Let’s Talk Bitcoin Episode 61 – LTB for New Users!

Participants:

Adam B. Levine (ABL) – HostStephanie Murphy (SM) – Co-Host“Vooza” - Some content from Vooza's satirical “What is Bitcoin?" video is responded to, where an audio quote from Vooza is given, then responded to by panelists.

DISCLAIMER:

The following program is for informational purposes only. It is not a recommendation to buy or sell bitcoin or any particular investment or product, nor a recommendation to pursue any particular purchase or investment strategy. The brands, opinions, advertisements and recommendations expressed by this program are the opinions and recommendations of the individuals creating the show, and not the LTB network.

ABL: Welcome to Let’s Talk Bitcoin, a twice-weekly show about the ideas, people and projects building the digital economy and the future of money. My name is Adam B. Levine and I am the editor-in-chief of Let’s Talk Bitcoin and LTB network. With Bitcoin in the news recently and not many new users understanding even the basics of it, Dr Stephanie Murphy, one of the other hosts at Let’s Talk Bitcoin and I decided to break it down for you here today. So, Stephanie, where do you think we should start?

SM: Let’s start out with maybe the most basic question of all, what is a Bitcoin and why does it matter?

ABL: It’s kind of like cash that lives on the Internet, right? If you’re standing next to a person in real life, then you can hand them a couple of dollars or however much you want in cash. They receive it directly, it doesn’t go through a bank when I hand cash from me to you, and if I later want to put a hold on that or if it was a fraudulent transaction there are no protections that I can really call on. I can’t call my bank and say ‘Hey, can you put a hold on that ten dollar bill that I gave to Stephanie a while ago.’ If you can get past thinking about money as credit cards and get towards thinking about money as cash - then you take that and you combine the concept with e-mail - then it’s like if you took cash and combined it with e-mail, that’s the core visualisation, I think, for people who have no context, is it’s doing for money what e-mail did for mail.

SM: Yeah, I really like the e-mail analogy because that goes into the next thing about bitcoins - well, how do you move bitcoins around? Well, they’re not associated with Adam or Stephanie, they’re associated with a Bitcoin address, and a Bitcoin address is like an e-mail address.

ABL: Harder to remember.

SM: Harder to remember, yeah. It’s a string of kind of gibberish characters and you can send bitcoins to an address if you know what the address is. Anybody can send bitcoins to an address if they know they address, but the only person who can move bitcoins from the address and send them somewhere else is the person who can prove their ownership over the

address by having control of something called the private keys. It’s basically like you can receive mail at an e-mail address but you can only send mail if you have your password and you type it in.

ABL: Right. The physical analogy for this, again, using the mail: this is like a one-way drop box, like a mailbox, like one of the ones where mail is collected for larger delivery and you can put mail into the top but only someone with the key at the bottom can actually extract what has been put in. It’s very similar here and so that means that, on the one hand, you have to protect the key, because if someone else gets the key then they can open the box and take things out too, but on the other hand, it means that if we make a cash transaction and I’m asleep at the time, well, then we can’t make a cash transaction. -But we can make a Bitcoin transaction because I don’t need to be there: I can just go later with my key, access my account, and if the bitcoin is there then I’m able to spend it. I want to take a step back here and get a little bit more in-depth at how Bitcoin works. At its core, Bitcoin, like cash, is an ownership-based system, so whoever owns the asset, whoever holds the asset actually owns the asset. When it comes to Bitcoin, even though you might think you have them in your phone or on your computer, you actually don’t. What you have is that key, your mailbox key, or your password, your e-mail account or whatever, it’s that which actually gives you the ownership. When I send Bitcoin to you, Stephanie, I’m not actually sending bitcoin to you: what I’m doing is I’m actually taking my key, I’m unlocking these coins that I control, and then I’m transferring the ownership to you, but the coins themselves never actually move because the coins themselves live on that blockchain that we’ve talked about before. When we’re talking about a change of ownership, imagine that instead of having keys these were like stamps and every address had the ability to have its own stamp, and so, essentially, when I send you bitcoin, I’m taking my stamp and I’m covering it over with yours, and so as long as my stop is the one on top only I can affect it, only I can choose what stamp goes over mine or if no stamp goes over mine; so long as mine is on top, I own it. If I sell it to you then essentially what I’m doing is: you give me a copy of your stamp, which is your public address, and I copy it over onto that and now only you can access it, so even though this thing never moved - all we did was change who owns it – still, technically, the ownership changed and it moved hands, and because of that, it’s able to do so very fast and very efficiently because, frankly, nothing actually moves, it’s just a change of who owns it. This public record called the blockchain really is the core of what Bitcoin is: it’s the continuous record and the continuous ledger from the very first bitcoins that were ever created, back in 2009. Essentially, you can look at the blockchain and track transactions all the way back to that. Now, you might think that this is hugely bad for privacy, and in some circumstances it could be, but because most people, and anybody can, there’s no cost to doing it, use essentially a different receiving address every time, so this is like if you had a different mailbox address every time and before you received a payment you had the ability to give someone your new address instantly, immediately, and there was no additional cost for doing that, it would be very, very difficult to track and correspond because you can’t tell which person controls which addresses. The same thing is true here in Bitcoin, and someone like myself who does a lot of transactions because Let’s Talk Bitcoin runs primarily on Bitcoin, I have thousands of addresses.

