Bitcoin 101

Ron Swanson Money memeTonight I fell down a rabbit hole in an attempt to understand the newest currency sweeping the land: Bitcoin.

Earlier today my best friend sent me a link to a Yahoo story boldly proclaiming “A College Kid Made More Than $24,000 Just by Waving This Sign on ESPN.” The sign said “Hi Mom Send”…then featured an image of a Bitcoin along with a QR code which corresponded with his Bitcoin wallet.

His sign made it to the front page of Reddit where the Internet’s finest proceeded to send him money…just because?

My best understanding, he was sent bitcoins by fellow digital-currency enthusiasts because he helped generate publicity for the cause.

Regardless, the unidentified kid secured a total of 22 bitcoins which, when the Yahoo article was penned early in the day on December 2, was equivalent to $24,000. About 12 hours later, while I was writing, his 22 bitcoins netted $21,945.94, according to the Coinmill Currency Converter or $22,542.52 if you agreed with Bitcoinexchangerate.org.

Needless to say, bitcoins are volatile.

After reading the Yahoo story, two thoughts lingered with me — how exactly does Bitcoin work? And is it really like having $24,000 or is more like monopoly money that works in very specific circumstances?

What is Bitcoin?

Officially Bitcoin is “the first decentralized digital currency.” The system was created in 2009 — but hasn’t gained mainstream popularity until recently. No one owns the Bitcoin network and the creator is anonymous. In 2010, he (or possibly she) left the project in the hands of developers. According to the official website, anyone can review the open-source code and even make their own modified version of the program.

As the snappy introductory video  explains, Bitcoin

  • doesn’t deal with banks
  • reduces transactions fees you experience with a bank
  • enables people to immediately send “money” to each other
  • doesn’t require any prerequisites or enforce arbitrary limits
  • enables a global economy
  • are regulated, so only a set number can be released into the economy during a specific time period (ie: 25 in 10 minutes).

In my mind, it’s sort of like PayPal, but without government approved currency or the ability to immediately transfer your money into your bank account.

There are some currency exchanges that allow you to cash in bitcoins for legal tender, such as the site Mt.Gox. Unfortunately, due the unregulated nature of bitcoin, it’s been easy for people to be scammed and hacked when trying to convert into USD (or any other currency).

What is the significance of Bitcoin being decentralized?  For one it isn’t government regulated (which made criminals early adopters of the technology). It also doesn’t have any form of hierarchy within the system. And unlike your bank, Bitcoin doesn’t have a centralized system to facilitate transactions.

Instead, it relies on users participating in a process called mining.

How do you get Bitcoins?

Mining Bitcoins is a passive way to accumulate digital wealth and become the proud owner of a bitcoin (or a fraction of one) without using local currency to buy into the system.

Your bank owns rows-upon-rows of massive computers and servers, in undisclosed locations, all working to send your money from one account to another when you transfer funds or get a direct deposit or pay a bill. Because it’s decentralized, Bitcoin harnesses the internet and users’ computers/servers to provide the computing power and perform the necessary algorithms allowing the financial system to operate.

You don’t need to be a computer whiz or understand coding, you simply have to sign up, download the software and leave your computer running. Mining seems to be like the CD of the bitcoin world, while trading the coin is similar to buying individual stocks. The latter is far riskier, but where the money is to be had.

This video offers digestible explanation about mining — even though the miner sounds a bit like Ferris Buller’s teacher.

If you aren’t interested in setting up mega servers, you can join a pool to harness your computing power together to earn bitcoins.

Who accepts bitcoins?

Bitcoins can be used for peer-to-peer transactions. For example, if you hire a freelance writer who accepts bitcoins, you can pay him or her with those digital gold coins instead of sending money through PayPal or a direct deposit.

The use of bitcoins in “the real world” is a bit more difficult. Some mainstream companies have started to accept them, including a Subway (sandwich) store in Allentown, PA. It should be noted, the whole franchise isn’t allowing this payment, just the specific Allentown store. A barber in Reno, Nevada accepts bitcoin to avoid the merchant fees when customers’ use credit cards. Various business owners who sell goods online have started accepting payment in bitcoins.

