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 Bitcoins
 Bitcoins - an introduction
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James R. Davis
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Posted - 02/02/2014 :  2:18 PM Follow poster on Twitter  Join poster on Facebook as Friend                        Like
You can learn about Bitcoins and even create a bitcoin wallet by clicking on this image ->


There is, of course, no obligation involved, nor is there a cost.

If you setup a wallet online at Coinbase, you can virtually immediately begin using it to buy/transfer/sell bitcoins.

There are several bitcoin wallet programs that can create a wallet on your personal computer if you wish to do that instead of use an online wallet. (Actually, you can have as many wallets as you wish located on-line or on your own PCs.)

If you decide to have a wallet on your PC instead of on-line, it will take a solid 24 HOURS of computer and internet time before that wallet can be used, and not incidentally about 20 GIGABYTES of disk space on your system!

Anyway, this is the first message in this forum about Bitcoins and I'm hoping that if there is interest, we can have a thorough and educational discussion about the subject.

Let me know your interest.

James R. Davis
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Posted - 02/02/2014 :  2:50 PM Follow poster on Twitter  Join poster on Facebook as Friend  
The first question I was asked: What is a bitcoin worth?

Bitcoins are worth a market based price in virtually any currency around the world (just like gold is).

For example, the value of 1 bitcoin (BTC) in US dollars is $820 today at about 2:30 central time. A single BTC is worth 897 Canadian dollars, and it is worth about 605 Euros.

But bitcoins are not physical things - they are digital. So they are used to buy or sell, or to transfer between wallets, in very small decimal pieces. For example, let's say I wanted to buy something for $1.92 at a store that accepts bitcoins. As of this moment, I could pay that store 0.00234635 BTC instead of using US currency.

I can buy or sell bitcoins using virtually any other form of currency. For example, I could buy $100 worth of bitcoins by paying $100 (US) and end up having 0.122 BTC in my wallet as a result.

In other words, 'a bitcoin' (1 BTC) is only a convenient reference to establish value, it is NOT the smallest 'denomination' (like a 'penny').
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scottrnelson
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Posted - 02/02/2014 :  5:45 PM
The question I would ask: Are bitcoins safe?

I've read a lot about various ways they can be stolen and other risks of using them.

http://rt.com/usa/bloomberg-anchor-...bitcoin-747/
http://www.dailytech.com/article.aspx?newsid=21877
http://arstechnica.com/tech-policy/...s-questions/
http://www.dailytech.com/Inside+the...cle21942.htm
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Mikeydude
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Posted - 02/02/2014 :  7:50 PM
I'm definitely interested in learning more about them. I'll be watching closely.
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James R. Davis
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Posted - 02/02/2014 :  8:43 PM Follow poster on Twitter  Join poster on Facebook as Friend  
Well, some of you probably recognize that safety is rather a big thing, to me. So, although it is impossible for any currency to be 'risk free', bitcoins have some terrific new capabilities that make possessing, trading, and otherwise using them VERY, VERY safe indeed.

I mean, if you were to carry $1,000 in cash on your person, that set of greenbacks would be vulnerable to loss. If you wrote your pin number on your credit or debit card, your money would be vulnerable to loss. So you don't do that kind of thing - and certainly don't have to.

Bitcoins are 'stored' as electronic recordings. But, unlike your credit balances, those recordings are on many thousands of different computers at the same time - in a network.

Your 'bitcoin wallet(s)' contain identification information that is used to gain access to your bitcoin balance in the network - but only part of the identification information. The other part is some form of password (or passphrase). With that password, you can manage all aspects of your account - assuming your can also gain access to that account. And to do that, if dealing with an on-line wallet, you also need your user ID (usually your email address).

Sounds pretty normal, right? Well, let's go a little farther.

You will recall that I earlier said that you could have either on-line or on your PC wallets (or both). And you will have picked up that I STRONGLY favor on-line bitcoin wallets. There are several reasons for that which I'll get into shortly.

First, some more fundamentals.

Every wallet has a UNIQUE ID that is assigned when the wallet is created.

Remember that 20 gigabyte database that was created on your computer when you created a bitcoin wallet on your PC? That is used to synchronize your PC with the bitcoin network (where thousands of other computers have THE SAME database. Each and every bitcoin transaction (buy/sell/transfer) is recorded in each and every one of those thousands of computers in those databases.

Now let's say that your bitcoin wallet that is domiciled on your PC is lost, or your computer crashes. If you have your wallet ID, when you fix that computer or replace it, you can rebuild your wallet COMPLETELY using a recover wallet (from the bitcoin network) program. To be able to do that you must BACKUP your bitcoin wallet - ONCE (and I mean, you need to back it up only one time, ever - even before you ever put any value into it). That backup can be located on your computer (DUMB!!), an external hard drive (almost as dumb), on a thumb drive (dumb), or on a printed piece of paper (BRILLIANT!).

