Bitcoin

bitcoin-2895295__340

Bitcoin is a cryptocurrency.  “Crypto” meaning encoded; “currency” meaning money.  It was invented by someone named Satoshi Nakamoto in 2009.  He was trying to solve the problems of digital currency such as using money online for shopping or banking.  His solution was so thoroughly thought out that one could say he gave birth to Bitcoin whole and fully formed.  In 2008 he published a white paper describing his invention, then formed a group of programmers who could create and follow his design. He then disappeared and no one knows who he is or where he is to this day.

Bitcoin is the result of something else Nakamoto created called a blockchain.  A blockchain is a distributed, decentralized network.  You all know what a centralized network is where every node in the network is directly attached to a central hub.  Our online banking systems work like that.  Every transaction goes through a central hub.  A decentralized network might have several hubs scattered throughout the network.  This would be what you would imagine our fire department looks like with stations scattered throughout the city.  A distributed, decentralized network is slightly different from these.  With a distributed, decentralized network there are no hubs.  Every intersection in the network between two or more users is considered a node.  Each node has several neighbors.  A blockchain is a distributed, decentralized network of nodes.  The Bitcoin blockchain has over 11,000 nodes at the moment.

In Nakamoto’s design for Bitcoin, each node would have a computer running the Bitcoin blockchain program.  The program would do several things.  It would each a ledger of every transaction made anywhere on the network at any time from the beginning of the network until the present.  It would communicate with its neighbors.  A typical node might have five or six neighbors.  Remember, this is all running on the Internet so a cyber-neighbor on the Internet does not mean it is a physical neighbor.  The nearest neighbor for a node in New York could be Chicago, London or South Australia.  The time for a signal to travel around the world is a small fraction of a second.

distributed network

When some at node A gives a Bitcoin to someone at node B that is called a transaction.  A transaction would be written as “A gives B one Bitcoin”.  The program at node A tells its neighbors this transaction.  Let’s say its nearest neighbor is node C.  The program at C receives the message “A gives B one Bitcoin” and records it as a new transaction and marks it as “Pending”. It then checks all previous transactions to see if A really has enough Bitcoin to give one Bitcoin to B.  If it finds the current amount of Bitcoin at A is sufficient to pay B one Bitcoin it sends a message back to A and B and says “Transaction confirmed” meaning that transaction can proceed.  Node A and B record the confirmation and write “Transaction pending.  1 confirmation”. C then goes on to tell all of its neighbors about this new transaction.  Node C tells D, E, F, G, and H.  They, in turn, check their ledgers to confirm that the transaction is authentic and allowable and send back confirmations if they do.  The process continues until Node A and B have 1000 confirmations.  At that point the transaction is considered authentic and allowed to proceed.  “Pending” status is changed to “Confirmed.” The 1000 confirmations make the network very, very difficult to cheat.  You would have to get 1000 strangers whom you do not know in advance to collude with you in order to cheat the system.

The transactions continue until there are a sufficient number of transactions to fill a block.  A block is about 1 kilobyte of data. When that happens the block is attached to the previous block to continue the chain. Now, Satoshi Nakamoto realized that he would have to get people to maintain all of these nodes, with a computer and a large disk drive at each one.  He created a very unique method for doing that.  These people would be called “miners.” A Bitcoin miner had 1) to be motivated to do the work, and 2) be chosen at random so that no one could take over the system for themselves.  His solution was this: he would pay them (in Bitcoin) for doing the work, and, he would create a very difficult mathematical problem for people to solve.  The problem was so difficult that even with a super-fast computer the miner would take about ten minutes to solve the problem.  And, the solution would be totally random so that even smart, fast computers did not have an advantage over anyone else doing the same thing.  The problem was to guess the password for the next blockchain.  This would be a random thirty-character password that took even the fastest computer about ten minutes to guess and looked something like this: 00RasOd2FsM5Gsdfd88up8pUs5QdWss:426SD38E1a.

The miner that guessed the password correctly was paid 12 bitcoin and had the privilege of creating the next block and communication that to the network.  Twelve (12) bitcoin today is worth over $100,000 so there are many people who want to do mining.   There are a total of 21,000,000 bitcoin in the system.  There will never be any more than that.  16,800,000 have already been distributed and there is enough bitcoin to pay miners for the next 100 years.  In the year 2108, the miners will have to charge fees to do the work.

