 and others say it will be over a million per coin.   How can you tell who the real bitcoin experts are?  I predict that someone is going to be closest to being right because every outcome has been predicted.  That doesn’t make them an expert.    The ones who predict 0 are looking at all the unsolved problems with it.  The ones who predict a million are looking to what Bitcoin aspires to be.

I imagine the price will go higher due to Metcalfe’s law.

Bitcoin has the network effect going for it.  That means the easier it is to buy, the more expensive it gets and the more people want it.   Until this year, it was difficult for a non-technical person to get involved, but it’s getting easier all the time.

Cryptocurrencies are powered by open source blockchain technology.  Bitcoin uses a blockchain, but it is not the same thing as blockchain.  Blockchain technology is here to stay and will eventually deliver on what it promises to do.   The people who will benefit most haven’t even been born yet.  That’s what I’m excited about.

Wherever trust is a problem, blockchain offers a solution.  It’s a protocol for trust that allows you to trade with another person without having to rely on a 3rd party like a credit card company, eBay, uber or AirBNB.

But, we have a lot of work to do, the internet wasn’t built in a day.

Blockchain combines the openness of the Internet with the merit of free markets.  It builds on concepts and technology that I’ve worked with for years in On Line Transaction Processing Systems, OLTP.  It uses cryptography to make a message secure with public keys, digital signatures, hashes and merkle trees.

What’s new is that the Bitcoin blockchain was the first to provide a solution to the double spend problem, without having to trust a 3rd party.

But, unless you are into IT, you don’t care about any of that..

You want to know what is bitcoin and how do you buy it.

A bitcoin is unlike any financial instrument the world has ever seen.

I’ll do my best to demystify it for you.

There’s a lot of confusion because simple explanations leave out important details. Full explanations need broad knowledge to understand.  There’s disagreement over whether it’s a currency, a method of settling transactions, or a speculative asset.

Lets start with what it’s not.

It’s not a Ponzi scheme or a pyramid scheme. However, people are running those scams using bitcoin, just as they’ve run them using other forms of money.

It’s not illegal for you to buy and sell Bitcoin.

Bitcoin is not a company, so talking about it’s market capitalization is misleading.

Bitcoin has no employees.

It’s not a physical coin. You can’t touch one. These symbols are for show.

It’s called a cryptocurrency, but it will have to get a thousand times faster to be usable by everyone.

Computers made music and movies cheap and easy to duplicate.

Bitcoin does the opposite, making a coin rare, expensive and designed to rise in value.  Bitcoin brings scarcity to the digital world. Only 21 million Bitcoin can ever be created and it will be 2140 before that happens.

A bitcoin cannot be randomly and easily inflated, manipulated, counterfeited, frozen or destroyed by someone else.

So, what is bitcoin?

It’s an open source computer project.  Programmers donated their time to write code they care about.

A bitcoin represents equity in the Bitcoin transaction network.

A bitcoin is a number which is a unique address.  It’s tied to some computer code and recorded in a database that is a special kind of ledger called a blockchain.

It’s decentralized so that you fully control what you own.

A bitcoin, or a tiny fraction of it, can be traded between any two people.  The price is determined by the free market, supply and demand.  How badly someone wants to buy it and what the owner is willing to sell it for.

Bitcoin broke the monopoly that governments have on the creation of money.

It’s like cash for the internet.  Some countries have passed laws to explicitly accept bitcoin as a legal payment method.

Where do bitcoins come from?

Bitcoin mining is the process of finding the answer to a difficult puzzle.  That’s called “proof of work”.  It’s computationally difficult to come up with the answer, but easy to verify.  It’s called mining because hard work is being done.  Nothing at all is actually being dug out of the ground.

By design, a coin is mined every 10 minutes.  The coin is payment to the miner for securing the ledger.

Mining is one of areas that causes a lot of confusion.  When Bitcoin started, anyone could mine coins with a home PC, it was a fully decentralized peer to peer system.  Today half the bitcoin in the world is mined in a few buildings in China. Only specialized computers with access to cheap electricity can profitably mine Bitcoin. It costs about a $1,000 of electricity to mine a single coin.

There’s nothing to stop other crypto currencies from being created.  In fact, hundreds already have been. They are called alt coins because they are alternatives to Bitcoin, which was the first to gain mainstream success.  A programmer like me can even create my own currency.  The question is, why would anyone value it?  I predict that by 2022, 95% of the alt coins will essentially be worthless.

Let’s talk about trust.   If you live in a country with limited banking options or high levels of corruption, then you have the most to gain.  I live in Canada and for the most part, we have trustworthy institutions, but they aren’t perfect.

The 2008 financial crisis had many people asking “who can I trust?”

