January 02, 2018

Understanding Bitcoin and Other Crypto Currencies

As a writer, please understand I’m taking some liberties as I did not create Bitcoin, nor am I a programmer by trade.  Just a lowly self-educated computer nerd who loves to help others.  That’s what this site is all about anyways.  For those wanting a basic understanding, this should suffice.  However, if you know me well – this won’t be a short answer.  Apologies in advance.

Before we can get too deep into Bitcoin and other crypto currencies, we must understand the major premise behind it – computing power.  The best example I can pull from comes from the movie Hidden Figures.  If you haven’t seen the movie, you’ll just have to trust me.  No *major* spoilers, but possibly one.  Essentially, the main character(s) are math whizzes.  They can complete major math problems very quickly, but more importantly – accurately.  The characters in the movie assisted with problems that needed to be solved that aided in the landing of the space shuttles.  Huge safety factor you can imagine.  You may have heard the statement before, but it’s been said that the first iPhone (from 2007) had more computing power than it took to land man on the moon.  While that is true, it’s wayyy more powerful than just that.  Again, taking liberties as I haven’t done the math, but that first iPhone probably had more computing power than at least half of the world’s computers combined, not just Nasa’s.  And when I say computing power, I mean the time it takes for the CPU to compute one problem.

Think about your normal calculator.  Simply inputting 2+2 doesn’t require a lot of time to compute.  However, if you tried to multiply some 100,000-digit number by another 100,000-digit number, it would take a long time, or you would at least get an error when the digits started to climb too high.  Now imagine you want to solve the math problems to help them land on the moon.  Referring back to the Hidden Figures movie, it took hours in some cases to solve a problem that today’s calculators could spit out in mere nano seconds.  With today’s businesses, escalate the problem.  A simple calculator couldn’t find the billionth-digit in Pi.   But with the proper computer program, you could.  And depending on your computer, this answer may take the CPU minutes to solve, or in some cases, weeks, months, or years.  A popular program today to do just that is called Python for those curious.

Another movie that *hints* to this is from 1999 and features Angelina Jolie – Hackers.  In this movie, we hear about oil vessels traveling overseas.  When the waters get rough, computers calculate where to move the oil to in the boat to help stabilize it.  Pretty ingenious if you ask me.  But this takes immense computing power.  So, these businesses purchased huge super computers to solve these problems.  Well, please believe me in that some businesses (or individuals in some cases) can’t afford to buy a super computer but desperately need to solve these crazy problems.  Many universities have super computers that can be “borrowed” for students, but businesses must rent their time on such machines.  As this happens worldwide, the exchange of fiat becomes an issue.  Paying a company upwards of $500,000 to rent a computer takes a minimum of 10 days in some cases and has a pretty hefty fee tied to it.  Paying someone with Bitcoin or other crypto currencies can take as quick as seconds with fees under a dollar (more on this later).  So how do we get there?

Let’s say ABC Corporation wants to solve some problem.  They can pay me (Wheat’s Consulting) that $500,000 from above.  Rather than having one super computer at my disposal that may take a week to solve a problem, I use 10,000 personal computers from all over the globe.  For example, this includes Johnny’s computer in San Francisco and Suzy’s computer in India.  Imagine the others are dispersed all accordingly.  Upon completion of the problem, rather than sending each user fiat local to their country (which would cost more as the fee may be more than their payout), I can pay them in something that called a Bitcoin.  Yes, it is “made up,” and its value is very much indicative of supply and demand.

When this idea was first started, many people did it for fun and 1 Bitcoin was essentially worth pennies.  As the need for computing grew, many people jumped on, Bitcoin gained traction, and here we are today.  However, as more people allow their computers to help solve the problems, the amount of Bitcoin handed out diminished, thus causing its value to grow.  The algorithm that allows all computers to become part of the “block chain” to solve problems limits the number of Bitcoins handed out.  Each “block” (or problem) is completed every 10 minutes.  When Bitcoin first started in 2009, 50 Bitcoins were rewarded at the completion of each block.  Every 4 years, this number is halved.  Now in 2018, 12.5 Bitcoins are rewarded every 10 minutes.  These Bitcoins are rewarded (or split) based on the computers currently on the block chain (helping to solve the problem) when the block is completed.  They are divvied up based on how computing power is allocated.  With this, you can imagine it’s a race to have the most powerful computer possible on the block chain – this is what’s called mining.  Many users have since purchased very expensive and powerful computers to do this, and to put it bluntly, even a $2,000 custom built PC is just about useless.  It doesn’t make fiscal sense to start mining bitcoin as many businesses who are invested hold most of the computing power.  However, many users can “combine” their computing power together in what’s called a “pool,” but after everything is split, it’s still almost useless.  To sum up, the more computers on the network, the less chance and value or Bitcoin you’ll earn, however, it’s worth more as this escalates.

Let’s talk about security.  As the block chain gets more robust (more users with powerful computers) the algorithm is exponentially more difficult to solve.  With this, it makes it almost impossible to hack.  If someone posses a computer powerful enough to hack the Bitcoin block chain, they could almost essentially hack the stock market.  Basically, they would be wasting their computing power as it would cost more to build the computer than what they would earn by hacking it.  The security is exponentially higher than almost all other security protocols (your bank password for example).  This is another reason businesses are buying into the premise of Bitcoin.