Bitcoin is just one cryptocurrency.  Since it was created in 2008, there have been many more cryptocurrencies created.  To date, there are over 1500 cryptocurrencies recorded.  Not all will survive.  Each one was designed to do something different from the others.  There are currencies which are just for real estate.  There is one just for contracts.  There are several for online gaming, sports gambling, international finance and so one.  Their creators hope that they become popular and successful.  Some will.  Some won’t.  The most popular ones today are Bitcoin, Ethereum, Litecoin, and Ripple.  To see the Bitcoin network in action take a look at bitlisten.com. Since all transactions are public, at this URL the programmer created a bubble for each transaction and displays the size of the transaction in the bubble as they appear.

So what’s the big deal about Bitcoin?  Why all the fuss? How to get Bitcoin? How to keep Bitcoin safely? What are bitcoin wallets? These and many more questions are subjects for future discussion.  You can read more about Bitcoin at bitcoinARL.com.

 

Someone Just Bought 250,000 Bitcoin ($2.5 Billion)

coindesk-bpi-chart
A little after one a.m. on January 31, 2018, Bitcoin hit bottom at $9647. After that, some interesting things began to happen.  
Screen Shot 20 2018-01-31 at 12.10.14 AM
There’s a fun website called BitListen which displays, in real time, every bitcoin trade as a soap bubble.  In the middle of each BitListen bubble is the amount of bitcoin that was traded.  With each trade, there is also a sound, much like wind chimes.  The pitch of each sound is relative to the size of the trade. If you or anyone you know is not convinced that bitcoin is alive and well send them over to Bitlisten.com.

Last night, while President Trump was giving his State of the Union Address, some unusual trading started happening.  Bitcoin had been falling for the past few days and most precipitously today.  By evening it was below $10,000 and by 10:00 pm EDT was hovering around $9800. Suddenly, on the BitListen screen appeared the largest bubble I’d ever seen.  It took up a quarter of the screen and read BTC 6209.02 Bitcoin!  That is sixty million dollars.  This bubble appeared with a deep — BONGGGG.  Was this the big sell off or an entry point for a big investor? 

Screen Shot 1 2018-01-30 at 11.15.19 PM
A 6209.84 Bitcoin (US$60,856,432) trade appeared on bitlisten.com as Bitcoin fell to $9800 earlier in the evening.  

BTC 6209.84 Bitcoin is $60,848,200.  That’s an enormous trade.  More astonishingly, almost as soon as that huge bubble drift off the top of the screen than another bubble appeared with an equal value.

Screen Shot 2 2018-01-30 at 11.16.54 PM
Another $61M trade appeared on the screen. The amount of Bitcoin represented by the bubble is written in the middle (B 6208)

Another $61M was traded.  Remember, every trade has a buyer and a seller.  Or, in this case, buyer and sellers.

Screen Shot 3 2018-01-30 at 11.29.04 PM
Trade after trade continued to appear for the next sixty minutes.

Another trade of an equal amount happened.

Screen Shot 4 2018-01-30 at 11.31.01 PM
Notice that the amount of Bitcoin with each of these enormous trades is slightly less than the trade before it if you can call four Bitcoin “slightly less”.  

Then another. Screen Shot 5 2018-01-30 at 11.31.53 PM.png

 

Then another. Screen Shot 6 2018-01-30 at 11.36.08 PM.png

As of this writing, I counted 40 such trades in the course of 45 minutes for 6200 Bitcoin or about $60,000,000.