Some larger companies including WordPress, CheapAir.com and OK Cupid have jumped on the bitcoin band wagon. It also probably doesn’t surprise anyone that Sir Richard Branson will allow you to fly into space on Virgin Galactic for $250,000 worth of Bitcoins – which today would be about 250 bitcoins. My personal favorite, The University of Nicosia in Cyrpus will not only allow you to pay tuition fees with Bitcoins, but they’re offering a masters degree in digital currency.

Everyone still has to convert bitcoins into local currency in order to pay their bills. A simple fact which still leaves me thinking of bitcoin as monopoly money, as it can’t be used in a majority of real-world stations — just with those willing to play along. But there is more to learn!

Now that we’ve covered the basics, what are your initial impressions of bitcoin? Is the currency of the future — or the largely predicted tulip bulb of our generation?

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44 comments on “Bitcoin 101
  1. Great article, Erin. The whole thing freaks me out, honestly, although I’m the girl who will still write a check at the store. :-)
    Laurie @thefrugalfarmer recently posted…November 2013 RecapMy Profile

    • Broke Millennial says:

      Oh no! You’re a line clogger-upper :P. I always have a little chuckle to myself when I see someone writing a check at the grocery store — mostly because it seems to make other people cranky. But good for you! If it works, it works.

  2. To be honest, Bitcoin sounds like a little sketchy to me. The fiat currency we have is scary enough as it is.
    Holly@ClubThrifty recently posted…It’s Easy to Judge a MotherMy Profile

  3. I’m a little concerned about the fact that it’s apparently difficult to convert Bitcoins into actual currency without putting yourself at risk of being scammed or hacked. It seems like it would have to become much more regulated in order to become mainstream.
    Dee @ Color Me Frugal recently posted…5 Financial Tips I’ve Learned from BloggersMy Profile

    • Broke Millennial says:

      I 100% agree. There would have to be a much stricter structure in place for me to trust having any sort of substantial amount of money in the Bitcoin system.

  4. Matt Becker says:

    I admittedly know very little about bitcoin. I appreciate the info here and the few other articles I’ve read, but it’s hard for me to imagine that this is anything more than a fad. I do see the potential and I think there’s the possibility that something like this becomes much bigger years down the road, but it’s use today seems to mostly be for speculation in the hunt for big profits.
    Matt Becker recently posted…What to Look For in a Disability Insurance PolicyMy Profile

    • Broke Millennial says:

      Yes, it seems like tulip mania — but I’d like to understand how it operates in case a credible version comes around in the future.

  5. Michelle A says:

    Sounds a little sketchy, especially since it is so easy to hack. It could be like the $1 that was supposed to “revolutionize” the dollar. Now those $1 coins are just rarities and collectable items.

    Also, the idea of not having something tangible is a hard thing for me to grasp. Thanks for the info Erin!

    • Broke Millennial says:

      Those damn $1 coins are the change you get when you buy a subway card in cash here in NYC. They’re the biggest pain to carry around and I always feel guilty paying for something by using them.

  6. Brian says:

    The idea is interesting. Wired had an interesting article about what they see as the most major problem. You cannot reverse transactions. So basically there are ZERO consumer protections. So if you use them to by a defective product and the seller is sketchy, too bad your money is gone. At least with a credit card you can dispute the charge and get your money back. This would also be the case if someone stole your bitcoins via hacking/phishing/etc. Worse still, you could accidentally throw your flash drive/HD away or erase all the data and lose all your bitcoins (just like cash I suppose)

    To me this is just a speculative play. Maybe I will be proved wrong, but for foreseeable future I do not see myself jumping on this bandwagon.

    • Broke Millennial says:

      You jumped the gun a bit, Brian! I was actually go to address some of the concerns from that same Wired article in my next post. Until there is far more regulation, I wouldn’t trust this — but then again that’s the exact opposite point of Bitcoin.

  7. This boggles my mind in a very sci-fi manner. I get the pros of it and where it’s all headed… but until actual, physical stores start accepting it, I’ll pass.
    Michelle @fitisthenewpoor recently posted…Giving Tuesday: Donate WiselyMy Profile

    • Broke Millennial says:

      It seems that it takes far too much effort with far too much risk to acquire them right now. I do agree that it would be interesting to see if stores start accepting them more readily.

