A Beginners Guide to Bitcoin

Special ReportBy: Cathy Reisenwitz

If you're reading this guide, you must have asked yourself, “What the heck is Bitcoin?”

Well, I’ll tell you. But first, I’m going to answer the second question you may be asking yourself, “Who the heck is Cathy Reisenwitz and why does she feel qualified to write a beginner’s guide to Bitcoin?”

Well, I’ll be upfront with you. I’m a no-one, and I’m not qualified.

Well, I did speak at CPAC and the first Cryptocurrency Con about Bitcoin. And I had a column in Bitcoin Magazine for a minute. And I was published in VICE Motherboard about it.

But I’m not a developer, so if you ask any developer, I don’t know crap about Bitcoin. The problem for developers and everyone else is that no one (except for other developers) wants to read what developers write.

So that’s why journalists and commentators have to step up to take technologies with the potential to change the world and tell enough people about them to actually start to change the world.

But why do I write about Bitcoin? Because screw the Federal Reserve. Am I right? (Yes.)

I don’t remember how I became aware of bitcoin, but I do remember getting my first bit of it, and I remember researching it for the first time. But before I go into that, I want to back up a bit further.

I remember learning three things at about the same time...

First, I learned from Ron Paul how the Federal Reserve uses inflationary monetary policy to steal from wage earners. At the same time, I was reading Mises.org papers on experiments in various times and places with private currencies. Most fundamentally, I found Rothbard, who helped teach me the mechanism by which private property and free exchange create the conditions necessary to innovate, thereby creating new wealth and raising standards of living.

This was back in 2007-2009, and I’d never heard of Bitcoin. But even then, I knew the power to defeat the Fed — and all monopolistic, staid, regressive monetary policies — would ultimately be found in a free-market, competitive currency system.

So I’ll admit a bias right here and now. And it ticks some people off — especially bitcoin supporters. But I don’t care about bitcoin. If bitcoin is the best, great. I hope it wins. If it’s not, I hope it loses and a better currency takes its place.

What I care about is that the same power that makes markets function to make everyone richer — openness, competition, innovation — is allowed to work in currency as well.

I didn’t know anything about bitcoin when publisher Jeffrey Tucker called me to ask me to speak about it at this new conference he was planning. He’d given me some via video chat, but I’d lost my wallet key back when they were unrecoverable.

As I researched it, however, I began to realize that bitcoin was the first major step forward in currency in at least 100 years. I began to see bitcoiners as experimenters. They were sacrificing their money and time to find out how to build, distribute, and use a free-market money. And that was the subject of my talk.

It may seem weird to say it, but I believe it would be impossible to overstate the importance of the invention of money to prosperity. By making trade easier, currency fosters the innovation necessary to create wealth.

So it’s a pretty important thing to understand. And to learn about currencies, we have to formulate theories and test them.

There are two ways to run experiments with currencies.

First, governments can and do experiment with monetary policy. When it comes down to it, the leaders of the Weimar Republic were just running an experiment.

We’ve seen the consequences of this kind of experimentation. At the worst end, you have Germany, Chile, and Zimbabwe. Not far from that, you have the troubles with the euro, from riots in Greece to the money grab in Cyprus that prompted the latest Bitcoin boom.

Then you have what we’re seeing in America, which is the long, slow erosion of wealth and savings through a steady stream of monetary inflation.

Not only does inflation slowly eat away at individual wealth, but it also disincentivizes savings. And without savings, there’s nothing to invest. So then without real savings, investment requires more quantitative easing, which begets more inflation, and the cycle continues.

On the other hand, individuals can experiment with new currencies themselves. In this case, fewer experimenters lessens the fallout of a hypothesis not supported by the evidence. In addition, instead of creating victims like government experiments, everyone participating in these experiments is a volunteer.

This, in essence, is Bitcoin. And this is why we’re all here.

Okay, so that was a good bit of history. Now, on to the meat.

What the Heck is Bitcoin?

You might have noticed that I’ve been using bitcoin and Bitcoin. No, that’s not because my copy editor sucks. It’s because bitcoin and Bitcoin actually denote two different things.

Generally speaking — though not always — bitcoin refers to the currency, and Bitcoin refers to the blockchain.

The what?

Stay with me.

The blockchain is a series of connected computers. These computers record every bitcoin transaction. Kind of like how a website exists on a server or several servers, evidence of every bitcoin transaction exists on many computers.

If you’re interested in the technical details of how this works, you’ll need to consult a bitcoin miner or high-end tech geek.

The currency bitcoin exists on Bitcoin the blockchain. It can also exist on wallets and printed out in safes, but it is created on the blockchain.

New bitcoins enter into circulation at a predetermined rate, keeping inflation low and steady.

Okay, let’s get right to why all this matters, apart from sticking it to the Federal Reserve.

Bitcoin transactions are:

Fee-lessImmediateSecure

Fee-less: Unlike credit card processors and banks, holding bitcoin and sending it to people doesn’t cost you any money. That’s because the transactions are processed by computers called miners, which automatically get bitcoins as payment for processing bitcoin transactions. It’s a system set up to pay for itself.