Of course the 20 gigs are not backed up - what's the point of that when it is already duplicated on thousands of other computers all over the world?

Rather, the backup is merely a single printed page (or even a hand written document) that contains a unique 72 letter 'ROOT CODE' that absolutely identifies the wallet.

You take that piece of paper and put it into your safe or any other safe place - just in case.

The recovery of your bitcoin wallet is accomplished by telling the recovery program which wallet you want to recover along with that 72 character string.

Now what I've just described is the safety and security capabilities of a wonderful bitcoin wallet program called ARMORY. It is free and relatively new - and works great.

But please note that if anybody else gets his hands on that 72 character string (and your wallet ID), he can do anything with it that you can do - including transferring the entire contents of your wallet somewhere else and then you have lost it. In case you haven't figured it out already, that QR code shown on the gift certificate that was shown on TV contains the root key information (72 character string) - it is a backup of a bitcoin wallet - and that explains why the account contents were so easily stolen. A backup belongs in a safe or other safe place, not out in a publicly available place.

What about hackers, or not so honest friends or relatives, that gain access to your computer? Well, first, of course, now you see why backing up on your system, an external hard drive, or a thumb drive is dumb, right? But one more very, very positive aspect of the ARMORY bitcoin wallet program is that it strongly encrypts the databases on your computer (most others do not).

And one advantage that keeping your bitcoin wallet on your PC provides is essentially NO FEES for your transactions.

There are other problems with a bitcoin wallet located on your PC. Principal among those problems is difficulty in buying and selling bitcoins - not a small problem, right?

Still, while I have a couple of on-line wallets, I also have one on my home computer as well - and I use it for 'petty cash' (in the form of bitcoins).

Now to on-line wallets.

There are many sites that provide you with bitcoin wallets on their sites. Some are trivially different than a wallet on your own PC, while others provide an enormous set of functions that you couldn't possibly do for yourself - like provide you direct access to bitcoin exchanges (so that you can buy and sell bitcoins easily). Some provide bank level encryption. Some provide backups that are more than 95% OFF SITE. One even provides a double authentication mechanism to assure that the userid and password you use is actually being used by *YOU*.

On-line bitcoin wallet providers charge a fee for your transactions, but those fees are quite low.

The on-line bitcoin wallet provider I elected to use is called CoinBase. (Located at coinbase.com). EVERY interaction with that site is secure in that it uses https rather than http urls.

This provider is quite large, and obviously professional in every way. It, has some of the largest investment bankers I know as owners. It provides the ability to buy and sell bitcoins in addition to transferring them. And unlike any other on-line bitcoin wallet site that I know about, allows you to buy bitcoins INSTANTLY with a VISA CREDIT CARD (only - no other credit cards, and NO DEBIT CARDS). It connects (like PayPal) your on-line wallet with your bank checking account so that you can use your bank account to buy and sell bitcoins.

And this company provides a double authentication program before it will execute any buy, sell, or transfer instructions from you. The way they implemented it was by use of your phone (you can designate more than one). After entering your transaction instructions, the site then calls your phone and provides you with a seven digit code (a different code each time it calls) that you must then enter into your computer dialog with the site. Without that code, the transaction is cancelled.

Foolproof? Of course not. Your girlfriend looking over your shoulder as you show her how easy it is to use your on-line bitcoin wallet? (Just one more dumb thing you might do.)

Anyway, this has been a long answer to Scott's question. Good question and the urls he provided were informative, but they were posted in June of 2011 and it's now February of 2014. A lot about bitcoins has improved as I hope this message demonstrates. One way to recognize that is that when those bitcoin problem messages were posted each bitcoin was worth about $20. Each bitcoin is now worth over $800. If you had purchased $100 worth of bitcoins in June of 2011 and did nothing but leave them in your wallet, those bitcoins would be worth $4,000 today. Seems to me a lot of money is chasing this new currency.
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scottrnelson
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Posted - 02/03/2014 :  8:54 AM
Thanks for educating me on this subject.
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James R. Davis
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Posted - 02/03/2014 :  11:02 AM Follow poster on Twitter  Join poster on Facebook as Friend  
Bitcoins is not a small subject - some economists are devoting their lives to understanding it. Investors (and speculators) see them as being more exciting and roughly equivalent to owning physical gold.

Some governments have been studying the possibility of becoming 'cashless' societies where ONLY digital currency exists. Bitcoin already exists. So what's the difference between digital US dollars, for example, and bitcoins?

How about this? For many months the Federal Reserve has been CREATING digital US dollars at the rate of $85 Billion dollars per month. That makes the value of every US dollar worth less each month relative to all other currencies. That's called INFLATION. That's right, GOVERNMENTS MANAGE the value of their currencies. Those currencies by the 'full faith and credit' of their governments.

