BITCOINS, BITCOINS, BITCOINS


Investing & Money
piece written on the 30th October 2013 by  

In my recent blog post about where to invest your money I spoke about my experience with investing and compiled as much information as I could by others to create what I wanted to be a useful resource. The post went on to be a huge success and is still attracting a great deal of interest. One thing I left out of the post on purpose was Bitcoins (BTCs) and I did that as I didn’t want people to see it as me saying Bitcoin were something to invest in. Today I’m going to talk about Bitcoin, share my knowledge with you and attempt to give you a rounded picture of what it’s all about.

bitcoin

To kick things off, let’s look at what Bitcoin is: In technical talk it’s a distributed peer-to-peer digital currency that functions without the intermediation of any central authority. The concept was introduced in 2008 by a gentleman called “Satoshi Nakamoto” and has been labelled a cryptocurrency in that it’s decentralised and uses cryptography. In simple terms it’s best to have a watch of the video below:

A really interesting and hugely innovative concept. I guess I shouldn’t call it a concept, it’s in practise already and hundreds of thousands of people are trading the coins. Heck, there’s even a South African company that handles the buying and selling, but more on that later.

Before we look at some myths, security related matters and best practises, let’s understand the jargon:

  • Wallet – Your wallet allows you to transact with other people. It gives you ownership of a Bitcoin balance so that you can send and receive Bitcoins. What’s interesting here is that you can have multiple wallets – you could have a “home wallet”, a “mobile wallet” and so forth. Just like in real life, you wouldn’t keep all your money in one place, the same applies for Bitcoins. You don’t keep all your money in one wallet because if you lose your wallet’s details, you lose your money. Resources go as far as saying that each time you make a transaction with a “random party”, you should create a new wallet for safety purposes. For for argument sake, it’s probably best to have a “home wallet” and a “transactional wallet”. You use your transactional wallet to buy and sell BTCs, but then move money between your “home wallet” and “transactional wallet” – this way nobody goes near your “home wallet”.
  • Address – The address is your unique, randomly-generated 33 character number and letter combination identifier. You use your address to receive money, or someone else’s address to send them money. A typical transaction could be seen as “Address A sent 10 BTC to Address B”.
  • Mining – Each Bitcoin transaction is recorded in a public ledger and each transaction is hashed into what is known as a block. After a solution to the block is found, it is replicated throughout the peer-to-peer network and all transactions are then verified by the Bitcoin client software. By solving the block, the solver is then rewarded with Bitcoins. Anyone can solve blocks, but you need a super computer and a great deal of time to turn it into a lucrative venture. So mining is effectively the solving of hashes that allow transactions to be processed so people can receive Bitcoins and the person doing the mining is then rewarded for doing so which in turn keeps the “economy” going. It’s almost like paying a stockbroker commission for his efforts.
  • Washing – One of the most interesting things about Bitcoins is the idea that nobody can see transactions between people. However, I’ve read a great deal and believe that it is actually possible if you go to great heights. If you really want to remain anonymous then you need to “wash” your Bitcoins and one place you can do that is here: http://www.bitlaunder.com/ (Classic name).

With anything that is unregulated or  highly volatile there are a great deal of myths. If you’re truly interested in Bitcoin then I recommend you have a read through the myths. Further to this, your second question might be something about safety and security, if that’s the case you’re going to want to have a read of this website. And finally, if you’re going to go forwards and get yourself a wallet, then you’re going to want to look at the best practises for keeping it secure.

That’s already a huge amount of information, but that’s the purpose of this post after all. I want you to be able to build your own opinion.

Let’s look a little closer at what’s happening with Bitcoin. To start this section off I would like to mention that software companies such as WordPress, OkCupid, Reddit, Baidu and a large number of other companies are now accepting BTC as a valid method of payment. Some interesting stories have popped up such as the ATM in a Canadian coffee shop that accepts Bitcoins. The Winklevoss twins put a large portion of their settlement from Facebook into Bitcoin and the incredible Valley investor Marc Andreessen said, “It’s going to be adopted precisely because it’s not controlled by the government of -pick a country – that has bad policies”. So it’s quite clear that there’s backing and this isn’t some strange taboo on the Internet.