Screen Shot 7 2018-01-30 at 11.37.15 PM.png Screen Shot 8 2018-01-30 at 11.39.08 PM.png Screen Shot 9 2018-01-30 at 11.41.54 PM.png Screen Shot 10 2018-01-30 at 11.44.32 PM.png

Screen Shot 11 2018-01-30 at 11.45.40 PM.png Screen Shot 12 2018-01-30 at 11.48.53 PM.png Screen Shot 13 2018-01-30 at 11.50.56 PM.png Screen Shot 14 2018-01-30 at 11.52.58 PM.png

Screen Shot 15 2018-01-30 at 11.55.18 PM.png Screen Shot 16 2018-01-30 at 11.58.36 PM.png Screen Shot 17 2018-01-31 at 12.01.07 AM.png Screen Shot 18 2018-01-31 at 12.06.09 AM.png

Screen Shot 19 2018-01-31 at 12.08.16 AM.png Screen Shot 20 2018-01-31 at 12.10.14 AM.png Screen Shot 21 2018-01-31 at 12.12.45 AM.png Screen Shot 22 2018-01-31 at 12.14.39 AM.png

Screen Shot 22 2018-01-31 at 12.14.39 AM.png Screen Shot 23 2018-01-31 at 12.16.35 AM.png Screen Shot 24 2018-01-31 at 12.18.46 AM.png Screen Shot 25 2018-01-31 at 12.21.11 AM.png

Screen Shot 26 2018-01-31 at 12.22.45 AM.png Screen Shot 27 2018-01-31 at 12.24.43 AM.png Screen Shot 28 2018-01-31 at 12.27.14 AM.png Screen Shot 29 2018-01-31 at 12.30.43 AM.png

Screen Shot 30 2018-01-31 at 12.32.44 AM.png Screen Shot 31 2018-01-31 at 12.35.57 AM.png Screen Shot 32 2018-01-31 at 12.37.18 AM.png Screen Shot 33 2018-01-31 at 12.38.21 AM.png

Screen Shot 34 2018-01-31 at 12.42.43 AM.png Screen Shot 35 2018-01-31 at 12.44.50 AM.png Screen Shot 36 2018-01-31 at 12.47.06 AM.png Screen Shot 37 2018-01-31 at 12.48.43 AM.png

Screen Shot 38 2018-01-31 at 12.51.39 AM.png Screen Shot 39 2018-01-31 at 12.59.14 AM.png Screen Shot 40 2018-01-31 at 1.05.07 AM.png

That was roughly $2.49 billion dollars spent buying Bitcoin in $60 million increments. What are we seeing?  It looks like a large exchange or brokerage preparing to trade bitcoin by stocking up so they can have a supply at the ready.  Getting in at a bottom means they will also earn money on the appreciation as well as the fees for trading.

 

 

Screen Shot 11 2018-01-30 at 11.45.40 PM.png

171030 The Inevitability of Bitcoin

distributed networkBitcoin is a cryptocurrency.  If the term is new to you, a cryptocurrency is a digital currency; virtual money.  It was the byproduct of another invention, blockchain.  Blockchain was invented by Satochi Nakamoto, an unknown inventor.  In 2009 he made the following announcement:

Announcing the first release of Bitcoin, a new electronic cash system that uses a peer-to-peer network to prevent double-spending. It’s completely decentralized with no server or central authority.  

Double-spending was the biggest problem for any electronic cash system.  If someone pays you online, how do you and your bank know that the payee didn’t already use all his money somewhere else?  You rely on your bank and the payee’s bank to ensure that the money hasn’t been double-spent.  It involves a lot of secrecy, electronic handshaking, passcodes, keys, locks, and accounting.  In the end, those systems aren’t very good.  There are often long delays, there is often theft, there is fraud and misdirected funds.  Blockchain is the technology that creates a decentralized network.  There is no central clearinghouse for the exchange of Bitcoin.  Bitcoin is the currency that is being exchanged.  We can go on and describe how it Bitcoin works in greater detail but suffice it to say over the past eight years Bitcoin has gained a huge following and spawned many other cryptocurrencies.

Before getting into all that, it’s important to ask “why?”  Why Bitcoin? Why now?

Bitcoin is inevitable.  At the beginning of the United States of America, when we had to create our own currency, we based our currency on gold. It was possible to trade paper and coin for gold.  Gold became impractical to use as everyday currency.  It was not easy to carry, divide or weigh.  For the next 250 years, paper and coin was the currency of choice.  Today most of our financial transactions are done with debit or credit cards.  Checks are quickly falling out of favor.  In fact, only 11% of people prefer cash as a method of payment.