Bitcoins are NOT under the control of any governments or central banks. Their value is established by markets and their availability (existence) is established by the bitcoin network, not governments or central banks.

Each bitcoin is unique. It has a serial number and a history maintained by that network. There are 12.349 million bitcoins in existence at this moment. New bitcoins are being created all the time by 'miners' (computers on the network) that are essentially grouped together to form a huge super computer that generates the solution to an enormously complex calculation associated with that bitcoin's serial number. The computer cycles required to generate a single bitcoin that meets the requirements of the network are so large that the cost of the energy used by the computers to generate that solution is a significant portion of the value of the created bitcoin. In other words, a large portion of the value of bitcoins is the cost to create them and that is why the 'miners' create them - to end up owning those new bitcoins.

To give you a sense of it, (but not an accurate one), your PC, if it ran 24/7 doing nothing but working that computations of that bitcoin creation algorithm would take YEARS to create just ONE bitcoin. Imagine the cost of electricity you paid to operate that PC (and to air conditioning in your house to dispel the heat it generated) and you see where the 'intrinsic value' of that ONE bitcoin you would then own came from.

Actually, that algorithm is not used to calculate an answer for one bitcoin's creation. Instead, it attempts to find as many solutions to a difficult problem as it can, as quickly as possible, while thousands of other computers are doing the same thing. These computers are all trying to build a 'block' of answers for the next available block in a chain of blocks where the previous block was found to have 'won' the effort of having the longest string of correct solutions in the shortest amount of time. The 'winner' of that effort becomes the owner of FIFTY (50) bitcoins. There are thousands of systems, almost all of them in associations, working on the algorithm at the same time. Naturally, all but one of them 'fails'.

It turns out that about 9 successful blocks are created per hour.

The algorithm is made to create 10,500,000 bitcoins in the first year, then it increases the difficulty of solving (thus creating) blocks so that only half as many will be created in the next four years, and that halving occurs again each four years so that by the year 2040 there will be no more than 21,000,000 bitcoins.

You probably already twigged to this, but in case you didn't ... every time the US prints a dollar (or the Federal Reserve adds billions of dollars to the money supply), the US dollar inflates (is worth less) AND bitcoins deflate (are worth MORE).

Further, the algorithm used to create bitcoins increases in complexity as the number of bitcoins in existence increases and when a certain number of bitcoins finally exists, NO MORE CAN BE CREATED.

Which means that bitcoins are self-limiting in terms of inflation.

Indeed, a large portion of the value of bitcoins is the result of DEFLATION rather than inflation. That is, by definition, if each bitcoin increases in value, it can buy more than the same coin could in previous times - and the things that bitcoins can buy includes currencies like US dollars (or any others).

The number of bitcoins does not just increase over time until that limit is reached. Bitcoins cease to exist as well. When a bitcoin wallet that contains bitcoins is lost or destroyed, if it cannot be recovered via a backup, those bitcoins are lost forever! It is impossible to regenerate lost bitcoins.

So what about market volatility?

I've mentioned that in June of 2011 a bitcoin was worth about $20 and now that same (actually, any) bitcoin is worth about $800. Indeed, in December of last year a bitcoin was worth about $1,200!! Obviously there is market volatility.

Here is a chart that shows the value of a bitcoin over just the past 6 months.



This chart shows the value of bitcoins traded on a single exchange (BitStamp) during that 6 months in candlestick format. Each green mark shows an increased value for the day and each red one shows a decrease. Further, please notice that the value axis is logarithmic instead of linear to account for the fact that a $10 change in price for something that is trading at $100 means much more than a $10 price change in something that is trading at $1,000, for example.

Notice that I added a 50 day moving average line to the chart to show what the closing price has done over time.

From the chart you can see that in October of last year there was a significant down day and that the closing price (about $150) penetrated that 50 day moving average. That is a classic BUY signal to traders, and the result was a rapid increase of price. Within a couple of weeks the growth rate in price was clearly speculative (because it was above the 50 day moving average) and grew to a point in December when the price had reached about $1,200 per bitcoin.

There then began a sell off that dropped the price until it again fell below the 50 day moving average (a BUY signal to traders). Since then, the price has gradually increased but stayed VERY CLOSE to that 50 day moving average. In other words, from a trader's point of view, the price remained reasonable without strong buy or sell signals.

It should be understood that the sell off during the month of December was NOT A MARKET CRASH!! It was a CORRECTION that was easily anticipated by anyone watching that market.

Anyway, this message was intended to broaden your understanding of bitcoins, not an attempt to teach charting techniques used by investors.

OH! Another difference between bitcoins and digital US dollars is that bitcoins are 'owned' by wallets (in other words, anonymously), so that they can be transferred from wallet to wallet just as anonymously. And, so far, no government can track those transfers (or TAX THEM!).
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scottrnelson
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Posted - 02/04/2014 :  10:59 AM
I'm still not understanding how a person can have $20 worth of an $800 bitcoin. If I have the information to use $20 worth of it, how am I prevented from getting the whole $800 of that bitcoin?

