- Bitcoins, What Are They?
- Bitcoin vs other means of exchange
- How to use Bitcoin
- Buying Bitcoins
- Selling Bitcoins
- Bitcoins ATMs & Debit Cards
- Appx. 1 – A History of Cryptocurrency
- Appx. 2 – Bitcoin Legality & Regulations
Bitcoin vs other means of exchange
3.1 Bitcoin vs Gold
Gold was first used as a currency in 643 B.C. in what we know today as Turkey, and throughout history has long been humanity’s currency of choice. By the mid-1800s countries the world over were interested in standardizing exchange and adopted the gold standard as a result. Paper money could be redeemed for its value in gold, making it no longer necessary to trade in heavy gold bullion or coins. Say you wanted to buy a tanker full of oil from a foreign country. Imagine the weight in gold you would have to carry over a great distance to pay in full. Secure and easy to transport, gold backed paper money simply made good common sense.
The problem was, individual banks started issuing their own paper notes, allegedly backed by gold. Notes that may be valid currency in one county or state might not be in the next, depending on public perception of the issuing bank. This led to regular runs on banks and a great deal of economic instability. To create stability and instill trust in the banking system (as well as keep people from hoarding gold), in 1913 President Woodrow Wilson, at the behest of members of Congress under the influence of the nation’s leading bankers, signed the Federal Reserve Act into law, in effect handing control of the nation’s money supply to a cabal of private bankers backed by the government. The act created the Federal Reserve or the nation’s central bank, to oversee a series of 12 regional Federal Reserve Banks (so as not to give too much influence to New York bankers) who would issue paper notes and coins backed by gold to local banks.
This worked for a while, or at least until October 29, 1929, also known as “Black Tuesday” when the stock markets crashed, spawning what became known as the Great Depression. At its height, on March 6, 1933, President Franklin D. Roosevelt closed the banks after a month-long run of people exchanging paper money for gold, which saw banks’ gold reserves seriously depleted. When the banks opened again on March 13, it was no longer possible for ordinary people to exchange their paper money for gold. At the same time, banks’ gold reserves had been handed over to the Federal Reserve for safe keeping.
To create stability and prevent people from hording gold, on April 5 Roosevelt ordered Americans to turn their gold in and exchange it for dollars and made it a criminal offense for Americans to own or trade gold anywhere in the world. This massive influx of gold created the gold reserves at Fort Knox, among other places, to make sure the U.S. had the largest supply of gold in the world and the economic credibility that came with it.
Then, on January 30, 1934, Roosevelt signed the Gold Reserve Act into law, effectively prohibiting the private ownership of gold except under license. Gold as a means of exchange for private citizens was out. Still, the dollar itself was, at least in theory, backed by gold. Banks could still go to the Federal Reserve and redeem their dollars for gold.
The gold standard’s final death knell came on August 15, 1971, when President Richard Nixon no longer allowed the Fed to redeem dollars for gold, making the gold standard meaningless.
It wasn’t until 1975 that Americans were again allowed to freely own and trade gold, but by then paper money backed only by the government reigned supreme.
That’s why Bitcoin supporters are so excited. As a decentralized, in other words non-government controlled, currency, Bitcoin is seen as a lot like gold only much easier to use as a means of exchange and free of government intervention. The key to gold’s success throughout history has been its ability to maintain purchasing power when compared to paper money (subject to devaluation and hyper-inflation) and other financial assets. Gold has long been seen as the ultimate investment in terms of security and control. Today Bitcoin aspires to usurp gold’s throne and offers some key advantages:
Bitcoin is easier to divide into exact payments. Imagine trying to pay for a pack of chewing gum with a South African Krugerrand gold coin, which weighs 1 oz and currently trades for around $1,200. See the problem? How many atoms would you have to scrape off to pay? Bitcoin, on the other hand, can be broken down into any amount necessary. A single Bitcoin can be broken down into eight decimal places or 0.00000001 BTC.
Bitcoin is easier to transport. So, you want to buy a yacht and pay in gold. The armored car rental alone would cost a fortune. What if you were relocating to another country and wanted to take your gold savings with you? Imagine the logistical nightmare, security nightmare and the headache you’d have from those endless questions by government officials, not to mention the customs duties. Bitcoin can be moved anywhere in the world with no nightmares, no headaches and no questions.
Bitcoin can store value. Gold is mined the world over and, while it remains a rare element, new deposits can always be found and influence its value. Bitcoin is finite, limited to 21 million Bitcoin, so it’s impossible for future discoveries to influence its value.
Bitcoin can generate income. While gold earns no interest, and can actually cost money to store safely, Bitcoin can be lent via various exchanges and earn interest in return.
3.2 Bitcoin vs e-Money
Okay, so clearly Bitcoin has its advantages over gold and paper money but what about Bitcoin in relation to e-Money. What’s the difference there?
Both exist completely in the virtual world but there are some key differences. E-money is a virtual way to interact with real world, government regulated currencies, such as dollars, euro or yen. Bitcoin, on the other hand, is a totally independent currency, with no regulatory authority other than supply and demand, allowing it to be transferred anonymously. The risks associated with e-money are the same as the risks associated with paper money, namely inflation and devaluation. The risks associated with Bitcoin generally involve its market volatility as supply and demand changes.
