2014-02-11

Co.Labs

The Casual Bitcoin Buyer's Guide To Investing In Cryptocurrencies

A quick and dirty explanation of the cryptocurrency speculation game.



If you're interested in buying Bitcoins, you may have heard of Silk Road, the online agora for contraband--you know, the one whose founder called himself the Dread Pirate Roberts. The cryptocurrency was vital to Silk Road’s anonymous transactions, but Bitcoins aren't just useful currency for people who call themselves Dread Pirate Roberts. In fact, anyone can buy Bitcoins. Sort Of.

At least, that's what a lot of the Bitcoin cottage industry is hoping. Bitcoins today can be used to purchase legitimate goods and services on thousands upon thousands of websites and counting. And 5,000 bitcoin ATMs are projected to pop up globally in the next five years.
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Bitcoin actually scares NYDFS, the guys who regulate banks in New York, enough that they had a hearing about whether or not to regulate it. And a Bitcoin center opened next to the New York Stock Exchange in January, to both evangelize its future and serve as a hub for educational seminars and events.

If you're one of the believers, this is how you go about buying in.

How To Make Money With Bitcoin

The simplest way to make money with Bitcoin is to let it appreciate. The downside, of course, is Bitcoin's price volatility when valued against the dollar. Two years ago, 20 cents could buy one whole Bitcoin. As of Februrary 6, one Bitcoin was valued at $849 USD. February 9 it dropped to $687 USD. The peak? Almost double that: $1,203 last November. It's a roller coaster.

You can make more money mining, but it's a lot more technically complicated. The documentation for mining is open source, so anyone can download and program any kind of computer to be a network node. Through participating in the “game” of discovering blocks, a group of transactions in a certain window of time, miners are rewarded in Bitcoins when they solve a block’s puzzle--essentially gained interest. (The current reward is 25 BTC. That value started at 50 and halves every 210,000 blocks, which equals out to about every 4 years.)

The most recent block is sequentially added to the end of the blockchain, listing and confirming the transactions in that block to the Bitcoin ledger. Advanced cryptography is set up so that blocks are mined about every 10 minutes and the puzzle difficulty is recalculated every 2,016 blocks, and adjusts to get harder over time. A sole miner will rarely, if ever, mine back-to-back blocks.

Getting Into Mining

To see how this works, I visited IT freelancer Jon Cevera, who’s been dabbling in Bitcoin and alt-currencies for about a year, intending to talk about the easy ways to get into Bitcoin. It was immediately apparent that mining was not for someone casually invested in the venture. “Pretty much anyone with an IT background could do it,” he assured me. Even then, it's possible that you won't be successful.

He’s currently active in a Litecoin pool called LTCRabbit, which miners can join to increase the efficiency of their block discovery by grouping their resources and evenly distributing the rewards from mined blocks. Some pools are significantly more successful than others; BTCGuild and GHash.IO command almost a 50% share of discovered blocks.

Cevera, though, is just looking to pay his electricity bill through his mining. With a computer eating up electricity and constantly transferring data to mine, the returns can be diminishing. Miners rely on cheaply bought computers set up to be solely dedicated to mining. Alternative hardware amplifies the block mining speed, and the best rigs can get very complicated and very powerful. Bitcoin Center NYC has screenless machines whose only indication of effort is their tremendous heat.

CoinDesk, bitcoinmining.com, startbitcoin.com, and the Bitcoin wiki are all good resources to learn more about the basics of mining. For the rest of us, there's speculation.

Buying And Selling

So mining isn’t for you. If you want to get ahold of some aftermarket Bitcoins, here's how you do it.

The most secure way to buy Bitcoin is in person with cash: people list Bitcoins for sale on Craigslist and other classified sites. If you want to go the online route, the first step is setting up your personal wallet that’s properly encrypted and secure. Making a wallet sets you up with a public address that’s used to buy or receive Bitcoin, and a private key, which is used to access the funds in your wallet. Your address makes it so that transactions are pseudonymous.

There are many options of wallets available for the web, desktop, or mobile devices. Generally, desktop wallets like Bitcoin-Qt are considered the most secure as you can either print or store your private access key on a USB drive, but they take up a bunch of space on your computer.

Howtobuybitcoins.info is your best bet for a prospective buyer’s options, country by country. It lists 17 different options for the United States alone, the majority being popular Bitcoin exchanges. Mt. Gox is the largest bitcoin exchange, but recently suspended its account holders from withdrawing funds, inevitably sparking a massive backlash of infuriated account holders.

Coinbase is another option that acts as both an encrypted wallet and exchange market that’s incredibly easy to use. Bitstamp, based in Slovenia, is a similar option. These kinds of services make it easy to cash out your Bitcoins to dollars with low transaction fees, and are cheaper and far more secure than something like PayPal or eBay.

In the Vice podcast on Bitcoin, guest Jerry Brito, a senior research fellow at George Mason University's Mercatus Center and Bitcoin expert, addressed the problems for an average person’s willingness to use Bitcoin as a medium of exchange:

"Consumers are not going to want to download Bitcoin software. And they're not going to want to meet with somebody on the street to exchange dollars for Bitcoins and then keep it on their laptop. It's very complicated. They're going to want a turnkey solution. A consumer solution. So they're going to want exchanges that are trustworthy, that are regulated. They're going to want online wallet services that are as easy as PayPal.”

And they'll probably get them.

[Image: Flickr user Fabian Figueredo]


Article Tags: bitcoin





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