And a second, different question - how does one get hold of the software to generate new bitcoins? I see all these computers around here sitting idle nights and weekends and start wondering if they could make a few bucks for the company when they're not being used for their regular tasks.
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James R. Davis
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Posted - 02/04/2014 :  11:59 AM Follow poster on Twitter  Join poster on Facebook as Friend  
Scott,

Rather than another long - perhaps tedious - explanation, this time I'll try for simple clarity.

Bitcoins are kept in bitcoin wallets. That is, your wallet contains a certain amount of value as measured in bitcoins (BTC). You can buy or sell or transfer that value in increments of 8 decimal points. The bitcoin networks keeps track of those digital coins, not you.

So, for example, a particular wallet might contain 10.02381 BTC of value. If you transferred 1.01 BTC from that wallet to some other wallet, the first wallet would end up with 9.01381 BTCs in it and the second wallet would have 1.01 BTCs in it.

As to your second question about bitcoin mining software ...

Don't bother.

The way mining works, as I clumsily explained earlier, is that throughout the day (24/7) the bitcoin network creates a new 'block' containing 50 NOT YET FUNCTIONAL BITCOINS. Each of those bitcoins is assigned a random (but unique) 128 bit identifier that mining software runs an exquisitely difficult algorithm against trying to find a solution. There are LOTS of different solutions!!

Each time one is found, it is added to that block along with who found it and how long it took to find. The difficulty level of the algorithm used for the solution (that is, how hard it is to solve) is also part of the coin stored in the block. There might be hundreds of different valid solutions at one level of difficulty but only dozens at a more difficult level. Each miner uses another unique and randomly generated 'seed' as input to its solving effort.

Though the difficulty involved (computer floating point cycles) is almost beyond comprehension, the effort to verify a correct solution is trivial. So, when a bitcoin is used in any way, the bitcoin network is able to determine that the bitcoin is valid almost instantly.

Immediately after the NEXT block is generated (about every 10 minutes), the current block is looked at to see which miner contributed the most solutions in the shortest amount of time. THAT ONE MINER [this could be an association of miners - an organization that then disperses its won bitcoins to its members based on how much work those individuals contributed] is then given those 50 bitcoins (in the first four years - 2009 to 2012 - it was 50, for each four years that follow the number of bitcoins awarded is cut in half so that as of 2013 the number of bitcoins won by a miner is only 25) as a reward for his efforts and all other miners abandon their efforts to find solutions to the current block and start work on that new one. The current block is marked as valid and added to the string of valid bitcoin blocks (that 20 gigabyte database shared throughout the network). There are now 284,154 valid blocks in the database containing 12.354 million valid coins.

Now, finally, to answer the question beyond "Don't bother") ...

To earn bitcoins, a miner must create solutions VERY, VERY FAST. Your computer is NOT FAST ENOUGH to compete. To begin with, some PCs did compete (they have floating point processors in them) , but it was found that graphic cards were built with extremely fast floating point processors on them (called Graphic Processor Units or GPUs) and that they could be used for bitcoin mining. So, soon, it was realized that miners who 'merely' had CPUs working on solutions never won any bitcoins as miners who used GPUs created more solutions, faster.

Then new bitcoin mining devices were created (first as plugin cards, then as standalone devices connected via USB) that contained multiple processors that were specifically designed to solve bitcoin mining problems. Those miners using GPUs quickly became also rans.

Some miners spend many thousands of dollars for their mining equipment. Many are finding that mining is not only hard to do, it might not pay enough to be worth it - as new and more powerful mining equipment comes on-line, that bitmining machine they just paid for suddenly is no longer competitive.



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Magnawing
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Posted - 02/04/2014 :  12:22 PM Follow poster on Twitter
So, if I understand this correctly, BitCoins, in manner of trade, are very similar to traditional Stocks and the BitCoin exchanges are similar to various Stock Markets around the world? You can, and many including myself do, own partial shares of corporate stocks.
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James R. Davis
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Posted - 02/04/2014 :  12:37 PM Follow poster on Twitter  Join poster on Facebook as Friend  
That is correct. There are bitcoin exchanges all over the world. You can trade bitcoins just like stock. But unlike stocks, you can also spend bitcoins like cash with those merchants that accept bitcoins. Also, unlike stocks, all bitcoins are the same.

Interesting plays exist as a result.

For example, you might buy some number of bitcoins using US dollars at one exchange, transfer those bitcoins to another exchange that trades in Euros, then sell the bitcoins for Euros. This then becomes a currency play.

To begin trading an account on most exchanges is no more difficult than transferring bitcoins to it. In other words, one does NOT have to wire transfer US dollars to an exchange in Europe and pay fees to convert those dollars to Euros before you can trade. Just click on your wallet screen to send the exchange bitcoins - and when you sell them on that exchange, you have Euros in your account at the exchange.