Bitcoinity.org/markets is a great website that shows you the current price that Bitcoins are selling at, along with the current transactions. Here’s a look at Bitcoin values over the past two years:

Screen Shot 2013-10-30 at 9.25.20 AM

Another great resource is https://blockchain.info/charts (Thanks Craig).

A very recent story was published about the incredible success story of a gentleman who was doing a research paper and bought 5000 Bitcoins for $27 back in 2009. The value of his Bitcoins is now sitting at $886,000! He was able to withdrawl a portion and buy a flat for cash in a very upmarket area in Oslo! The best part about the story is that when he bought the Bitcoins, he soon forgot about them and only realised when media started to make a big song and dance about them. Awesome.

Christopher Koch

The biggest upset to the Bitcoin market price was caused a few months ago when a site called SilkRoad was closed down by the Feds. SilkRoad was a classifieds type website that allowed people to buy and sell things with Bitcoin, but not normal things, the focus was on drugs and other illegal products and services. One could even order a “hit” on the site! This was one of the biggest stories this year, the “owner” of the website, Ross William Ulbricht (aka Dread Pirate Roberts) was caught by US Authorities and $28 million worth of digital currency was seized! Interesting story and well worth the read. This action caused a big stir in the Bitcoin world and the price tanked, but as you can see, it’s back up at an all time high.

How do I get started?

Ok, so the information above is great and all, but let’s actually talk about getting started! To do this I’m going to share with you what I did:

Luno is the South African Bitcoin Exchange that allows you to buy and sell Bitcoins in Rands. There are 5 simple steps involved:

  1. Sign up for an account on Luno, it’ll only take you a few minutes maximum.
  2. Next you’ll need a wallet. I downloaded MultiBit, which works on Windows, Mac and Linux. The software isn’t very complicated and it didn’t take me long to understand what was going on.
  3. Once your wallet is set up, you can place an order on Luno, look for the black, red, green, yellow and blue buttons at the top.
  4. Transfer your money via EFT to Luno.
  5. You’ll receive your Bitcoins.

Note: The receiving of Bitcoins post-EFT isn’t immediate so please be patient.

Here’s a screen shot of a test wallet I created using MultiBit:

MultiBit

It really is as simple as that.

Of course, you don’t have to do things locally, here are 5 other places to buy Bitcoins:

  1. http://howdoyoubuybitcoins.com/
  2. https://localbitcoins.com/
  3. https://www.mtgox.com/
  4. https://bitinstant.com/
  5. https://www.bitstamp.net/

A topic I’m not going to cover is that of accepting Bitcoins on your website, but what I can do is point you to Bitpay.com, which has a WordPress Bitcoin shopping plugin.

My Opinion?

I think it’s a very exciting development and as the video above says, “Bitcoin is changing finance the same way the web changed publishing”. I believe that the world is ready for something like this and I believe that Bitcoin will continue to grow and grow amongst people around the world for a myriad of reasons. However, my concern is that when it comes to something that is unregulated and where taxes are being avoided and so forth, the governments and powers that be will not simply accept it and will make a move on either making it regulated or closing it down altogether. So, if you’re going to buy some Bitcoins and give it a whirl, just be sure to watch the news closely and be ready to cash in those coins!

So that’s as far as I’m going to go today. If you appreciated this post, please feel free to send me some Bitcoins to 1DuSbH8FHnFB2rPcxndxyNeQxuNvXBb69Q.

PS. I’d like to give my mate Ruark a massive hat tip for assisting me with all this information, you’re a legend bro!

Update 08.12.2013: How NOT to make money with Bitcoin as a South African.

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  • Craig Colin Roy McLeod

    Check out cavirtex as another place to buy, great pricing most of the time.
    Butterfly labs is launching a cloud mining solution for those who want to mine.
    B2T is launching its BitCoin Merchant stores in Feb.
    Gyft currently supports BitCoin.
    And RoboCash may be rolling out one BTC vending machine here later, I am waiting for the unit to arrive. (It will be in Cape Town.)

  • I haven’t had a chance yet to look at all the platforms to determine which has the lowest buy and sell costs so thank you for mentioning a few more.

    I remember Vinny Lingham announcing that Gyft would accept Bitcoin – awesome to see a South African getting involved on a commercial level like that. I’d love to know what they’re managed to achieve in Bitcoin growth and whether the audience has been receptive to it.

    The mining is interesting, with some mega computers you could generate some decent coinage.