  8. Good explanation but I’m still totally lost ;) I think I should probably just stay away from Bitcoin.
    thebrokeandbeautifullife recently posted…Avoiding the UpsellMy Profile

    • Broke Millennial says:

      I re-watched a bunch of intro videos several times each before I really felt I had started grasping it a bit. It’s still quite abstract in my head though.

  9. Mr. NYBudget says:

    I enjoy taking a small portion of my portfolio and investing in interesting opportunities such as bitcoin. I have 4 bitcoins (I used to have 5, but I sold one once it reached the price that I bought all 5 for – basically, all I have invested in bitcoin now is gravy).

    I also have a small amount of money in P2P lending. Have you ever looked into Lending Club?
    Mr. NYBudget recently posted…Happy Thanksgiving!My Profile

    • Broke Millennial says:

      If you have small portions to play around with then power to ya! Nice that you got a return on your bitcoin investments. I’m not sure I’d be comfortable getting too experimental yet. I have started to read about P2P lending a bit, but haven’t really given it a deep dive. This whole series will probably prompt me to do so though.

  10. Thanks for this info! I keep hearing about bitcoin and it made no sense to me. I am not sure if makes sense to me now, but I have always had a fear of the unknown.
    Shannon @ Financially Blonde recently posted…Music Mondays – All I Want for Christmas is YouMy Profile

    • Broke Millennial says:

      I have a bit of the similar fear, although oddly enough not so much with investing in the stock market. Perhaps I feel that’s somehow less complicated?

  11. Mr. 1500 says:

    I’ve always thought that the most similar concept is gold. Like Bitcoin, gold doesn’t really have any intrinsic value. By that, I mean that an analyst can place a value on a stock (real estate holdings, cash reserves, sales, debt, revenue, etc.). With gold or Bitcoin, price is solely a reflection of demand.

    If you invest in gold or Bitcoin, you do it for one reason: you expect that at some future point in time, someone will pay you more for it than you paid. That’s really it.

    I dislike both.

    PS: Another crazy Bitcoin story: http://motherboard.vice.com/blog/this-pizza-is-worth-750000
    Mr. 1500 recently posted…Performance Update 11 of 50: November Wane and Book DronesMy Profile

    • Mr. NYBudget says:

      It’s slightly funny because the values of stocks that you mention all boil down to currency, which in the US, USED to be based on gold!

      But your point is well taken – it is a more speculative process with Bitcoin because of how unestablished it is and it’s lack of current usefulness in the marketplace.

      Long term speculators in Bitcoin are betting on that changing, though. They are betting that Bitcoin DOES become useful, just like any other currency. So it is risky, but it isn’t exactly the same as investing in gold, depending on your methods and motivations.
      Mr. NYBudget recently posted…Happy Thanksgiving!My Profile

      • Broke Millennial says:

        Other than buying jewelry, I don’t have plans to invest in gold. That is one of the major differences between Ron Swanson and myself! While I do appreciate both of your points, I’m leaning with Mr.1500 on this one. But that could also be due to my lack of knowledge.

        Another amusing factor in that post you linked to — it’s 8 months old when bitcoins were only worth $75 apiece. Tonight, that pizza has theoretically gone up in price from $75k to $10,570,500.

  12. A little too conceptual for me. I get it in theory, but it’s the same as gold so I don’t see the difference other than not having fees, and the currency determined by the market.
    save. spend. splurge. recently posted…The Cost of the 12 Days of Christmas 2013 = $114,651.18My Profile

    • Mr. NYBudget says:

      Well, to break down my point, I guess I am saying:

      Gold is gold and will always act like gold. Bitcoin will hopefully act like a real currency at some point.

      That’s the main difference to me. But I definitely agree that the most important word in that sentence is “hopefully”. It is definitely a risk.
      Mr. NYBudget recently posted…Happy Thanksgiving!My Profile

    • Broke Millennial says:

      It’s very conceptual. I feel like I barely scratched the surface after hours of research to write this post. I’d like to understand it better before 100% passing my judgement, but my gut instinct is to be skeptical.

      I agree with Mr. NYBudget’s point that gold will always act like gold. I trust gold in the same way I trust the stock market. Prices rise and drop, but there is a small sense of trust because of a basic understanding and decades/centuries of “rules” and regulations. Bitcoin is just so new, it doesn’t feel trustworthy.