With e-money a user exchanges electronic money, held for example in your bank account or on your debit card, for an equal amount of e-value stored in a mobile wallet (on your or someone else’s mobile phone). This allows the user to send and receive e-money easily by e-mail or sms. When you make a transaction, you receive an sms confirming that the money has been transferred and the e-money provider keeps a record of your transaction and balance. To cash out, your e-money wallet is linked to your bank account or debit card and the e-money provider simply wires it to your account or card, which can take from a few minutes to a few days depending on your bank and the type of account. Examples of e-money include Google Wallet and Apple Pay.
With Bitcoin, paper money is traded for Bitcoins in an online exchange or marketplace then stored as code in a Bitcoin wallet (more on that later). To make a purchase, a request is sent to the network using a private encryption key and the transaction is validated, which can take up to 10 minutes or more. A record of the validated transaction is then kept on the public blockchain log and the Bitcoin added to your wallet.
3.3 Other virtual currencies
While it may have been the first true virtual currency, Bitcoin is not alone in the virtual currency world and there are a number of notable contenders eager to usurp Bitcoin’s throne. Let’s have a look at who else is getting in the game and their position in the cryptocurrency court.
Litecoin is like Bitcoin’s baby brother. Launched in 2011, it too is a peer-to-peer based virtual currency that boasts faster transaction confirmation times than Bitcoin, while claiming to be complementary and using much of the same technology. It also uses a blockchain, encrypted wallets and offers a mining reward of 25 Litecoin per block, which is halved every four years. 84 million coins are scheduled for production, 4 times as many as Bitcoin. The uptake is however slow. While Bitcoin boasts a market capitalization of over $249 billion, little brother Litecoin is far behind at $13 billion as of early January 2018.
Ethereum is also much like Bitcoin, although it has experienced a few major hiccups along the way. First proposed in a white paper by cryptocurrency researcher Vitalik Buterin in 2013, development was funded by online crowdsale in 2014 and Ethereum was released in 2015. The value of its blockchain tokens is called “Ether” and often referred to as “gas”. In 2016 the DAO, a platform for the autonomous governance of investment capital, was hacked and about a third of the Ether (at the time estimated to be worth $50 million) was moved into a clone DAO. Due to the decentralized nature of the cryptocurrency, quick action in relation to the hack was hard to come by. After a few weeks of debate in the community, a backwards-incompatible change (known as a fork) was made to reverse the hack and return the funds. Other attacks then followed, and the currency has forked a number of times since.
The fundamental difference between Bitcoin and Etherium is that while Bitcoin is simply a currency, Etherium is a ledger technology that companies can use to build new applications. Etherium allows for something called “smart contract” technology, the ability to integrate a contact and its terms into the transaction. Think of it sort of like an escrow account, in which the funds are released only when both parties have confirmed they have satisfied the terms of the contract. This makes Etherium unique and has led to the formation of something called the Enterprise Etherium Alliance, a group of Fortune 500 companies that have agreed to work together to build upon Etherium’s technology.
Etherium’s current market capitalization (as of early January 2018) is about $84 billion, still far behind Bitcoin.
Released in 2012, Ripple is a form of cryptocurrency designed specifically for banks. Unlike Bitcoin and Litecoin, it is not peer-to-peer but an internet protocol. It was designed specifically to allow banks around the globe to send real-time international payments across networks, so in essence it’s a settlement system, not an independent currency like Bitcoin. It does have some pretty neat features though, as it can support tokens representing real paper money, cryptocurrency like Bitcoin, commodities, and any other units of value such as frequent flier miles or mobile minutes. Pretty cool stuff but unfortunately a toy/tool for stuffy bankers only.
Of all things, Dogecoin was originally intended as a “joke” cryptocurrency. But to the chagrin and beguile of its creator Billy Markus, Dogecoin quickly developed a serious following. It was, however, not without its own problems. Mined just like Bitcoin, Dogecoin originally intended to produce 100 billion coins but later announced that it would produce infinite Dogecoins, which somewhat changed the game. Remember, one of Bitcoin’s main selling points is its finite supply.
And talk about volatility, wow, fasten your seatbelts! In 2013 Dogecoin jumped nearly 300% in value in 72 hours, three days later it dropped 80% in value due to how easily it could be mined. Later that year the system was hacked, and millions of coins stolen. Persistent as they were in their belief in Dogecoin, the community rallied and started an initiative to donate coins to those who lost them in the hack. Enough was eventually raised to cover the loss completely and by January 2014 the trading volume of Dogecoin briefly exceeded that of all other cryptocurrencies combined, including Bitcoin. It currently has a market capitalization of around $1 billion, a far cry from the other mainstream cryptocurrencies like Bitcoin, but it maintains a strong and determined following.
Monero is a lot like Bitcoin but with a reputation for a greater degree of privacy. While that may sound attractive to many, it comes with a substantial downside… called the Russian mafia. Monero received little attention after its launch in 2014 until it was adopted by AlphaBay, a major darknet market, known for selling hacked information like stolen Uber accounts and illegal drugs and alleged to be run by the Russian mob. That’s where it has a bit more than technology in common with Bitcoin, which was widely used on the darknet market Silk Road, until the market was shut down by the FBI in 2013. It took quite some time for Bitcoin to recover from the PR damage Silk Road caused, yet, ironically, Monero’s use on AlphaBay helped its market capitalization jump from $5 million to $185 million in 2016 alone. Its market cap as of January 2018 is $6 billion, meaning it remains a serious player in the cryptocurrency world.
3.4 Bitcoin Market Capitalization in Comparison
Source: coinmarketcap.com, March 2018