How to get, use and spend Bitcoin

Image of Bitcoin, via Wikipedia.
Image of Bitcoin, via Wikipedia.

ALISO VIEJO, California, February 19, 2015 − Bitcoin is a peer-to-peer system where users can make direct transactions without needing an intermediary. Since this system functions quite differently from a bank, without a central repository or a central banker or administrator, the U.S. Treasury currently defines it as a decentralized virtual currency.

It is widely believed that a man or group of men named Satoshi Nakamoto developed the Bitcoin protocol in early 2009. The concept was introduced in a white paper published in October 2008 through the cryptographic mailing list Metzdowd.

There are basically two ways to acquire Bitcoin. The first is through a difficult and often expensive process called “mining.” As with an open-sourced operating system like Linux, anyone can try their hand at Bitcoin. Special hardware is required, such as the Rockminer T1-box (800Gh/s), which retails for $335.

Miners essentially do the Bitcoin payment processing work. To mine, or create a Bitcoin, one must navigate complex algorithmic and mathematical tasks within the secure network. Upon completion, the miner is rewarded a Bitcoin. The maximum amount of Bitcoin that will ever be placed into circulation is 21 million.

The second way to acquire Bitcoin is on the open market through one of Bitcoin’s various exchanges, like Coinbase and Bitstamp. Opening an account is fairly easy. Most exchanges accept major credit cards and can draft from bank accounts.

Using Bitcoin for purchases requires an app on your smartphone called a “wallet,” where the actual Bitcoin code is stored. Be careful before hitting “send,” because once you send your Bitcoins, you can’t get them back. Some businesses that accept Bitcoin for payment include Microsoft, Dell,, the Sacramento Kings and Zynga.

Here are some frequently asked questions regarding Bitcoin:

Q: Will Bitcoin ever be available in physical form?

A: No. Printing or minting Bitcoin would undermine the entire “virtual” idea of Bitcoin.

Q: Will the 21 million cap ever be lifted?

A: Probably not. The limit has been set, and breaching it would be a de-facto devaluation, thus undermining Bitcoin’s “decentralization” premise.

Q: Who is/Where is Satoshi Nakamoto?

A: Nobody knows. The name is of Japanese origin, but for all we know, Mr. “Nakamoto” could be a couple of Armenian nationals living in Bermuda.

Outside of being another way to buy things, Bitcoin might be looked at in two ways:

  1. As a hedge against dollar collapse and financial calamity; or
  2. As an investment.

For the most part, gold has been the most common choice as a hedge against fiat currency depreciation. It would be crazy to compare Bitcoin to gold, but some are buying Bitcoin instead of gold.

To be sure, this past Friday an ounce of gold for April delivery closed at $1,228 on the New York Mercantile Exchange, while Bitcoin closed at $240.53 on Coinbase. As an investment, Bitcoin might be compared to a highly volatile tech stock like Zygna. Again on Friday, Zynga (ZNGA) closed at $2.24 on the NASDAQ, while Bitcoin traded at around $231.53 at Bitstamp.

The difference between Bitcoin and gold or stocks are obvious: the markets. In the previous article, we learned Anne Barnhardt’s theory on the nature of money. What we didn’t know, however, was that Ms. Barnhardt owned her own commodities brokerage business for six years. In late 2011, she lost it when MF Global collapsed. At the time, MF Global was the clearinghouse for Barnhardt Capital Management. By the end of the year, though, $1.6 billion went missing there, due to a violation of “the sacrosanct segregation of customer funds from clearing firm capital,” as she detailed in a letter that made it all the way to the Rush Limbaugh Show.

Bitcoin is also riskier than commodities. Why? Because Bitcoin’s exchanges are even less accountable, and unlike major stock and commodities markets, the Bitcoin market is not very deep and not very liquid (which like diving, can be hazardous). In April 2013, the largest Bitcoin exchange, Mt. Gox, was hacked into, and 850,000 Bitcoins held by the firm and its clients were lost. At the time, Mt. Gox was handling roughly 70% of Bitcoin trades, to which CEO Mark Karpeles could only say, “I’m very sorry.”

Bitcoin was then known as _ _ _ _ coin on the ZeroHedge messaging boards. (Hint: it rhymes with “bit,” but is brown and and possesses an unpleasant smell).

As with all financial trading or investing, be careful and investigate everything thoroughly.

And please note: The above information is just that, information. It is not to be taken as investment or financial advice.

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  • DougNJ

    Upper case Bitcoin is the protocol. Lower case bitcoin is the unit of account. The math the miner does to add a block of transactions is not that complex, it just needs to be done up to several billion attempts until a suitable answer is gotten. The math needs to be simply enough for other miners to verify the result immediately.
    I eagerly await the next article “Bitcoin at Tax Time”.