- 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
Bitcoins, What Are They?
Cash. Credit. Debit. Even PayPal.
All of the above are forms of payment accepted when you’re gambling, with the latter three being accepted at the majority of major online casinos. But, what about a form of payment that isn’t linked to a bank account? Or any personal information at all?
That, my dear reader, is where Bitcoin comes in.
The use of Bitcoin in online gambling is growing, with Bitcoin casinos popping up everywhere and we’re here to tell you everything you need to know about this electronic currency – the good, the bad, and the mysterious, so you can calculate the risk and make up your own mind whether Bitcoin is for you.
2.1. What is Bitcoin?
We’re glad you asked. Bitcoin is a form of digital currency – also known as “cryptocurrency” – created by a guy named Satoshi Nakamoto back in 2009. They’re purely electronic, so no Bitcoin will ever be minted, and you won’t find them sitting in your wallet in your back pocket. No sir, all the Bitcoin you ever own will be stored on a computer in a digital wallet, to be used for purchases made online.
2.2. The Pros and Cons of Bitcoin
What’s so great about Bitcoin?
Another fantastic question! Let me break down the pros of this virtual cryptocurrency:
That’s just a fancy word to say that Bitcoin is the only form of currency that is not controlled by anyone. And most importantly, it means that whatever Bitcoin you own is yours. The big banks don’t control it, governments don’t control it and you aren’t charged fees for using your money. Plus, you can use it anywhere in the world – there’s no worrying about exchange fees or whether your money will be accepted depending on the location. Bitcoin is, in essence, borderless and truly global.
Bitcoin addresses aren’t linked to your personal name, address, or any other private or potentially damning information. For this reason, Bitcoin is very popular for buying illegal products and services – the currency has been used to buy anything from drugs to hired hitmen. While we do NOT recommend purchasing these or other unsavory items, Bitcoin is excellent for keeping you and your personal information safely under wraps. No one will ever know your obsession with buying Star Trek memorabilia unless you want them to.
Ah, the wonders of the World Wide Web. Since Bitcoin is solely electronic, they are exceptionally easy to use and ridiculously fast. Money can be sent and received almost instantaneously, to and from anywhere in the world. A Bitcoin account is fairly easy to set-up and begin using, so you could be spending (and receiving) coins in no time.
To sum up, using Bitcoin is fast, easy, anonymous, borderless and no one controls your money but you. Pretty sweet, right?
Sounds cool. But what’s the catch?
Unfortunately, like all other currency, Bitcoin does have its drawbacks. The most notable cons include:
2.2.4. Limited use
Back in the day you could only use Bitcoin online. If you wanted to use your Bitcoin in most physical businesses, you’d need to exchange them for physical currency first, which can be a bit complicated. To turn Bitcoin into real money you have to sell them at a Bitcoin exchange or in an online market, then withdraw the money from your bank account. So, while they’re great for online use, you still couldn’t go into H&M and buy those jeans with Bitcoin without turning them into real coins first, at least for now. That, however, is changing rapidly as more and more brick and mortar shops begin to accept payments in Bitcoin.
2.2.5. System transparency
While you and your personal information are anonymous, your transactions using Bitcoin are not. Every single transaction made by anyone using Bitcoin is recorded and stored in giant ledgers made by “miners” called “blockchains”. And if you have a public Bitcoin address, anyone with a Bitcoin account can see how much value your address possesses. Granted, no one really knows anything about you, but they can know pretty much everything about your Bitcoin address. Makes you second-guess buying those illegal drugs or hiring that hitman for your ex-wife, doesn’t it?
This is the biggest drawback of Bitcoin. Since this form of currency is decentralized, no insurance is possible, unlike placing your money in a bank, where deposits in the U.S., for example, are insured by the FDIC. So, bad news: if you lose your Bitcoin, for example by throwing away the hard drive you keep them on, there is no way to replace them. This means that if your digital wallet is lost, a virus corrupts the data, or someone hacks into your information and steals what is rightfully yours, there is no way to recover the money that you’ve lost. For example, take James Howells. In 2013, during a spring-cleaning, he threw away a hard-drive that, at the time, held over $9 million in Bitcoins. And, because it’s a decentralized, electronic currency, it was gone – destined to rot forever in a landfill in the United Kingdom. Anyone want to go dumpster diving?
So, while you do get to enjoy (some) anonymity, complete control over your coins, and ease of use, there are some drawbacks.