  13. Oh wow I have no idea if that is the wave of the future. I’d hate to think I have my head up my butt and think “ah no way,” who knows!!! Technology is changing so fast. Anything is possible I guess but as much as I’m not a fan of the government, it does give me some peace of mind to know it’s regulated.
    Budget and the Beach recently posted…December GoalsMy Profile

    • Broke Millennial says:

      It’s one reason I found the meme so appropriate. I love Ron Swanson’ libertarian views (to a point), but I’m a fan of our currency being regulated and centralized. Perhaps Bitcoin has a place in the future, only time will tell.

  14. Bitcoin could go to $1 million dollars. It’s only perceived scarcity. Some gonna make a lot, and others will get toasted. If you wanna send some my way I’ll accept.
    Charles@gettingarichlife recently posted…Why I Want To Keep Up With The JonesesMy Profile

  15. Great article! Will be interesting to see where it goes from here.

    • Broke Millennial says:

      Thanks, Jon. I’m also looking forward to watching the future of Bitcoin — even though I’ll likely stay on the sidelines.

  16. Dear Debt says:

    Thanks for the illuminating explanation! I was confused. Sounds kinda weird and interesting at the same time. I prefer cash, but I do like the non-government aspect. When I was in SF, I saw a small convenience store taking bitcoins!
    Dear Debt recently posted…End of November Update — Under 45kMy Profile

  17. I love the idea of competing currencies since I think the USD is pretty messed up in it’s current state, so I’m definitely quietly cheer leading Bitcoin. The government gets upset enough about the fact that some people would – God forbid – think of gold as money, but Bitcoin is pretty unprecedented.
    DC @ Young Adult Money recently posted…How to Find the Perfect Side Hustle for YouMy Profile

    • Broke Millennial says:

      How libertarian of us to start thinking of gold as money. If you listen to NPR’s Planet Money podcast, check out the Libertarian Summer Camp episode (#286). Talks about using precious metals for currency.

  18. This is one of the best write-ups I have seen on Bitcoin. You did a fabulous job putting it all together!!

    My take is this. Most of the people who place a high value on bitcoin have bought specialized mining “rigs”, which are computers that are optimized to mine the most efficiently (through the use of GPUs and whatnot). I have a friend that has spent thousands of dollars on equipment already.

    To these folks, if bitcoin loses all of its value– Then all of their equipment is virtually worthless. So none of them EVER sell any of the bitcoins that they have. With nobody selling bitcoins, the value gets artificially inflated. Nobody is buying bitcoins at their listed face value, everyone is hoping to mine them instead for “free”. It’s all a bit of a pyramid scheme, and eventually it will fall apart.
    jefferson @See Debt Run recently posted…The Danger of “I Deserve This” ThinkingMy Profile

    • Broke Millennial says:

      Hopefully they could sell of their equipment to help cut losses if Bitcoin fails completely. The guy in the video linked in the post sells some bitcoins just to reinvest in the equipment to mine them. It certainly is an interesting phenomenon.

  19. Miiockm says:

    I had tried to buy some bitcoins early on but found the process wasn’t exactly user friendly. At the time I thought that it was going to negatively affect its adoption but apparently not.
    Miiockm recently posted…Dec 2013 Net Worth Update +3.34%My Profile

  20. I am not totally sold on the virtual money idea, but I do believe that the world would be a much better place if I didn’t need to carry my wallet around everywhere I go.
    Tahnya Kristina recently posted…Friday Faves: I’m getting my Christmas treeMy Profile

  21. Georgebracken says:

    It appears that BTC continues to gain attention. However, people don’t exactly know what really bitcoin is, how it work and where to spend it. Check this out: http://bitcoindaily.com/about-bitcoin/

  22. Michael Belk says:

    Bitcoin is too volatile right now, I am not sure it is a good idea to have the industry go unregulated.

    Who would a consumer hold accountable?
    Michael Belk recently posted…According to chairwoman, Janet Yellen the Federal Reserve has no authority to regulate Bitcoin. (video)My Profile

  23. Great article Erin. Bitcoin is definitely a great new use of technology and I think it will only keep growing as time goes on.
    Kate Gallagher recently posted…June 14, 2014: Bitcoin Market Consolidation Keeps Bull Market HealthyMy Profile

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