The two largest bitcoin exchanges are Bitstamp (https://www.bitstamp.net) and Mt. Gox (https://mtgox.com).

Bitstamp is my preference and is actually located in the UK while Mt. Gox was one of the first exchanges and is actually located in Japan.

During the last 30 days, Bitstamp traded more than 418,000 bitcoins with a value of more than $346,000,000 while Mt. Gox traded more than 260,000 bitcoins worth more than $248,000,000.
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James R. Davis
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Posted - 02/04/2014 :  1:18 PM Follow poster on Twitter  Join poster on Facebook as Friend  
Hmmmm I think a little more is needed in the form of concepts here.

There are only three ways to obtain bitcoins (other than stealing them):
  • You BUY them using some other form of currency - like US dollars,
  • You CREATE them via mining (no longer a realistic or economic method for most), or
  • They are GIVEN to you.


In order to buy bitcoins, you exchange another form of currency for them and you typically do that on an EXCHANGE like Bitstamp (or by using my absolute favorite on-line wallet, Coinbase).

Beware that there are ways to buy bitcoins from individuals and those individuals might be crooks or otherwise dangerous people! I've seen ads by 'dealers' in Houston, for example, who will sell bitcoins for CASH - and arrange for a meeting time and place (usually YOUR BANK) for the exchange. So, are you going to go to your bank and withdraw $80,000 in cash in order to pay for the 100 bitcoins the dealer is going to provide? Those bitcoins are REAL bitcoins and the transaction just might be otherwise legit, but would you do that?

How about that dealer who is willing to buy your bitcoins for cash? Where do you think that $80,000, or $500,000, or whatever, cash came from? And then you probably will deposit that cash into your bank account. Hmmmm. The IRS is notified of any bank transaction in excess of $10,000. Do you want to explain how it is that you knew nothing about the laundering of drug money?

Stick to the exchanges!!!!
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James R. Davis
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Posted - 02/04/2014 :  2:09 PM Follow poster on Twitter  Join poster on Facebook as Friend  
Am I the only person here that has any experience with bitcoins?

For the record, I'm NOT suggesting that you get involved - that's an investment (more or less) decision of yours to make. Like any investment, there is a risk of loss involved.

I will say, however, that if you do get involved, do it in a learning mode! That is, create an on-line wallet. Put a small amount of money into your account and then buy some small amount of bitcoins (like $100). Create a bitcoin wallet on your PC and transfer some small amount of bitcoins to it from your on-line wallet - like 0.006 BTC. That will result in an almost instant transfer of that tiny fraction of a bitcoin (at current rates about $5 worth) into your PC wallet and out of your on-line wallet.

Get familiar with the wallet capabilities and see what fees, if any, are involved. If all goes well, you are on your way to becoming knowledgeable - and you've risked almost nothing doing it.

From your on-line wallet, sell a fraction of a bitcoin (using Coinbase, you will be shown the dollar value of that transaction before you actually execute it). See how long it takes for the US currency to get to your bank account.

In other words, PLAY while you learn.

When you are confident that you know what you're doing, create an account at an exchange (or simply stay on Coinbase and buy and sell there) and do your thing. Or, do what most people do - buy some bitcoins with your on-line wallet and then do nothing but watch it as its value (in US dollars) changes with time. I.e., invest in bitcoins and sell them whenever you want to to lock in a profit (or limit a loss), or when you need US dollars.
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rayg50
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Posted - 02/05/2014 :  6:02 AM
quote:
Am I the only person here that has any experience with bitcoins?
I had heard the term but never really read anything about it. Thank you for the introduction. I have a couple of questions. I'll see if I can do some reading to answer them but will post one.

Let's say only one bitcoin existed. You originally bought it for 20. I now buy it for 800 from you. You transfer the 800 to your bank account. What now backs my bitcoin? If I wanted to cash it in, short of finding a buyer, how would I be able to get currency for it?


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scottrnelson
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Posted - 02/05/2014 :  8:23 AM
quote:
Originally posted by James R. Davis

Am I the only person here that has any experience with bitcoins?
That is quite likely the case.

I find the concept interesting, but I tend to stick with investments that I know and trust. Money and financial dealings is NOT one of my interests. It is just a way for me to afford motorcycles and to be able to ride them.
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James R. Davis
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Posted - 02/05/2014 :  10:05 AM Follow poster on Twitter  Join poster on Facebook as Friend  
quote:
Let's say only one bitcoin existed. You originally bought it for 20. I now buy it for 800 from you. You transfer the 800 to your bank account. What now backs my bitcoin? If I wanted to cash it in, short of finding a buyer, how would I be able to get currency for it?




Interesting question.