As the value of Bitcoin rises, it can be used to purchase things.  ANYTHING is worth what two parties agree on.  The first recorded transaction of Bitcoin included a man in Europe paying 40 BTC for a pizza.  Many of you today are thinking, oh wow, that’s worth almost half a million dollars today!  And while you’re absolutely right, at the time you probably thought that guy was an idiot.  Since the value of Bitcoin has rose so much, many people are now selling them for fiat – in person or online.  The black market has also taken a liken to Bitcoin as the transfers are untraceable (to some extent).  With more and more people willing to buy a piece of a Bitcoin for US dollars or other currencies, the value again rises.  To repeat, it’s worth what two parties agree on – just like your American dollar.

Issues with Bitcoin…  Since Bitcoin is not regulated like the US dollar or other fiat, it has issues.  As you can see – many major players have the ability to hold the market hostage if you will.  They can buy or sell large quantities at a time (think in the millions and billions) causing the market to fluctuate accordingly.  When businesses announce accepting (or not accepting) of Bitcoin, the value can change.  If all of the computers went off the market tomorrow, the value could plummet – arguably the value of other fiat would plummet too.  Generally speaking, Bitcoin is very similar to you using credit cards, PayPal and the like.  There’s no physical exchange of money, only digital.  With your credit cards, you can always pull out cash.  In the Bitcoin world, there is no physical aspect.  It’s all digital.  Your Bitcoin is stored in a digital wallet that requires a login, password, and two-factor authentication (a text code, email link, etc).  If you forget your password or no longer have access to a verification process, you’re up the creek.  There are millions of coins that are believed to have been lost for this very reason.  On that note – Bitcoins ARE limited.  There will only be 21 million Bitcoins ever created, with the last one mined in the year 2140.  Hence, affecting the value as we get closer to that year as well.

On to other crypto currencies…

First off, why do we even need something other than Bitcoin if it’s so great?  Just like we in the fiat world have Visa, Discover, American Express, Money Orders, PayPal, Apple Pay, etc, there are other crypto currencies that have specific traits that *may* be better for certain aspects and transactions.  As you can see from above, Bitcoin is limited, and its value is predicated on market penetration and user base.  While it is much faster than bank transfers when moving money across the globe, it still is slower than what consumers would like.  Transactions can take anywhere from 5 seconds to 24 hours.  It is dependent on how many transactions are being completed across the chain.  In its secure and robust block chain, it also is its own worst enemy.  Transaction fees are also pretty pricey, in some cases 2-4% or a flat rate.  At one time, it would have cost me $24 to move $5 on the block chain because it was so overwhelmed.  This fee does and can change.  The need for other currencies will rise as more and more people invest in Bitcoin and want to use it on a daily basis.

While Bitcoin is the first to market crypto currency and the current major player (see www.coinmarketcap.com), it has its faults.  Mainly in the time transactions take alongside their fee, but other technical flaws appear in comparison to other block chain technologies.  If you want to buy into Bitcoin, you can do so with just about any fiat.  Coinbase (https://www.coinbase.com/join/59698d9ce06d7b008e5338f4) is one of the most popular sites to do so.  This site sells other crypto currencies, but currently limited to Ethereum, Litecoin and Bitcoin Cash.  As new coins are added to Coinbase, their popularity rises, and the need for Bitcoin (in relation to that coin) drops.  Other sites that sell Bitcoin are listed at https://bitcoin.org/en/exchanges.

If you want to buy any other crypto currency (of the thousands available), there are many sites to do this.  I mostly use Bittex, but there are many more.  However, this is one really big kicker --- you must buy Bitcoin first!  This is because Bitcoin is the gold standard of crypto currency and is the trading fiat in this world.  And, you can’t buy Bitcoin on these exchanges.  Think about it like this.  You can’t buy USD on the stock market, but you have to have USD to buy stocks.  And you can only buy them on qualified exchanges (eTrade, Scott Trade, etc).

As businesses have been invested in Bitcoin, many invest in other crypto currencies. Just for examples sake:   Microsoft is invested in Ethereum (ETH) and IOTA.  IBM is invested in Stellar Lumens (XLM).  Many major banks are looking to invest in Ripple (XRP).  Visa is trying to develop their own blockchain based off of the Ripple or Ethereum technology.  You can even bet on or against Bitcoin futures on the stock exchange!  There’s definitely a need for other crypto currencies as their technologies are different.  The times of transactions, security, privacy, amount of coins (some are unlimited for example), all play into the value of those currencies.  Time will tell…

If you do decide to invest, and want to use Coinbase, I posted my referral link above, but it’s also located here:  https://www.coinbase.com/join/59698d9ce06d7b008e5338f4  If you spend $100, this link will give you an extra $10 and give me $10.  Thanks in advance!  If you are feeling generous or are already in the crypto world and want to donate some Bitcoin to me, my address is:  1927SnmdTBf1iH2zn6M4hEJemCFRGi9hHz



Photo by Andre Francois on Unsplash