Immediate: Transactions happen immediately. There’s no one to wait for.

Secure: As I wrote for Money & Tech :

Credit card transactions are slow, insecure, and error-prone. Since they were developed and before e-commerce was the norm, they have been clumsily retrofitted to work online.

Chargebacks are a huge problem for retailers. When a credit cardholder contacts their bank to initiate a refund, whether they changed their mind or were a victim of fraud, retailers don’t get paid for the items and also usually get stuck with an administration fee for processing the chargeback, which can range from $25 to $100 per occurrence.

LexisNexis describes this additional cost of fraud shouldered by merchants as the fraud multiplier. In 2013, the fraud multiplier increased, mainly driven by a spike in fraud happening online. On average, merchants pay a whopping $3.10 for each dollar of fraud losses incurred online. According to LexisNexis, online fraud represents merchants’ greatest liability, again because credit cards weren’t designed for this use.

Data security and theft-protection always come down to an arms race between service providers and thieves. Unfortunately, credit card companies are running with their feet bound.

One big disadvantage to credit cards is that responsibility for detecting and dealing with fraud becomes diffused amongst retailers, banks, and users. A recent snafu Tim Berners-Lee described in the Washington Post highlights the deleterious effects of this diffusion...

While planning a trip to Asia, Berners-Lee had three separate transactions preemptively flagged as fraudulent by his credit card company, despite three separate calls to the company assuring them they were not.

Many people took the Mt Gox debacle to mean that bitcoin is insecure. What happened with Mt Gox is much more akin to a bank robbery.

Mt Gox was an exchange where people bought and sold bitcoin for other currencies. There was a flaw in their security that they did not fix, and hackers exploited it. The flaw has nothing to do with whether bitcoin itself is secure.

The biggest threat to bitcoin’s security that we know of is a 51% attack, where people who own 51% of the bitcoin in existence would collude to heck over the other 49%. Colluding is tough to do, especially at that level, so most people in the know think the blockchain is pretty safe for now.

That doesn’t mean every exchange is safe. It’s on every bitcoin holder to do his or her due diligence to make sure the wallets and exchanges are trustworthy. That’s a blessing and a curse. There’s no FDIC or bailouts for bitcoin, so there’s no guarantee you’ll get your money back. But it’s a massive blessing as well. In the American banking system, reward is privatized, while risk is socialized.

You and I bought golden parachutes for the bankers who tanked AIG while millions of Americans lost their homes.

Not so with bitcoin.

Now, part of the reason — perhaps the whole reason — there’s no socialization of risk in the bitcoin banking ecosystem is because there really isn’t a bitcoin banking ecosystem.

There is, however, an opportunity. We could build it better, allowing banks to fail, allowing banks to charge the interest rates and lend to the people they think will be profitable. We could allow market signals, not political power transfers upwards, to build a banking system in which profits everyone, not just the people at the top.

I know, I’m a dreamer.

So that’s the overview. Let’s move on to some FAQs about bitcoin.

Is Bitcoin Anonymous?

No.

Bitcoin is a lot like cash online, except for the technology that makes it work. The blockchain is a public ledger of every single transaction made on it. If you send bitcoin to someone online, the sender and receiver's public identifiers are recorded, along with the amount.

It’s kind of the most transparent and therefore least anonymous method of payment possible.

It’s kind of the most transparent and therefore least anonymous method of payment possible.

However, you can make bitcoin transactions anonymous. On the low-tech end, you can hand your printed out bitcoin to someone in person or through the mail. If you want to get high-tech, you’ve got a technology called tumblers, which anonymizes your wallet address so it (theoretically) can’t be traced back to you or your IP address.

What is Bitcoin Backed By?

Nothing.

Guess what the U.S. dollar is backed by? The U.S. government.

What does that mean? Well, it means if they want to stop using it and replace it with someone else, they can. It means they can debase its value at will. It means its value is determined by the U.S. government’s decisions.

It doesn’t mean you are guaranteed to be able to spend your dollars for what you paid for them. It doesn’t mean you can change out your dollars for gold or anything else you’d rather have.

What About the Price?

Bitcoin is a currency, not an investment. Stop worrying about the price.

What Is It Being Used For?

Drugs.

Okay, some other stuff too. Like products on Overstock.com, Microsoft products, TIME Inc. magazine subscriptions, etc.

There’s also a really amazing charity called Sean’s Outpost that is entirely bitcoin-funded.

What’s Next?

Smart Property

Credit scores are an error-prone and inefficient way to calculate risk. This system leaves millions of people out of opportunities like renting an apartment or buying a car.

A mistake on a credit report can effectively lock someone out of the middle class, as getting a legal job generally requires a permanent residence and a vehicle.

Smart property has the potential to make it easier for folks with bad credit to gain access to the bare necessities to work toward entry to the middle class, and with less risk or burden to lenders and rental agencies than under the current system.