Furthermore, more and more of our transactions are done online.  For those, we must use a digital form of payment.  In the very near future, a new payment requirement will become necessary — computer to computer payments.  Your computer will interact with the computer of a good or service without your direct involvement.  Those payments might be very, very small and/or very, very fast.  For example, you will go to a website where you pay to read what is there by the word.  A word might cost $0.0001324.  Your Lyft, Uber or Apple driverless car service gets directions and the payment from your smartphone.  You pay for groceries simply by bagging them and carrying them out of the store.  There are no cashiers.  Much of this will be micropayments and they will happen quickly, too quickly for us to be actively involved.  Nor would we want to be.  For this type of transaction, it will be necessary to have a cryptocurrency, one that can be divided into 1/100,000,000th of a coin if necessary.  Also, the cryptocurrency will have to be decentralized.  There is no time to send a message back to a central clearinghouse, wait for a response, and then send messages off to a couple of exchanges and two or more banks in order to keep up with the necessary bookkeeping.

Bitcoin does all of this with ease.  Until you have actually received or spent a bitcoin it is hard to imagine just how easy bitcoin is to use.  To keep bitcoin you use a bitcoin wallet.  Bitcoin is placed in the wallet by means of a public and private key.  To receive bitcoin, you would give the payee your bitcoin wallet public address.  Your address is part of the bitcoin blockchain.  Every single owner of bitcoin has a complete record of every bitcoin transaction, kept in the blockchain.  New transactions are not permitted until all of the modes in the bitcoin network surrounding the new transaction agree that it is a legitimate new transaction.  For a more detailed description of the blockchain technology and why it works, other entries cover that in great detail.

One of the first questions about bitcoin is “Isn’t bitcoin used by drug dealers and money launderers?”  Yes, it is.  That’s because it is totally anonymous, secure and fast.  But that is also why it is used by families sending money home to Venezuela and the Philippines.  That is why people suggested to the independence-seeking Catalonians who are now looking for a new currency to use Bitcoin.  The best part about Bitcoin — there are no fees.  There is no central government or governing body.  There is no clearinghouse or regulations, at least for now.  It would be very surprising if a country allowed bitcoin without imposing some sort of regulations or governance.  In fact, China has already barred some forms of cryptocurrency and announced they will be issuing regulations on Bitcoin soon.  Russia has already outlawed Bitcoin but then restated their intent to regulate it.  Russia will, however, be issuing CryptoRubles, a state-owned cryptocurrency.

There are 16,600,000 bitcoins in existence.  Some more will be issued as time goes on but the total will never exceed 21,00,000 bitcoins.  That makes them exceedingly rare when they have to be shared by the world’s 7.5 billion people.  On January 1, 2017, bitcoin was valued at a little over $600.  At the moment, bitcoin is $6150.  Estimates range from $6000 to $25,000 for the value of bitcoin by the end of 2018.  Estimates range from $0 to $1,000,000 for the value of bitcoin at some point in the future.

Technology requires that there be a cryptocurrency.  Paper and coin, which replaced gold nuggets, isn’t flexible enough to work with computerized systems.  When we use debit or credit cards over the internet we are practically using a digital currency.  The only difference is that the banks, the exchanges, and the clearinghouses that handle the digital transactions are all involved.  The only role the cards are playing is acting like the account numbers for the banks to keep in their ledgers.  Each of those players must keep the information secret, and take responsibility for its being genuine.  There are long delays; often days are set aside while transactions are proven, settled and cleared.  Technology in the near future will require fast, reliable, secure, anonymous transactions.  Blockchain technology promises to deliver all of that.  In fact, blockchain is so well liked and reliable that most of the Fortune 500 companies are already using blockchain to secure all sorts of networks from financial to legal to real estate.  Why not currencies, too?

If you want to get a sense of how popular bitcoin is already, check out bitlisten.com. There the programmer has made a bubble for each bitcoin transaction with the size of the bubble equal to the amount of bitcoin.  The tone played gets lower with the size of the transaction as well.  You’ll be surprised.  There are hundreds of transactions per minute. Bitcoin is inevitable and it’s here to stay.