That bitcoin that I bought for $20 had a value of $20 - by definition - only because someone (me) was willing to buy it for $20 at the time. It is valued by the market, not by some other backing or intrinsic value. You can't eat it or make love with it or melt it and convert it into a circuit board. But 'buying' something is often done with something other than currency, so, for example, if someone is willing to trade (barter) a moped for a bitcoin, then it would be clear that a bitcoin was worth a moped, at that time - and then you sell the moped for some other currency in order to stick that into your bank.

That bitcoin was worth $800 when you bought it because there was someone (you) willing to pay $800 for it at the time.

In all the various bitcoin exchanges that exist in the world, potential buyers exist who have placed 'bids' (orders to buy) at a certain price while there are potential sellers who have placed 'asks' (order to sell) at a certain price. When a bid and an ask order exist at the same price, they are executed and the coin ownership is exchanged.

Until there is an actual sale, the highest 'bid price' that exists in the market is the current market value quoted to the world.

What something is worth to a buyer is determined by its utility and its rarity. So if there was only one bitcoin in the world, and there could never be another, it would be one of the rarest things on earth and its worth (to a collector, for example) might be a billion dollars, or nothing at all. Bit coins can not be created after there are 21 million of them (in about the year 2040). As there are about 12 million of them now, and the market values each at about $800, it should be clear that if there were more of them, the market would value each to be worth less than $800. That's called inflation. That's what's happening to US dollars. That's also why bitcoins were designed so that inflation cannot happen to them by absolutely curtailing their 'manufacture'.

And, with 12 million coins in existence, owned by hundreds of thousands of people, there are always bitcoins up for sale and people who want to buy them - and why a bitcoin exchange can work. That is, there is a 'market depth' that assures virtually instant exchange ability. This is a wonderful example of the heath of the market and how confident an investor can be that it is liquid (ease of buying or selling).

Here is a chart of the market depth at the Bitstamp exchange at this moment in time:



The best bid price is $803 per bitcoin while the best ask price is $805 per bitcoin. Only when a potential buyer increases his bid to $805, or when an owner lowers his ask price to $803, will a bitcoin be guaranteed sold.

From the charts you can see that there are about 13,000 orders on the books to buy bitcoins at prices from $560 to $803 per bitcoin, and there are about the same number of orders on the books to sell bitcoins at prices from $805 to $1,045 per bitcoin. You can also see that there are over 2,000 bitcoins that are being offered for sale at an average price of $820.08 each and offers to buy about 2,500 bitcoins at prices from $787.92 to $803 each.

Note that there is significant interest (by sellers) to get $1,000 per bitcoin as the number of bitcoins offered for sale at that price is about 2,000. These are people who bought bitcoins at some lower price than $805 and who are simply holding them until they reach $1,000 each, then are willing to sell them (and MUST so long as their orders are still on the books) for a nice profit.

That's how markets work and how the value of each bitcoin is established - by the market.
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James R. Davis
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Posted - 02/07/2014 :  10:28 AM Follow poster on Twitter  Join poster on Facebook as Friend  
Just in case you think that the bitcoin market is in any way 'stable' (lacks volatility), see how quickly and how far prices can change in just one day.

Last night, around midnight central time, a major sell off occurred which happened with huge volume and where the price of a bitcoin fell from about $780 to about $680 in 8 hours involving a volume of about 40,000 bitcoins (at Bitstamp). Over the next 7 hours the price recovered to about $730 per bitcoin (again, on the Bitstamp exchange). [It is now $755.] Similar movements happened on the other bitcoin exchanges as well, of course.




What does that mean? Well, I'm not a stock analyst, though I have owned a seat on a commodity exchange and traded sugar, silver, copper, and cocoa from inside the pits on a daily basis, so I do have some understanding of commodities markets. So I'll just tell you what it means to me and let you decide for yourself what it means to you.

For commodities, there are essentially three kinds of people who buy and sell on the markets:
  • Investors - who take longer term positions,
  • Speculators (traders) - who take shorter term position, and
  • Hedge players (farmers, for example) - who lock in future values to safeguard (hedge) against market swings to protect their livelihood).

Since there is very limited futures trading in bitcoins, I ignore the 'hedgers' possibility.

Speculators abhor stability. When prices are stable, there is no 'game' and buying and selling is of no interest to them. So, if a position remains in a tight range for too long a period of time, some of them will sell in order to free up buying power in something more interesting to them. And when a relatively stagnant market shows signs of meaningful change, or there is NEWS that they think will affect the market, these players immediately 'play' - with the result that those changes get exaggerated. Most of the market swing last night is the result of those kinds of players.

Investors, on the other hand, saw last night as a series of buying opportunities. That is, unlike speculators who dump major positions on down swings, investors tend to accumulate more and more positions as they chase lower and lower prices in order to end up holding a larger inventor with a lower average price. And, though they are nervous along the way, they ultimately find common ground with speculators that find new low prices to be 'too low' and who start buying again - and the sell off reverses itself.