Can I trust the credit rating services?  Nope

Can I trust financial institutions to not take excessive risks? Nope

Can I trust the government to oversee those institutions? Nope

Can I trust the government to not manipulate currency?  Nope

The next time there’s a crisis, will the government confiscate my money? It’s been done in other countries.

If you can’t trust the bank, your government or credit raters, who can you trust?

That brings us to Satoshi Nakamoto, the creator of Bitcoin.

Satoshi’s answer is that you can trust the code, trust the math and let the free market do the rest.

Satoshi, a C++ programmer, authored the 8 page white paper that defined Bitcoin.  I recommend reading that before you buy any Bitcoin.  I’ll include a link to it in the show notes.

https://bitcoin.org/bitcoin.pdf

Satoshi is a Japanese man’s name, so I will refer to him as he.  It’s not actually known who he is, he could be Canadian.

Satoshi could be a woman or a small team.

He could be a 13 year old genius.

There’s even speculation that Satoshi is the first self aware, artificial intelligence.

We don’t know. If I was Satoshi, I’d want to remain unknown  too.  That way, the idea of Bitcoin is judged entirely on its own merits.

Another reason to remain unknown is that at the time, it wasn’t clear if it was legal to create bitcoin.

it’s assumed that he mined much of the bitcoin in the first few months of it’s existence.  Would governments retaliate against him?

It’s estimated that he owns 1 million bitcoin and he hasn’t spent any of it.

What can we learn from that?

How can you make a fortune and not spend a dime?

I can think of a few possibilities.

1) He created Bitcoin as a public service.  Maybe he’s a tech billionaire who has more money than he can spend,  maybe he’s a priest who took a vow of poverty.

2) He might have lost his keys.  If you lose your keys, then you’ve permanently lost access to your bitcoin.

3) He might have died and his heirs are unaware that the keys exist or have value.

4) Maybe he’s waiting.  Maybe he believes that each coin will someday be worth a million dollars.  That would make him the worlds first trillionaire.  Why kill the goose that’s laying golden eggs?

If Satoshi wants to reveal himself, he can do so with a single encrypted email signed with his key.

Bitcoin is a great example of how you can get a lot done if you don’t care who gets the credit.

Management of your cryptographic bitcoin keys is very important.   You know how to use a bank card.  HOLD BACK UP You need a short PIN number to prove that you are allowed to use it.  You don’t write that number on your card and you don’t keep that PIN in your wallet.  If your forget your number, you walk into the bank and they will issue you a new one.   Cryptographic keys are too long and complicated for most people to remember.  If you lose a bitcoin key then you can never access that money again.

It’s vital that you master key management.

That’s enough for today. I want to keep these shows short for you. If there is demand for it, I’ll create a show on how to buy and protect your bitcoin and the related keys.

 

Thank you for watching this far.  You know, there are lots of people who say they want to get into bitcoin, but they’re not willing to spend the time and effort to learn about it.

There are three things you can do now.

First,  I promised to show you how to get $25 for free.  Create a free account with Tangerine, an online bank.  You’ll learn how to transfer money to and from your current bank account.   If you deposit $100 and use the Tangerine Orange Key from the show notes below, Tangerine will deposit $25 to your account.  This will get you comfortable with the idea of having a bank account with a bank you can’t walk into.  If that makes you nervous, then don’t buy cryptocurrency.  Tangerine is far more regulated and trustworthy than the cryptocurrency exchanges.

Second, create a free encrypted email account at ProtonMail.

I’ve seen people who should know better lose their encryption keys.  When an encryption key is lost, then access is permanently lost.  I’m repeating myself because it’s so important.  ProtonMail is a way for you to get started with cryptography and key management. You’ll get experience working with PGP signatures.  You can use that email for your cryptocurrency, making it more secure.

But, you can skip all these steps and buy Bitcoin right now, if you want to.

In the show notes, I’ll include a link to Coinbase where you can purchase a couple of hundred dollars worth of bitcoin with your credit card.

My thanks to Shawn for suggesting this show.

Would you do me a favour?

Click on the thumbs up button  to like this video.

And click on the picture in the upper right corner  to subscribe to my channel because, that’s helpful.

Share it with a friend.

Every time you talk about it, the more you find yourself putting it to use in your own life.

Thank you for watching!

Be seeing you

Show Notes

Get $25 at https://www.tangerine.ca/en/index.html when you open an account with $110 and reference this Orange Key 46641110S1

You can buy up to $250 of bitcoin per week using your credit card at https://www.coinbase.com/join/53ab74bf46b3d0a92c000001. You will get $10 when you open an account with $130

For Canadians, you can also purchase bitcoin at https://coinsquare.io/register?r=BDBA5F7F6  You will get $20 when you open at account with $70