SM: Literally, you can, at no cost, generate a new Bitcoin address every single time you do a transaction, and, actually, that’s a great practice if you want to maintain security and privacy with respect to using your bitcoins. There’s no cost to do it, so it really makes it easy to just separate each transaction to a separate address.

ABL: Of course, the downside to being able to create so many addresses is actually that this is why the addresses are so long and impossible to remember: it’s because in order to have that many addresses in order to allow people to have as many as they want at no cost, they have to be, I think it’s 35 characters long and alphanumeric, and so the number of possibilities is literally in the trillions upon trillions - I don’t even know if that’s a big enough number. It has its positives in that you get as many as you want but has its negatives in that it’s very difficult to remember and so you basically just can’t remember them.

SM: There are solutions to deal with that. For instance, people will translate Bitcoin addresses into QR codes, [which are] kind of like barcodes except it’s a square instead of a rectangle and you’re scanning dots instead of lines, and somebody’s phone or computer can read that and translate it back into a Bitcoin address or they can copy it to their clipboard or whatever and use their Bitcoin program to send you some bitcoins. There’s also wallet software where you can manage several different addresses under the umbrella of one single wallet that belongs to you. There are ways to manage the problem of having lots of different Bitcoin addresses.

ABL: In the reasonably-near future, too, there are other projects that attempt to take this and really simplify it by using essentially a dynamic name system where like, if my name on the system is Adam and you want to send me either communication or bitcoin or whatever, you just send it to Adam and then my name automatically generates an address, sends it to your system, and so we’re able to do business as if there’s no addresses at all. It’s all being done in the background in a very secure fashion. That’s not out yet, but I expect that, in the next six months, we will see that.

SM: Really, the key point is that you’re not sending to a person, you’re sending to a Bitcoin address, so that’s what makes Bitcoin pseudo-anonymous (pseudonymous). On the one hand, there’s this public ledger of all the transactions of bitcoins that have ever been [transferred], so in one way, it’s very public, very trackable, very transparent. On the other hand, unless somebody gives you that information, you don’t necessarily know who those addresses all belong to, so you’ve got this very interesting quality that most other money that we’re used to dealing with, or most other currency that we’re dealing with, does not have, except maybe cash. Cash is kind of anonymous unless you know who’s holding the cash in their hand. It can be used more anonymously than, for instance, a bank account.

VOOZA:

I would say when I rank the bits it goes bit Bitdoor, Bitboard, Bitman and then, right up there in that fourth place spot, it’s back and forth between Bitcork, Bitcorn, Bitcoin and Bitcorn.

