bitcoin-stock

There are a lot of news about Bitcoin in the last few months and I don’t think most “ordinary people” even understand what exactly Bitcoin is, and why the news about stolen Bitcoins are such big deal for some people.

This is my personal opinion about Bitcoin, and I am going to write this using the easiest possible explanation for ordinary (non-technical) readers. My explanations might ignore some technical details for the sake of simplifying.

First, what is Bitcoin? It’s a digital currency. When we talk about US Dollar, Euro, Japanese Yen or other currencies, there are usually some authorities issuing those money, regulating the value and printing the physical form of that money. In the case of Bitcoin, everything is different. Bitcoin was created by an unknown person. All we know is that the person creating Bitcoin used the name Satoshi Nakamoto. But since no one can actually verify who is this person, we don’t even know if Satoshi Nakamoto is a real person’s name or just a nickname.

Satoshi Nakamoto created a cryptocurrency algorithm to generate a digital currency named Bitcoin. This currency doesn’t have physical form (no bank notes or physical coins), and there is no country / formal authority to govern the value (and the credibility) of this new currency. Basically, after this algorithm was invented, several people calling themselves “Bitcoin miners” installed some software in their computers, run the software 24×7 in their computers and occasionally the software will tell them they just received Bitcoin.

Since there is no centralized authority to govern Bitcoin, there is NO central server to keep record who has Bitcoins. Instead of putting the data in a server, the information of every Bitcoin transaction is recorded in everyone’s computers in the network. It means, everyone currently turning on their computers for Bitcoin will have a huge chunk of data containing all Bitcoin transactions in the world. Same copy is recorded everywhere, and it can only grow larger as time flows.

Bitcoins transaction doesn’t have to include one whole Bitcoin. One can purchase something using 0.01 Bitcoin, for example. As per today (8 Mar 2014), 1 Bitcoin is worth USD 627. A big number for a currency. At its peak value around early December 2013, 1 Bitcoin was USD 1,151. That was an even more impressive value.

By the time of its peak value, Bitcoin made news everywhere, and a lot of people who previously didn’t hear about it became curious. Many of them end up trying to become a Bitcoin miner for the “dream” of getting easy money.

Yep, somehow the idea of easy money always attract a lot of people.

In fact, by the time it got famous, mining Bitcoin is no longer easy. The cryptocurrency algorithm has exponentially increased complexity. What does this mean? It means when only few people has Bitcoins, the number of miners were just less than 100, and one miner using one ordinary desktop computer can hope to earn Bitcoin within few days. As per today, there are thousands of miners and there is no information on its exact numbers. The more Bitcoins has been “mined”, the more difficult the next Bitcoin will be. Now Bitcoin miners can no longer work individually, so they created groups instead. A group will earn Bitcoin every few weeks to few months, depending on the members’ computing power. And those Bitcoins will be splitted amongst its members relative to their contribution, after some deduction from the group’s organizers.

To make the comparison clearer, in its early days, a miner can earn one whole Bitcoin within few days. Today, a miner would be lucky to get a small fraction of 1 Bitcoin (zero point something or even zero point zero something) within a month or much longer.

What kind of computer is needed? In early times, a normal desktop computer can help a miner to earn every few days or weeks. Today, miners must invest on expensive computers designed specifically for Bitcoin mining to do it effectively. One machine can cost a hefty USD 8,000 ++

Now let’s talk about the cost of actual Bitcoin mining for today. Other than the cost of purchasing the special hardware itself, you will need good Internet connection and electricity for 24×7. And don’t think that purchasing the special hardware is a one-time investment because in many cases, the process of Bitcoin mining involves a lot of complex calculation, which translates into those machines doing hard work, which translates to serious heat generation, and creates a serious risk of damaging the hardware. So a miner might have to repurchase the hardware if it’s broken.

So, those early miners of Bitcoin might have millions of dollars today for doing simple work, but it doesn’t mean new miners can get it easy too.

After discussing about mining, now once a person have Bitcoin, what’s gonna happen? Well, that person can store the Bitcoins in his own computer, or he can choose to put his Bitcoins into one of many “online wallet” available to store Bitcoin. Then what? Now this is the amazing part: Bitcoin can be exchanged into popular “conventional” currencies like USD or EUR thanks to many “exchange” companies. With this, Bitcoins actually have real value because it has buying power. Some online stores even accept Bitcoin as payment and some cities have Bitcoin ATMs installed. Sounds like real money?

The big difference between Bitcoin and other “conventional” currencies are the lack of government regulation. Many people see this “no regulation” as “freedom” and got excited with the idea of unregulated currency. However, they forget one major issue here: no regulation means there is no law to protect their money. In the last few weeks there have been MASSIVE news about stolen Bitcoins from Bitcoin exchange companies, Bitcoin wallet provider and other companies providing services for Bitcoin. Hackers hacked into their servers and stole Bitcoins worth million dollars.

http://www.theregister.co.uk/2014/03/04/mtgox_sorry_about_your_bitcoin_we_got_p0wned_real_bad/
http://business.financialpost.com/2014/03/05/alberta-bitcoin-bank-flexcoin-shuts-down-after-hackers-stole-all-of-its-online-coins/
http://www.bloomberg.com/news/2014-03-05/flexcoin-shuts-after-bitcoins-stolen-from-bank-guardian-reports.html
http://www.deepdotweb.com/2014/02/13/silk-road-2-hacked-bitcoins-stolen-unknown-amount/
http://www.abc.net.au/news/2013-11-08/bitcoin-site-hacked-founder-says/5078148
http://www.coindesk.com/poloniex-loses-12-3-bitcoins-latest-bitcoin-exchange-hack/
http://gizmodo.com/hackers-have-stolen-40-000-from-bitcoins-biggest-wall-1518184070

