Keith's Interweb: Cryptocurrency 101

(go here for session #1)

Tangible likeness of the intangible

bitcoin – one word, two meanings:

1. a digital currency (1 bitcoin currently trades at $600)

2. the network/system that enables bitcoin transactions and that maintains the accounting ledger for bitcoins

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uses – like any currency

buying and selling goods and services

a place to keep some of your savings

transferring money

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similar to a credit card or a checking account:

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bitcoin advantages

it’s a world currency - transactions can easily cross international borders.

it cannot be controlled or manipulated by one person, group, company, or government - the system is managed by a software algorithm spread across hundreds of computers that are independently operated.

avoidance of high transaction fees (such as 2% or 3% for credit cards) - because the bitcoins can be secured and transferred without bankers or other middlemen.

online purchases without the need for a credit card or a bank account

avoidance of currency devaluation via dilution – there will never be more than 21 million bitcoins in circulation

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risks in owning bitcoin

Governments may enact laws against use of bitcoin, and that could cause it to fade away

It’s unproven (beyond 4 years) - the bitcoin system or the bitcoin currency could fail

If you trust the wrong website (or persons) with your password or private key, your bitcoin holdings can be very easily stolen

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bitcoin basics

bitcoin currency - as of Feb 22, 2014 12.4 million bitcoins have been created. Over the next ten years 9 million more bitcoins will be minted. The forever cap on total created bitcoins is 21 million. Bitcoin value is determined by market demand. The value of 1 bitcoin is currently $600.

wallet = bitcoin account. You can set up as many online wallets (and paper wallets) as you desire. They are free. Usually the transaction details are managed by an online service.

public key = wallet ID number. You can share this without risk

private key = key that enables transferring bitcoins out of your wallet. Keep this to yourself. Protect it as you would a stack of 100 bills, and don’t let anybody take a photo of it or write it down.

blockchain = the bitcoin system ledger of bitcoins. This is open source – anyone can look up the transactions into and out of any wallet. A new block, which details the specifics of all the most recent bitcoin transactions, is added to the blockchain every 10 minutes. The blocks are added using heavy encryption that prevents the ledger from being modified, yet still allows anyone to read the transaction information.

bitcoin software algorithm = the computer program that is operated on the hundreds of computers across the world (the system nodes) that together comprise the bitcoin system. The software is designed such that >50% consensus is required for verification of blocks added to the blockchain, for upgrades to the system code, and for other special events. The system code is open source – anyone can inspect the details of the code, there is 100% transparency.

miners = the owners and operators of the independent computers that make up the bitcoin network. They supply the computing power that is used to maintain the blockchain and that is used to verify transactions.

Anyone who has an internet link and a computer system can become a miner. The miners are rewarded for their computational work with bitcoin payments funded from transaction fees and from issuance of new bitcoins. All of this is run by the bitcoin software algorithm. The miners have only to load the algorithm onto their computers, keep their computers connected to the internet and running, and then collect their rewards.

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What bitcoin is not:

· it is not a ponzi scheme

· it is not a currency that allows you to conceal transactions

· it is not a currency that is used in particular by illicit businesses, no more so than is the dollar

· it is not fiat currency (currency run by a government)

· it is not foolproof - if you lose your digital keys you lose your money, anyone who has access to your private key can take your money. Also, bitcoin transactions are final – they cannot be reversed.

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bitcoin acceptance – reflected in the growth of bitcoin value

Eight fold increase in bitcoin value per year, for each of the last 3 years
Today bitcoin is 0.1% of the worlds currency
Should bitcoin grow to become 10% of the world’s currency, then one bitcoin will be worth $100,000