ABL: There are some definitions that are kind of core to understanding Bitcoin and with any sort of technical subject there’s always the jargon, so I really want to go through these terms and break down what they mean. The first one that you’ll hear when you deal with Bitcoin – really, any of the new type of cryptocurrencies - is this idea of a decentralised protocol. At its core, this means that instead of there being a Bitcoin company that runs and operates Bitcoin, Bitcoin really is just a set of rules that live out on the Internet. It’s called a protocol because, again, it’s like ‘if you follow these rules then you can do this’, so it’s an opt-in system for essentially money. In the case of Bitcoin, that decentralised protocol is followed by people all over the world, both users who want to spend bitcoin and earn bitcoin, they follow the rules by running the wallet software on their computer, or on the other side of it you’ve got people

who mine, and they’re trying to follow a different set of rules, where, essentially, they’re playing a game - you can think of it like a lottery or like a global game of bingo - where every ten minutes, somebody gets bingo and that bingo is a block. There are different types of ways that people can participate but the important factor is that they all choose to participate because they view it as being in their best interest to do so. They feel like they can make money or do something that they couldn’t do otherwise, or have more safety. Whatever their particular motivation is, they are choosing to participate as opposed to participating by default. Because of that - because there is no central entity - it means that it’s a very robust system because you could have large sections of the Internet go out if there was a Bitcoin company located somewhere, even in two or three places, then those are distinct points of failure where, if something happened to the Bitcoin company, then something might happen to Bitcoin. Because Bitcoin exists in this weird sort of decentralised [state], nobody’s really in charge of it, but everybody gets to participate in [the same] fashion that these protocols develop in [which] it makes it so that there is very little risk to the protocol. There is risk to individual participants who use it, but to the protocol itself, there just isn’t much that can be done to it because, as is often said, you can’t hold a gun to algebra.

SM: Right, exactly. It becomes almost like an organism, it becomes like an animal that’s kind of been released into the wild and now there’s no way it can be put back in Pandora’s – I guess I’m mixing metaphors, but...

ABL: There’re too many variables and whenever you’re trying to identify something, you really try to look for the points where it has the most pressure, the most tension, right? -Because those are the points, oftentimes, that will define it because they define the largest challenges that it faces. With Bitcoin, those challenges are all based around things that are not Bitcoin. Bitcoin, at its core, is actually very simple: it’s just a set of rules. People can choose to follow it. The thing of it is that some of those rules and the way that identity, especially, works, kind of conflict with the way some of the regulatory environment in the world exists. We’re not going to get into that here - that’s what we talk about on the show most of the time, it seems like, but the challenges that are ahead for Bitcoin are actually both helped and hurt by the fact that it can’t react because it’s just a set of rules.

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SM: You’ve probably heard the phrase “Bitcoin mining” or heard about Bitcoin mining before, and what that’s associated with in the popular media is, I guess, people running these specialised computers and getting Bitcoins out of thin air; getting money for nothing and as we’ll see in a minute that’s not quite exactly true, but like Adam mentioned just a second ago, mining isn’t really a great phrase for this activity. It’s more like bingo or a lottery that somebody wins about once every ten minutes and then gets a reward for doing that. The Bitcoin network is basically connections of computers to one another all around the world. It’s a peer-to-peer network just like file torrenting or file sharing, peer-to-peer - and peer-to-peer just means that your computer’s connected to some other computers and they’re connected to some other computers, and pretty soon you’ve got a big network.