  • Lionel Bisschoff

    For those interested in digital currency, financial services, peer to peer, social networks, complex adaptive systems theory etc. check out my book Societal Renaissance. It looks at South Africa’s challenges and investigates how these factors can enable or inhibit our ability to execute the NPC’s National Development Plan. http://www.societalrenaissance.com and http://www.amazon.com/dp/ASIN/B00G7HUVPY

  • Thank you very much for coming and sharing Lionel, we’ll be sure to click through and have a good read. Congratulations on the book by the way!

  • rrcatto

    I prefer to buy bitcoins on virwox .com and sell them on bitx .co.za, virwox also allows you to hold foreign currency in your wallet, which allows you to speculate on the major currencies (in relation to ZAR).

    My bitcoin wallet is electrum, but you will no doubt end up with multiple BTC wallets all over the show.

    Don’t despair, Silk Road will be back, The SA version with only the finest of illegal drugs etc. :D

  • Out of interest, when you use virwox.com, do you EFT to that account or do you move funds from an International PayPal account? It’s the “getting money into” part where I see barriers to entry for South Africans who don’t want to use the local providers.

    Go on, tell us how big your loot is? :)

  • rrcatto

    Virwox accepts credit card payments via paypal, skrll, neteller and a number of other payment mechanisms. Getting cash back into SA is the challenge. You can get prepaid mastercards from skrill and neteller. Or you can sell your btc locally via bitx .co.za who transfers the ZAR via EFT to you.

  • Jacques

    This is a awesome article.Really enjoyed this and the previous one about investing. I have had bitcoins on my mind for a while, however I don’t have the finances to mine them myself yet. I am a total newbie at this, but do I understand right, that the value/price of BTC is at a all time high at the moment? I am trying to find market graphs to compare but I am a complete noob. Trying to figure out when the best time will be to start investing in some BTC

  • Jacques Thank you for your message on Facebook and thank you for bringing it along here. As mentioned, this is a forum where a lot of people can learn and hence requesting that we do it here.

    I think the first question I’d ask is whether you’re wanting to go the BTC route as a primary investing tool or just as an interesting sideline. I ask this because if it’s a primary investing tool that you’re looking for I would probably advise against it due to it being unregulated and so volatile. I was in exactly the same boat, I see BTC as a big risk and something that should only be done with “spare” money – for all we know, the Feds might simply just shut it down and that wouldn’t surprise me especially after SilkRoad as they’re now very much aware of it.

    As with any “stock” type investing, there’s a level of risk and knowing when to buy and sell is difficult. Sometimes people feel that when a share is doing so well that it’s good to buy in, others argue that when a share is trading at the upper end that it will probably start to correct. http://bitcoinity.org/markets is the website that provides all the graphs to give you an idea of the fluctuations in share price, but the real knowledge is staying abreast with what’s going on in the media relative to BTCs.

    Personally I’m rather uncertain and at the price of $208/BTC (+- R2070/BTC) I’m not sure that I would buy in now. I could be wrong and it could continue to grow, but I don’t thinking the wave ride will last that long before a correction happens. At some point the Feds or Governments (or whoever) are going to issue an investigation or something and everyone is going to sell and run. That’s just my opinion. Again, on the other hand, I’m seeing more and more media about investors and venture capitalists saying they’re trying to invest more and more – just yesterday I read something on TechCrunch about a gentleman who has $5mil in BTC and wants to get to $10 in BTC, and he’s a well known guy.

    So, what I’m doing is waiting for another month to see if the price continues to grow, stabilises or starts to drop and I might make a call then. Then again, at R2070 per BTC, that money might be better invested on the JSE – however, the JSE is performing at an all time high, so we might have to hold on that side too!

    I understand that I haven’t told you explicitly what to do, but I’m not a professional and I don’t think anyone can say exactly what to do. I hope this helps though.

    @craigcolinroymcleod:disqus Have anything to add? @rrcatto:disqus Any advise?

  • Jacques

    Hi Chris. Thanks for the extensive reply. This really helps alot. I guess my best bet is to start getting my hands dirty with the JSE by just getting a hand full of shares and testing the waters. It will for now be a tiny side project, as most of my finances have been going into my wedding (which is happening very soon) and our house. I just want to start somewhere though :)

    I will be using your other post on Investments as a reference point. Thanks again for that.