So what news might have started this sell off?

A few days ago a major bitcoin exchange (Mt. Gox) was being criticized for taking a very long time in 'settling' and returning currencies to their account holders - sometimes weeks. Even a hint of trouble like that destabilizes a market and the result was that Mt. Gox became the third largest bitcoin exchange, from being the second largest. But that was not something that happened or just hit the news yesterday. What did hit the news yesterday was that Mt. Gox had temporarily halted all withdrawals due to a 'technical glitch'. That was a major cause of concern to the bitcoin market.

There is one corporate identity that is obviously threatened by bitcoins - PayPal. That firm has made it clear that they would NOT be integrating bitcoin support into their payment system. But that is also old news.

A corporate entity that PLANS to be actively involved as a convenient provider of payment system is Apple! They have been working on all of the foundation required to compete head on with PayPal - by using mobile devices like the iPhone.

A few months ago they discontinued an iPhone app that connected Coinbase (the on-line wallet that I've mentioned here earlier) and made it easy to work with that wallet from anywhere at any time. (Coinbase has a duplicate app for use on Androids, which Apple cannot try to stop.) Anyway, yesterday, Apple dropped all other Bitcoin apps from their app store. This action, in my opinion, is blatantly anti-competitive. News of that action also, in my opinion, started the sell off.

Now it's old news.

Since Apple dropped the Coinbase app, Coinbase grew from about 800,000 wallets to over 900,000, for example, and the number of merchants (who accept bitcoins just like cash) has grown from about 14,000 to about 23,000. That's just a simple indication that bitcoins are growing in popularity and interest. It's also a reason that I'm an investor rather than a speculator in bitcoins.

Edited to show upgraded graph without misleading '50 moving average' (which is not accurate when looking at short time frames) and the existence of limited futures trading.
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James R. Davis
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Posted - 02/16/2014 :  11:14 AM Follow poster on Twitter  Join poster on Facebook as Friend  
The first two weeks of February have been difficult for bitcoins in general. There has been a relatively steady decrease in price of bitcoins based on news of troubles in the form of software glitches and malicious Denial of Service (DoS) attempts at some of the largest exchanges.

These problems have NOT resulted in the loss or theft of any bitcoins but they have made it difficult for some of those exchanges to transfer money in a timely fashion. Most notably, the Mt. Gox exchange in Japan had software that did not properly handle those DoS attempts. This was NOT a failure of the bitcoin protocol so it effected the exchanges that implemented THEIR processing software poorly.

The DoS attempts were caused by one or more bitcoin miners who deliberately changed the details of transactions they were confirming so that those confirmations looked like different transactions. Properly written processing software merely rejected those false transactions and the network went on without incident. Poorly written processing software accepted them (as duplicate transactions) then went on to fail to confirm the transactions because the block they were in did not match the block that all other miners were attempting to confirm. (The system confirms based on a majority vote of all miners.) This all amounted to a great deal of additional work for the network.

I think it is necessary here to expand on what I have said about bitcoin mining and miners because I believe I've left the impression that the only thing they do is solve a major 'puzzle' with their computing power and the 'winner' (miner who provides the most solutions in the shortest amount of time) gets awarded some number of bitcoins (since 2013 the winner is awarded a total of 25 bitcoins).

That is far from true - the bitcoin miners are the backbone of the bitcoin network. They ASSURE that each and every bitcoin transaction is valid and is recorded in the blockchain maintained by every other bitcoin miner so that the integrity and functionality of the network is guaranteed.

Each and every bitcoin transaction is recorded in the chain of blocks (called the 'chainblock'.) Thus, when a new transaction occurs, before it becomes part of a verified new block, the miners software confirms that the wallet that is sending some number of bitcoins (remember, they can be traded in fractional parts as small as a millionth of a bitcoin), actually owns those bitcoins (has received them via prior transactions).

About every ten minutes a new block is started and all of the verified transactions that occurred during the formation of the prior block, along with EVERY OTHER BLOCK IN THE BLOCKCHAIN BEFORE IT, are then assembled into what is called 'the puzzle'. In addition to all of those prior verified transactions, the miners will add ONE MORE TRANSACTION to the block - one that includes the creation and transfer of 25 (as of 2013) bitcoins to himself. Thus, each and every miner solves a DIFFERENT 'puzzle' because only their own puzzle contains that added transaction.

While it could take years to solve an individual puzzle, it might only take a few minutes as well. That is, because there are many possible solutions available, only a very small number of those solutions meet the required level of difficulty and happen to be found in a short period of time. Each solution is packed into the block and another solution is looked for. Then, after about 10 minutes, all blocks with solutions are evaluated for the one that contains the 'most work' done - called a 'Proof of Work'. Again, all the miners vote on which block that is and the winning block is added to the blockchain while all miners go on to solving puzzles from the next block. When a block is added to the blockchain, all the transactions in that new block are THEN confirmed. This is why it can take up to 10 minutes for a transaction to be confirmed in your wallet.