ABL: On the one hand, that’s what it is, but think about it again, drawing it back to the analogy. P2P just means person-to-person, so again, it’s just that cash transaction thing. There’s no middleman happening there, so how do we create money? This is the thing; it’s that one of the reasons why Bitcoin is such good money, and this is something that a lot of new people actually have a hard time understanding. It’s difficult to see the value in Bitcoin if you don’t understand why the money that we have in the rest of the world isn’t that good as money. If you can’t understand why something is bad then it’s hard to appreciate why something else is good. I think that’s kind of the core of this problem here. The reason why something like gold historically has made good money is because it’s universally accepted and strictly limited in terms of supply. The strictly limited in terms of supply is a really, really important part of this equation and Bitcoin goes out of its way to accomplish this in a very similar way to how gold does. Just as you mine for gold, you also mine for bitcoin, and that’s true in that you put work in in order to generate whatever it is you’re trying to generate. In the case of gold mining, it’s you [putting] work or money into mining gold and then you generate gold. In this case, essentially what you’re doing is you are devoting computational resources, so early on in the network, this started off as people’s individual computers and then it became people’s computers that were good at playing video games and they would use their cards that powered the graphics of the video games in order to mine faster. Over time, it’s become a very-highly specialised field, but at its core, that’s what it is; it’s a global bingo game where every ten minutes or so, somebody wins one of these blocks and the important part about it is that it scales with the number of people who are playing the game. If there are two people playing the game then it’s supposed to, in a perfect world - this doesn’t always work out - it’s supposed to scale so that they find one block every ten minutes, and if it’s got ten million people in it, it’s supposed to scale so that they find one block every ten minutes. What that means is that the more people who mine, the harder it is for everybody else to mine, and so this creates this self-balancing system where, based on the price of bitcoin, compared to the price of electricity, you wind up with a system that balances out for how much currency should be issued and who should get it, because the people who get it are the people who are willing to put the most amount of resources into it, and then they get permission to essentially sell it and be the first to sell it on the market, or to hold it and speculate on its future value. It’s the process of putting value into it that’s important because if you can just, like Stephanie - if I could just turn on my computer and be like ‘hey, I’d like to create a thousand bitcoin today, then bitcoins wouldn’t be trading at high prices. Bitcoin would be easy to make and so who would care about having them because why would you buy them when you can just make them yourself?

SM: It’s a controlled rate of inflation or “bitcoin creation” that doesn’t need a central authority to enforce. We don’t need the Federal Reserve of Bitcoin to issue the inflation rates. What we have is a mathematical algorithm that automatically adjusts based on the number of

people who are mining or attempting to do the proof-of-work to create bitcoins and the creation of bitcoins is kind of decreasing at a controlled rate. There will only ever be twenty-one million bitcoins. It’s built into the Bitcoin program and we’re asymptotically approaching that amount of bitcoins. Right now, there are almost twelve-million bitcoins - something like that - we’re about halfway up that curve, a little more than halfway, so the next ten million bitcoins or however many are going to be gradually mined over the next several years, decade or something like that.

ABL: It’s actually about a hundred years, bitcoins have a terminus mining date in the year 2140, which was a fascinating number for me, and again, this is a really important point because Bitcoin isn’t competing against systems that are perfect, Bitcoin is competing against systems that we have now and I don’t think that anyone is going to make the claim that they’re perfect. When you compare Bitcoin and this long, slow predictable rollout of the currency over the course of a hundred and forty years where we now, in the year 2013, can say, ‘okay, in eighty years, I know about how many are going to be out in the economy.’ You compare that to any monetary system that we have today and that is so science fiction it’s just not even funny. The Federal Reserve in the United States - we are literally adjusting and re-examining monetary policy every three months, which means that at any point in time, three months in the future, the monetary policy of the currency could change, and when it does change, chances are pretty good it will be to the detriment of the people that are holding it.

SM: Right. It’s very unpredictable, but the one thing that you can kind of predict about that is that the government’s going to keep inflating your money gradually and you don’t have much control over it, and it’s probably going to be to your detriment.

ABL: The problem there is that, even if they stopped, Stephanie, even if they were like, ‘oh, you know what, we’ve decided that it’s bad to inflate,’ even then you’re going to have people who have made decisions on their past actions and are locked into them. This is the core thing: it’s that Bitcoin doesn’t care who you are, it doesn’t care what you do - it doesn’t care. If you want to opt-in and you want to follow the rules, then you can use the system and it will probably benefit just about whatever you’re doing because it’s a much more efficient way of conducting commerce or doing financial business than really any other system that we have available to us at this point. On the other hand, if you don’t want to follow the rules then you can’t break the rules, you just don’t have to participate.

SM: Bitcoin was the first digital cryptocurrency that follows this kind of pattern that has this kind of system. There are others with slightly different rules, so if you don’t like Bitcoin but you maybe like Bitcoin with a couple of tweaks...