The fact that every transaction is recorded means that in a mostly bitcoin economy, accurately estimating risk level could be near zero. Not only that, but recouping your losses could also be much easier.

Smart property makes it possible for locks to change automatically the moment a renter violates his or her lease agreement and makes it possible for a car to refuse to start the moment a payment is late.

Most importantly, it does so on a trustless basis. Because the Bitcoin protocol distributes transactions across the web, it offers transactions in which it’s nearly impossible to falsify who owns what and why.

With smart contracts, the consequences for violating the agreement are implemented automatically, with no need for human judgment. Essentially, it doesn’t matter that the landlord can’t trust a renter to pay. And it doesn’t matter that a renter can’t trust a landlord not to kick her out without good reason.

Both parties are fully aware of both the terms of the contract and the immediate consequences of violation. The promise of this innovation should be clear to anyone, but it will impact people who have traditionally suffered from a paucity of trust the most.

Other current uses of the blockchain include crowd-funding, micro-finance, and micro-charity. The fee-less structure of the blockchain lends itself to cost-effective transfers of a tiny amount of money online, something that has never been feasible before.

Altcoins

Bitcoin is just the first major online currency. There are other coins, some of which may become contenders for preeminence.

Institutions

For Bitcoin to become as widely used as the dollar, it has to be as useful. While it has many advantages over dollars, there are some serious limitations to what you can easily do with it.

First, you still cannot use it for most purchases, even online.

Getting retailers to start taking Bitcoin will require demand from customers. One thing that would help speed that along is to transfer risk from buyers to sellers.

Right now, credit card companies effectively charge retailers for the right to take credit card transactions as payment. And when something goes wrong and a credit card company has to refund the buyer, it charges the seller, first for the item and then for the transaction.

But when something goes wrong between buyers and sellers with Bitcoin, the buyer is out of luck, which discourages use. Setting up a bank or some other institution to mediate misunderstandings and conflict, better and more streamlined for the Internet, would make bitcoin more attractive to users and therefore to retailers, who are being crushed by credit card fees and chargebacks.

The other big Bitcoin institution we needs is a reputable bitcoin lender. That’s what’s required to buy houses and cars in bitcoin.

What Bitcoin Means for Self-Governance

I’m boring myself here with these bitcoin basics. Here’s what gets me hot and bothered about bitcoin...

Using bitcoin instead of a state-backed currency is telling governments to go fly a kite.

I honestly don’t care how it works. All you need to know about bitcoin is that it’s saying “heck, no” to inflationary monetary policy. It’s saying “heck, no” to wage theft. It’s saying “heck, no” to bailout-backed golden parachutes for bankers, to lending laws that incentivize predatory lending, and to redlining that deprived millions of black Americans from access to the middle class.

It’s saying “heck, no” to a government that felt comfortable stealing people’s gold and giving them crappy pieces of paper in return. It’s saying “heck, no” to dictators in developing nations who debase currency in a futile attempt to screw their subjects and save their own asses.

Here’s the deal: Decentralized, peer-to-peer online currency makes too much sense to not eventually become the default method of payment. The question isn’t if, it’s when. So it will behoove you to become familiar with making payments online with crypto.

And as more people stop depending on the state for their currency, it’ll become even harder for the state to hurt people by messing with their currencies. Win, win, win.

So how do you get started?

Buy some Bitcoin!

Coindesk has a great guide I borrowed heavily from here. The easiest way to do purchase is to buy from an exchange. This guide will focus on U.S.-based buyers who want to use a credit or debit card to buy.

Exchanges that will let you do this include Coinbase, Circle, Trucoin, and coin.mx.

If you don’t have a credit card, you can use a service to get connected to someone who will meet up with you to sell you Bitcoin with cash. You can also use  expresscoin to buy Bitcoin with money orders, personal checks, and wire transfers.

Now, most online exchanges will let you store your bitcoins with them. I would not recommend this. Exchanges are more likely to get hacked, looking back at recent memory. Get yourself a wallet to store your bitcoin.

I use and recommend blockchain.info .

Getting a wallet is like any other online service. Just sign up and choose a username and a password. You’ll get an address, which people can use to send you Bitcoin and which you’ll use to move Bitcoin from the exchange, where you buy it, to your wallet, where you store it.

And that's pretty much how it works.

Pretty simple, really.

Cathy Reisenwitz is a saleslady at Capterra and a D.C.-based writer. She is Editor-in-Chief of Sex and the Sale , and her writing has appeared in The Week, Forbes, the Chicago Tribune , The Daily Beast , VICE Motherboard , Reason magazine, Talking Points Memo , and other publications. She has been quoted by the New York Times Magazine and has been a columnist at Townhall.com and Bitcoin Magazine . Her media appearances include Fox News and Al Jazeera America. She serves on the Board of Advisors for the Center for a Stateless Society. Cathy is also a regular contributor to LibertyBriefing.com .

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