You might think that a huge amount of compute power was used to create just 25 bitcoins for one miner in this process, and that every four years that 'award' gets smaller (by 2017 the award becomes only 12.5 bitcoins, for example). But there is more to the 'award' than just the created bitcoins. You see, each transaction has a 'fee' associated with it. Typically, that fee is about 0.0001 bitcoins. Whichever miner is awarded the created bitcoins for solving that block's puzzle with the best 'Proof of Work', is also awarded all the transaction fees (in the form of bitcoin transfers).

So as the number of new bitcoins being created diminishes over time, because the number of transactions that occurs during that approximately ten minute time frame of each blocks creation increases, and, thus, so does the award size to the miners.

Financial incentive to continue mining exists and the backbone of the bitcoin network is well compensated for their 'contribution' of compute power.
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James R. Davis
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Posted - 03/04/2014 :  12:05 PM Follow poster on Twitter  Join poster on Facebook as Friend  
Bitcoins are receiving a lot of attention in the news of late. That, because of the failure of the Mt. Gox exchange in Japan. While original reports of that exchange's troubles argued that it was the result of problems with the site's software error handling and from a concerted denial of service attack, it now appears that the exchange was poorly constructed and had even poorer management (and possibly some illegal behaviors).

Also, originally it was reported that no investor had his money or bitcoins 'disappear' as a result of the exchanges problems, it now appears that nearly half a billion dollars worth of bitcoins were lost or stolen from that exchange. The exchange is closed and has filed for bankruptcy.

That news has really shaken the bitcoin market. For the month of February we've seen the price for a single bitcoin fall from $800 to just over $400, and then it rebounded to very near $700. Clearly the market is very volatile. On the other hand, its recovery demonstrates that there is significant strength in the bitcoin market - it's just not for the faint of heart, or those who look at investments in terms of hourly horizons.

Traders love it! They made and/or lost a great deal of money in the month of February. Investors can love it just as well.

Investors bought bitcoins on the way down in order to lower the average cost of their inventory. For example, an investor you know bought 1 bitcoin at $800, 1 at $700, 1 at $600, and 1 at $500. (Approximate prices for illustration.) In other words, before the price began to rise, he had purchased 4 bitcoins and averaged a price of $650 per coin. With the price now close to $700, he has actually made a profit already.



But here's something most of you do not know - you can do more with bitcoins than buy or sell or transfer them. You can, for example, earn interest on them while exposing yourself to virtually no risk at the same time.

Exchanges allow traders to use margin accounts in order to buy larger positions than they have funds to cover. That's leverage - and it works BOTH WAYS. The trader can earn a lot of money, and he can lose a lot of money as a result - based entirely on the change in price of the stock or commodity or bitcoin. Leverage is NASTY BUSINESS if you are an investor, so they stay away from margin accounts.

Exchanges also let you do things like 'sell short' - that is, betting that the price of the stock or commodity or bitcoin is going to go down, the trader will sell it at today's price and then buy it back at a later date. But selling something you don't have is fraudulent! So, the exchange allows the trader to 'borrow' what he wants to sell, so that the trader actually sells it, and returns it to the lender when that trader later buys it back (at hopefully a lower price).

Borrowing is NOT FREE. In the case of bitcoins, the lender (today) charges 0.061% interest PER DAY to the borrower. That's 22.26% per year. Oh, and if the borrower wants US dollars instead of bitcoins, the lender is today charging 0.11% PER DAY (40.15% per year).

The lender takes no market fluctuation risks while he has lent out his bitcoins. That is, if he lends 4 bitcoins for 10 days to somebody, regardless of what the price of bitcoins does for those 10 days, he gets his 4 bitcoins back after 10 days, plus the interest (in bitcoins) earned.

Margin traders and short sellers take huge market risks, the people they borrow bitcoins or money from in order to take those risks JUST EARN INTEREST (how boring - yet PROFITABLE)!

So let's say this investor holds his 4 bitcoins for a year and during that time the price of bitcoins goes up and down randomly, and ends up exactly where it is today (about $700 per bitcoin). He also lends those 4 bitcoins out during those 365 days. He will have his original 4 bitcoins PLUS an additional 0.89 bitcoins in his account. His original investment for those 4 bitcoins was $2,600. The value of his inventory while the price of bitcoins remains at $700 per, is $3,423.42. That's a profit of $823.42 (or 31.67%).

Edited: Ugh! This sounded like a sales pitch to me after I re-read it. I AM NOT ADVOCATING THAT YOU GET INVOLVED IN BITCOINS. This is just an educational post. JRD
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James R. Davis
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Posted - 11/20/2017 :  4:42 PM Follow poster on Twitter  Join poster on Facebook as Friend  
Still curious?

Bitcoins trades for $8,262 today.
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