  • Hi @Jacques it’s my pleasure. I really think it’s a far wiser move to invest your money into the JSE or at least a ETF (equity trade fund) like the Satrix 40. The Satrix 40 will leave the trading in the hands of stock brokers so you don’t need to worry about buying and selling individual shares. If you have the time, buying and selling individual shares is a little more fun, but a lot more involved. YoY returns from the Satrix 40 have been good though.

    My wedding is on December 16th so I’m very familiar with the sheer expense it brings!

    You’re welcome to ask any questions and I’ll share what knowledge I have with pleasure. Good luck with the wedding!

  • Craig Colin Roy McLeod

    Reporting in for Q&A via bitcoins, post your questions and I will try my best to answer based on what I know 5000 coins and 4 years later :)

  • Hey @craigcolinroymcleod:disqus, @disqus_zFWdtVS3Q1:disqus asked some questions below and I’ve answered as best as I can. 5000 BTC is quite a feat!

  • Craig Colin Roy McLeod

    Ok in terms of regulation the conversion of bitcoins into cash is treated like any Forex transaction.
    So converting it into cash you will be taxed in Cananda, USA, SA etc. (so do not try and see it as tax free – UNLESS you read what I say next.)

    One of the values of bitcoin is exchange, you can transfer coins for goods and services (now that is where tax does not come into play for you.)

    In terms of price lots of news outlets tend to bash bitcoin to affect price (to little success I might add).

    Being a currency bitcoin in the last 18 months has become a playground for FX exchange types. Trying to short it like penny stocks, to poor effect, big boys like the vinkevoss twins and so on, actually do this properly, but when you have an 11 million dollar worth of BTC reserve you can push the market around.

    Mainly hacks big buys and big sells, affect price, and then big news items.

    Also remember resource scarcity will come into affect, there will only ever be so many coins, that will never change, that is a good thing. (What if a government could never print more currency in place of bad debt no inflation.)

    With Bitcoin ATM’s coming out you wont see that much shift, but there are some announcements coming out in feb that will, and that is where it gets interesting, there is no such thing as insider trading with bitcoin, so if you know when someone will make a play or say for example that there are 500 000 stores about to start accepting bitcoins, you can do things with that info.

  • Craig Colin Roy McLeod

    Well over 4 years, it was a combination of early day mining, trading for services, and trading btc as a commodity.

  • basheer

    Thanks for the post.
    The security concerns worry me tho. I stil dont fully understand the concept in
    its entirety, but will research it more. on the links you provided. What stops
    someone else tho with coming up with introducing a newer digital currency? So
    easy to launder money with BTC and im sure gvts gonna start taking a more
    stronger stand against Bitcoin.

  • Craig Colin Roy McLeod

    1) Security – like any digital wallet, you should use a good antivirus not a cracked or free one. (yes that includes on a mac) same applies to your internet banking.
    2) the concept is any currency must be backed by something of value – in this case the cost of electricity and gpu to mine it as an actual valid real cost.
    3) Governments treat is like a currency, normal tax, if you convert it just like forex.
    4) Great for trading for goods and services instead of to cash.

  • You realise that’s R13,962,900.00 South African Rand hey?

  • I’m still worried that the governments and exchange controls will get involved and there will be a big upset, it’s almost too good to be true if you know what I mean.

  • Craig Colin Roy McLeod

    Yup :)

  • Craig Colin Roy McLeod

    They are already involved, you have to explain when that money comes to your account, its taxable. It’s why people prefer to trade BTC for thing and services.

  • Freaking retire, lol!

  • Ah, alright, I wasn’t sure about that. That’s good news then!

  • Craig Colin Roy McLeod

    Or buy a new car, maybe look at a house in CB, put money into a marketing budget for imod digital and developing a product they can market, like a website builder.

  • No complaints! When can I come see the bat mobile?

  • Craig Colin Roy McLeod

    Next week when you do sub friday a block from my place?

  • That could work nicely, sub’s on us, drive on you!

  • Craig Colin Roy McLeod

    cc @ChristopherMills:disqus please add this to the article: https://blockchain.info/charts

  • That’s a wicked resource, thank you for sharing. It has been added to the article, thank you.

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  • I am wonder from where i can get some free bitcoins?

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