In addition, the value of Bitcoin fluctuates wildly. Bear with us, as we throw some numbers at you – as of January 4, 2017, one Bitcoin was valued at $1,127.48. Less than a week later on January 10, 2017, that same Bitcoin was valued at $903.99 – that’s a decrease of $223.49, or 19.8%, in just six days.
In 2017, Bitcoin surged more then 1,900% as the cryptocurrency captured the imagination of both Wall Street speculators and Main Street investors. But what goes up can also go down, with Bitcoin seeing a 36% dive in June and July 2017.
2.3 Bitcoins vs Real Money
At a glance:
2.4. Who Issues Real Money?
Seriously, we all know it doesn’t grow on trees, right? It certainly doesn’t fall from the sky. So, it’s gotta come from somewhere. But where? In the U.S. there’s a common misperception that money is made by the Federal Reserve, also known as the “Fed” the central bank of the United States or bank for the banks. While it’s true that the Fed does control the money supply, it doesn’t actually print the physical money.
But before we get to who does print the money, let’s talk for a minute about what the Fed does, as understanding its function is important to understanding the difference between cryptocurrency and real money.
The Fed came into being in 1913, when president Woodrow Wilson signed the Federal Reserve Act into law. In a nutshell, the Fed was designed to implement the nation’s monetary policy by influencing money and credit conditions and regulating banks. Keep in mind, the policy makers on the Fed’s Board of Governors, while technically independent, are appointed by the president, so there is always a political dimension to monetary policy.
The Fed controls the money supply by performing operations that influence interest rates, such as setting short-term interest rates and reserve requirements (the amount of cash a bank has to keep on hand). When determining the money supply in relation to monetary policy, the Fed doesn’t need to print paper money at all. Most of the time it simply issues electronic credits or debits to different banks in relation to their reserve requirements. The Fed does this by issuing Treasury bills.
Say the Fed wants to expand the money supply. It does so by buying its own Treasury bills on the “open market’ and electronically crediting the selling banks, pumping more virtual cash into the money supply.
The banks can then convert this to real cash, notes and coins upon request. By way of example, your bank balance isn’t a pile of cash stored away in a vault. It’s a series of zeros and ones on the banks computer defining the amount on your account. When you want cash, you go to the bank or ATM, fill out a slip or insert your card, and the bank debits your account electronically and hands you cash.
Virtual credit, those zeros and ones on the banks computer, is a far larger component of the money supply than actual banknotes and coins.
The U.S. Treasury is the entity that physically prints U.S. Dollars, overseeing the Bureau of Engraving and Printing (BEP), which handles paper currencies, and the U.S. Mint, which mints the coins, and circulates approximately $1.5 trillion in cash globally as of January 2017.
To put the cash versus credit relationship into perspective, the 2008 financial crisis was said to cost Americans $12.8 trillion, or nearly 12 times the amount of physical U.S. cash in circulation. So, most of what’s in use as a means of exchange exists in the virtual world and the virtual world alone.
The Federal Reserve also has 12 regional banks that oversee local banks, providing them with physical currency (paper money and coins) ordered from the BEP or removing physical currency from circulation when its damaged, counterfeit or too old.
2.5. Who Issues Bitcoin?
This is where things get tricky. Bitcoins are actually not issued at all. They are “mined”, kind of like gold. Unlike traditional paper money and coins, which are issued by central banks, Bitcoins are the product of a peer-to-peer computer network. Some examples of peer-to-peer networks, networks with no central administrator, include BitTorrent and Skype. Computers on the network perform difficult mathematical tasks, known as “mining”, and uncover Bitcoins as a result. The number of Bitcoin that can be mined is fixed at 21 million, so it’s not possible to endlessly flood the market with new Bitcoin and devalue the currency.
2.6. How is Bitcoin created?
Bitcoin was invented by a programmer or group of programmers using the name Satoshi Nakamoto by running a “hashing” algorithm (more on that below) that issued the first 50 Bitcoin and registered them in a public log called a “blockchain”. This log is shared by all the computers on the network to monitor and verify the creation of newly “mined” Bitcoin and all transactions in Bitcoin are registered in this log.
To prevent tampering, when a block of transactions is created, Bitcoin miners apply a highly complex mathematical formula to the block and turn it into a seemingly random series of letters and numbers known as a “hash” (short for the hashing algorithm), which is then stored together on the network with the block for all to see. Each hash is produced using parts of the hash before it, kind of like a digital seal that just keeps growing. If anyone tampers with it, everyone else knows.