And there’s even an interesting article like this one:
http://www.theverge.com/2013/12/19/5183356/how-to-steal-bitcoin-in-three-easy-steps

Since there is no law protecting the clients of those companies (owners of Bitcoins), then nothing can be done. Since the network is a free network and anonymous, tracking the case becomes harder and there is no legal base on the investigation because Bitcoin is not something regulated by any government or any law. If the digital money is stolen, under bankruptcy law, any company can still apply for bankruptcy protection and their clients can no longer ask for their money. From law’s point of view, it’s the same as telling the police “someone stole my monopoly money” or like FarmVille player reporting that “someone stole my Farm Cash”.

Is Bitcoin a failed concept?

I would like to discuss Bitcoin from two different perspective here:
1. The process of using the money and recording every transaction in everyone’s computer.
2. The process of issuing/generating the money.

The idea of open network is generally a great concept. And having everyone’s computer have the entire set of transaction records does make it a solid distribution. So I actually like the concept of how digital currency works for transaction.

What I don’t like, is the process how Bitcoin is issued.

When I first heard about Bitcoin, my first question was about that “mystery” algorithm. What does the algorithm actually calculates?

There are many complex calculation in the world of science that requires a lot of computing power. Some of those calculations are shared amongst many people who voluntarily donate their computer’s processing power when their computer is not in heavy use. I thought Bitcoin generates “value” for its currency because all those computers owned by miners are actually helping to solve grand science projects.

Apparently I was wrong.

Cryptocurrency algorithm doesn’t calculate science project something like that. Instead, it merely provides complex calculation that requires a LOT of processing power, generating heat, using great amount of electricity, adding Internet traffic, and there is no real life use of all those wasted processing power, electricity and Internet traffic. Those machines are running dumb calculation, with the end goal to earn Bitcoins. According to this article, Bitcoin mining uses $15 million worth of electricity every single day. It’s like human beings don’t have enough problem yet with sustainable energy.

Will it be different if Bitcoin algorithm actually solves real world problem (such as science project or something similar)?? Maybe not by a large margin, but at the very least it has a tiny bit of contribution, which means real world “actual” value.

So, by doing calculation that solves no real world problem, Bitcoin mining generates its results, giving lots of Bitcoins to its early miners and giving dream to its late miners. Then how on Earth it could actually become a currency worth real money? I mean, try going to a Starbucks and attempt to pay your coffee with monopoly money, or with your FarmVille Cash, or with your Candy Crush lives, or with your “money” earned from any of your online game. Would they accept your payment? Nope.

Then how on Earth a single unit of digital money called “Bitcoin” can worth more than $600?

Some people said those “miners” are doing “work”, so they deserve “payment”. I personally think that turning on computer 24×7 to run calculation does not qualify to be considered as “working”. It seems more like wasting energy and resources.

I searched for months, asked countless people, read many articles and forums, and I could not really find a definite conclusion on how a digitally created money can worth actual product / services. My only wild imagination is… probably someone very rich with enough power to do so decided to reap some profit from people’s dream. When it was still not worth anything, he might have significant amount of those digital money and he thought of how to convert it into actual profit. He could sacrifice some amount of money to give products / services / real money to Bitcoin owners and soon that currency will have actual value. People will go crazy mining or buying Bitcoin because of its “future potential”. Spread some “spicy” rumor about the promise of privacy coming from unregulated money and all those people who so want privacy above all else will go converting their real money into this unregulated money. Then all he needs to do is wait. He could slowly cash-in his pile of digital money for real profit, and when he has enough he can simply turn around and say he is no longer interested. Since Bitcoin is unregulated, there is no law to protect Bitcoin owners from losing their money. If one day Bitcoin becomes regulated, it will lose its main attraction to many people. Either way, this person who started everything would already gained massive profit.

Any financial move performed by someone (or an institution) with enough power will have real effect. That’s one of the lesson we all should have learned from many cases in money trading.

Again, this is just my wild imagination. I’m not accusing anyone here. It could be just a fantasy.

For me, it doesn’t really matter how it started. I simply don’t feel like trusting my savings to an unregulated money with no law to protect me.

After some people realizes that a cryptocurrency will only benefit its early miners, currently there are many “new” cryptocurrencies trying to become the next Bitcoin. Is it even possible? I would say it is indeed possible. Which one of them? No one can tell. Except, maybe someone with enough power to give real value to whatever cryptocurrency he chooses, and gain profit, just like my wild imagination above.

So, while I do agree that the open network concept of recording every transaction is a great concept, the process of Bitcoin creation leaves more bitter taste than the sweet one for me. The calculation is no different than dummy calculation of super complex formula that once calculated, serves no other real life purpose. Thus, I can’t help to think that the valuation of this cryptocurrency into real money is a thorough grand plan for profit-making, taking advantage of some people’s naive dreams about having a unregulated money that promises total privacy. Just because a government does not regulate something, it doesn’t mean they can’t monitor (spy) on people who uses that thing. Remember, Bitcoin uses open network, everyone can join. This means someone from government or institution with authority can also join, grab the whole transaction data, and assign their top decryption experts to read the transaction log. It’s unregulated, which means owners are not protected. But it’s not necessarily “safe” from control either. Sounds like a lose-lose situation for me.