ABL: Cryptocurrency is really interesting to me because it’s such a free market, there’s almost no friction once you get in to cryptocurrency. Buying Bitcoin, we’re going to talk about this in a second, can be a little bit difficult because it just doesn’t interface well with the existing financial system, so if you have your money in a bank account then it can be a little bit difficult to get it into a bitcoin, but once you get past that then there’s no barrier if you want to, for example, to trade Bitcoin for the second-most popular cryptocurrency out there, Litecoin, then you can do that on any number of exchanges. It’s very easy, it takes seconds and there’s no trouble whatsoever. The eco-system of cryptocurrency, I think, is ultimately what’s going to be so interesting, because as bitcoin gets to be more expensive, you know - I used to think that Bitcoin was going to be the only cryptocurrency out there, but I’m realising that there are niches for little currencies and little specific things that do specific jobs better

than Bitcoin can because Bitcoin is doing so many things and they can just all use Bitcoin as the highway and then each one of these little currencies is an off-ramp and you can stay there for as long as you want and then move back into Bitcoin. Bitcoin provides that kind of global structure that we’ve been talking about.

SM: In so many ways, it’s an innovation in money, and it’s something that was long overdue. There [are] a lot of problems with the existing financial system but we don’t have to tell you that, you probably already know. One thing that we didn’t mention that I think is really important is the future of Bitcoin transactions: they’re irreversible, which is also very different to what most are used to when they think about spending money. When you dispute a credit card charge, you can reverse it. If you send somebody a cheque and they’re ripping you off, you can call the bank and tell them to stop it and put a hold on it. -But with Bitcoin, you can’t do that, so once you send, that Bitcoin is gone unless the person maybe agrees to send it back to you - you can’t get it back. That’s another element about Bitcoin that’s really interesting and probably can offer some advantages because there [are] not really a lot of options currently in the legacy financial system that have that property of irreversibility.

ABL: Well, it’s a good thing and a bad thing, right, you want something to be reversible if you’ve screwed up and you want to get your money back, but you don’t want it to be reversible if you’re selling something or doing something like that because again, it’s not that refunds necessarily are a problem, it’s that forced refunds are a problem, where it’s the payment processor coming in, not really understanding what the situation is and just making a judgement because they don’t really care, it doesn’t really impact them, they just have to pick, and then whatever they pick, that’s the way it’s got to be. Bitcoin takes that option away and it makes it so the buyers and sellers have to actually negotiate with each other and say 'okay, well, this is not what I ordered,' and then, if there’s a valid reason, you process the refund but it’s not this de facto ‘oh somebody complained about something so that means full refund instantly take it out of the merchant’s side.’

SONG: ‘Holding’ by Zhou Tounged [PR note: if you must... http://www.youtube.com/watch?v=NG1qooBzE2w ]

SM: Now that we’ve given sort of a basic overview of what Bitcoins are, people are probably wondering about some practical applications of this kind of technology.

ABL: Well, there are lots of ways to do things. Bitcoin, because it’s an opt-in system, anybody can just choose to make something, so there are lots and lots of tools out there. Stephanie, you and I have both been kind of doing business: you do advertisements and you do voice work for the show, and I actually underpay you a little bit from your standard market rates because I pay you in bitcoin and because we do business kind of frequently. I think, probably, that with the price increases you’re doing pretty well on those spots that you did for me six months ago. Have you managed to hold on to any of those bitcoins?

SM: Right. You know the fact that Bitcoin is behaving as a deflationary currency; it’s worth more if you hang on to it, has really encouraged me to think about my spending and how I can save as much as possible, so yeah, a lot of my bitcoins that I have earned through working I have held on to. I have not sold. Some of them I had to sell, for one reason or another, bills to pay or whatever, some of them I did sell, but a lot of them I hung on to and I’m really happy that I did. -So yeah, I was going to say, Adam, I don’t feel like you’re underpaying me because I know if I just hang on to those coins for a little while then they’ll