2.7. Can Bitcoin be tampered with?
So, say you were an evil, malicious sort of person and you wanted to alter a transaction, first you would have to alter the block. But this would change the hash. If someone wanted to check the validity of the transaction, all they would have to do is look at the block, which is public for all to see, and run the hash function. They would immediately see that that hash was different from the one already stored in the blockchain and know the transaction was fake.
Miners job is to seal off the block by adding the hash. They compete with each other to do so. Every time a hash is successfully created, and the block sealed off, the blockchain is updated and the miner is rewarded with 25 Bitcoin and everyone on the network is informed. Miners have consistently been building bigger, better, faster computers to do so, which keeps the system going and transactions flowing. With around 300,000 Bitcoin transactions per day, you can imagine the blockchain and corresponding hashes would be pretty dang long.
As of early January 2018, it was over 150,000 MB in size (approximately 150 Gigabytes), which is one long chain of numbers. To put it into context, it would take 11.2 million sheets of paper to print out 150 GB of zeros and ones. And it’s growing every day.
2.8. How easy is Bitcoin mining?
The thing is, it’s not super hard for good computers to produce a hash. In theory, all of the Bitcoin, remember there is a limited number, 21 million, could be mined in minutes. But that’s obviously way too easy. So the system has to make it progressively more difficult to mine Bitcoin so as not to flood the market with all the Bitcoin at once. This is done by including something called “proof of work”, data that is difficult to produce in terms of time and expense (hardware and electricity) but can be easily validated by others.
The blockchain protocol won’t accept any old hash, it has to look a certain way, which is the “proof of work” and there’s no way to tell what it’s going to look like before it’s produced. Miners don’t just process transaction data in the block to create the hash, they have to add in a random piece of data called a “nonce” and each hash has to be unique. If the hash doesn’t look the right way, the nonce is changed and the whole thing has to be hashed again. It can take many tries to find a nonce that works, and miners on the network have massive banks of computers running 24/7 trying to do just that.
Generally, these days, Bitcoin is mined in pools, with miners sharing their computer resources with the pool of other computers for a share in the rewards. As Bitcoin gets harder to mine and competition increases, these networked computers have to be bigger, better and faster, cost substantially more to build and consume copious amounts of electricity, which as we all know isn’t free.
So, it really comes down to the cost of computer infrastructure, electricity and the size of the pool versus the profit that can be made. This has led to a handful of large scale pool mining operations such as GHash.io the Chinese based Discus Fish producing the majority of hashes and earning the most Bitcoin, information that changes daily and is available on the blockchain.
Unlike in Bitcoin’s early days, today, making a profit at home from small scale mining alone or with a pool of friends involves substantial risk and long odds.
As you can see, producing Bitcoin is a lot more complicated, and in many ways time and effort intensive, than simply printing money to release into circulation. And a lot slower. The last of the 21 million Bitcoin to be mined is expected to be produced in 2140, which is a long way from now in time and energy.
2.9. What happens once all the Bitcoin are mined?
The current consensus is that there are two possibilities once all the Bitcoin are mined. Both involve the idea of miners charging transaction fees to create hashes to validate blocks and keep transactions flowing smoothly.
One is to gradually increase the size of the block so that Bitcoin users will continually be able to have their transactions confirmed and transaction fees remain very low. The problem here is that as block size increases, new transactions cannot be confirmed until a new block is created, leading to a sort of currency gridlock with a bulk of transactions unable to move forward until the backlog has been cleared with a newly created block. Imagine going to buy something and standing at the cashiers not knowing whether it will take seconds, minutes, hours or even days for the person behind the cash register to reach out and take your money. Clearly this is not what people want in a digital currency, and would likely be the death of Bitcoin.
The second idea also involves charging transaction fees once miners lose their block payments, but this scenario uses simple monetary theory to postulate that once all the coins are mined, due to the discrepancy between the limited supply and growing demand, the purchasing power of Bitcoin, i.e. its value, will increase. This means that no matter how large or small the transaction fees are, the currency continues to gain value thanks to demand, turning mining (validating transactions) into a viable long-term investment as the Bitcoin earned continues to increase in value.
Remember, Bitcoin is finite, with only 21 million available to be mined. That’s where Bitcoin is, in theory, like gold, long seen as a safe-haven for wealth in turbulent times. Gold too is finite. You can’t just create it out of thin air (though throughout the ages many an alchemist has tried) and it must be mined. This thrills Bitcoin supporters, because its use as a currency harkens back to the days of the gold standard, when paper money was backed by gold and not just the government, which made people feel more secure in turbulent times.