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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