A BIT OF BITCOIN

Ever adventurous, Joy decided the only way to really get an idea of what Bitcoin was about, was to buy some. So she bought a bit.

At $4,000-plus per coin, she only bought a little bit of a Bitcoin. She bought $75 worth, which was a little less than two percent. With that little bit she bought a sweater from Overstock.com. It was $19.74. That left $54 worth of Bitcoin. She can go wild later.

So what is this all about? James Dimon, head of J.P. Morgan and Co., the largest bank in the U.S., says “It’s a fraud, a scam.” Well, Mr. Dimon is always worth listening to, but in this situation, he may be talking his book (his own interests), as they say in the investment biz. But the sweater is real and so was the transaction, so that wasn’t a scam. How did we get there?

The first question might be where would you buy a Bitcoin? The other first question is what is it? There are several other first questions, which we will try to get to in the order in which they were perceived. So the first one is she bought her Bitcoin at Coinbase.com. (There are no actual coins involved. Though we sometimes see pictures of coins with a big “B” stamped on the surface, these are artists’ renderings of what such a coin might look like if it actually existed.)

Another first question is: If it doesn’t really exist, what is it? To which we might add — and so we will — “what does this have to do with a column on computers and high tech?” Well … computers create the coins. They do this by solving problems involving blockchain transactions, and solving them first. Does this seem to be getting complicated? That’s only an appearance, like everything else involving money.

The person who solves a problem first gets some coins, 12.5 these days. Who gives them the coins? The web. That is, by an interlocking web of computers that acknowledges that someone has solved the problem first. Boom. A lot of computing power is involved.

Using the program that initially established Bitcoins — which are frequently called a cryptocurrency, meaning they’re encrypted currency — a limit of 21 million Bitcoins can be produced. That limit is expected to be reached in 2040, only 23 years from now. Looked at through the lens of classical economics, that would mean the price has to go up. But of course only if the currency is accepted. This seems to be happening: The coins are currently valued at more than $4000 apiece, up from around $600 this time last year.

So who accepts these coins as currency? So far: Whole Foods, Subway, Expedia (travel), New Egg (electronics discounter), Microsoft, Virgin Mobile and Virgin Airlines, DISH network, Intuit, Etsy, Steam (computer games), Bloomberg.com, etc. In all, nearly one hundred companies currently accept Bitcoins as payments. The number keeps growing.

Coinbase.com seems to be the most common source for buying and selling Bitcoins, though there are many others. The transaction fee is commonly about four percent. This may seem high but is only slightly more than the fees charged by credit card companies.

In a real life case, from a TED talk on the topic, a housekeeper in Toronto regularly sends money through Bitcoin to her mother in the Philippines. Before using the digital method, she paid a ten percent fee, and her mother waited 47 days to get the money. With Bitcoin, the money was transferred in minutes, and the fee was two percent. An app on her phone called Abra lets her choose the service with the highest rating. She used to spend five hours a week just doing the paperwork for transferring money but now does it in minutes.

Bitcoin transactions of course are outside government control and ignore national boundaries. Many countries have currency controls, limiting how much money can be taken out at any one time; the limits often being quite small. In the book “The Age of Cryptocurrency,” by two veteran Wall Street Journal reporters, one of the authors describes how he could not have sold his condo in Buenos Aires without ceding most of the profit to the government. He was advised by a friend to use Bitcoin instead. So he went to an unmarked building, nervously agreed to the transaction, and went away without even a paper receipt. When he got home to the U.S., a couple hundred thousand dollars had been transferred to his bank account.

Underlying Bitcoin is the so-called “blockchain technology.” Companies like Wells Fargo, Cisco Systems, IBM, Intel, and JPMorgan Chase have invested in it through the “Hyperledger” project. Barclays, Britain’s largest bank, is already using it. To Bob, whose memory goes back a long way in technology, blockchain seems very similar to the Unix operating system developed for mainframe computers in the early days. In Unix, everything is a file, just as in blockchain everything is a block. It worked well and was hard to crack. We still see its remnants every day in the “dot” used in Internet addresses. The dot is an old Unix command to look through the Internet’s files and find the corresponding “block.”

This is all very sci-fi. What is a national currency worth, many have asked? Only what people think it is worth, is the answer that often comes back.

Internuts

  • How the Blockchain is Changing Money and Business.” Google those words for a fascinating TED talk by Don Tapscott, a Harvard professor. He explains why Bitcoin will bring about more social equality than anything we’ve tried yet. For example, in developing countries where people can’t sell their land because they have no title to it, blockchain could make that happen.
  • How Does Bitcoin Work and Who Actually Pays for the Mining?” Google that phrase to find an explanation on Quora that tells all. It has an error, stating that the number of coins will top out in 2140; it should say 2040.
  • 19 Industries the Blockchain will Disrupt.” Search on those words to find a YouTube video that explains how the technology underlying Bitcoin is changing business everywhere.
  • BitcoinBlockHalf.com is about the rewards of mining. The reward was chopped in half in 2016, and is programmed to halve again. This site estimates when that will happen and gives other statistics.

 

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