probably be worth more, so it’s really a great incentive for saving which a lot of people culturally did not grow up with. I, at least, you know - for a lot of my life, I’m twenty-nine years old, so growing up in the US for a lot of my life where I was spending, where I was having to worry about paying my own bills and stuff, it didn’t really make sense to save because you know we have some rate of inflation, your money’s not going to be more valuable over time by just sitting in a bank account. The incentive is to save it or find some kind of investment to put it in, whereas with Bitcoin, it’s very different. If you save it, you’re likely to have more purchasing power or more value after some time goes by, so there’s this real strong incentive for saving, which I think is fascinating. [PR note: I don't usually do this, but I'd like to enter in a dissenting opinion. I'd argue that, even though Bitcoin's rate of inflation is predictable and set in code {which CAN be changed under certain unlikely conditions}, it's still inflationary by any definition. Some argue that, since rate of inflation was determined at Bitcoin's creation, it can no longer be considered inflation, but especially early on in 2010 and 2011, miners dumping their coins on the market created heavy sell pressure which moved the price downward. Holding, of course, prevented that sell pressure - so miners, in a way, and less pronounced now than as before, control the rate of inflation which hits the market. They're kind of like the QE-favored banks which consider whether they just play with the money between themselves and the government or to push that money out into the “citizen economy” with non-interbank loans. At any rate, I don't think you can call it deflationary unless you provide stats on “provably unspendable” bitcoins, which is a long debate I'll spare you from. As well, because Bitcoin is almost as pure a supply-and-demand market, I don't think it's safe to flat-out expect the value of Bitcoin to increase. Given this episode is not an infomercial, thought it was worth adding.]

ABL: Yeah, that’s been my experience with it, too. I try to get as many services as possible from Bitcoin and there are people who give me a larger discount than you do and I get notes from them - like the last couple of weeks, it’s been crazy. As the price has gone up, they’re like, ‘You’re the first person I dealt with in Bitcoin and I charged you less than I ever charged anybody else and this is the most profitable.” We had five business cards made for five bitcoin at the time. At the time, it was like $400 for 10,000 business cards for a couple of different people

SM: Business cards.

ABL: Exactly, but now that’s worth $2500. That’s almost $3000 at these current prices so the incentive is huge and so I totally agree with you, Stephanie: the cultural drive to save growing up, I simply did not have it. It made way more sense to spend the money, why keep it? It’s better to…

SM: It makes more sense to take out debt, actually, because when you pay back the debt you’re paying it with less valuable dollars. You actually have the opposite incentive; to borrow money.

ABL: -And, I don’t know, do you have a student loan? I have a student loan. I took that with the idea that, well, it doesn’t matter if I’m spending this money now because I’m going to earn so much later from these skills that I’m developing, but sometimes the math stops working with that after a while. With Bitcoin, the math is very obvious: if you don’t spend them, they probably will be worth more later because there are not that many of them being made and because the demand for them that is potential is quite huge. -So, it’s very simple, and I like things that have simple incentives - they make it so that I know what to do, as opposed to wondering if I’m making the right choice or not.

VOOZA:

Bitcoin is… it is a currency. It’s a currency that… it’s not necessarily a monetary currency but it’s a kind of a bartering system that we have with the other companies in our building where you can swap sodas or snacks.

Bitcoin, glad you asked. Bitcoin is a form of currency for drug dealers. It was invented by the Winklevoss twins, or as I call them, the Winklevii, who are, of course, the twin brothers who invented Facebook.

SM: There’s one way to get bitcoins that we didn’t mention. That’s because I hesitate to mention it, because it’s not a good way for somebody who’s new to get into Bitcoins. It requires a huge upfront investment, a bigger upfront investment than most people are probably willing to make if they’re new, and that is by mining. As we mentioned before, when people do the proof-of-work to process Bitcoin transactions to create the Bitcoin network, they are engaging in mining, and they are using their computing power to contribute to the Bitcoin network and, as such, somebody who is participating in that activity gets a so-called block reward, which is some amount of bitcoins. It’s 25 bitcoins per block right now. A block is just an amount of transactions bundled together - it’s called the blockchain and so forth. Anyway, the block reward is like winning the lottery or winning the bingo. It provides an incentive to mine. Nowadays, it’s getting so difficult to mine - you used to be able to do it with your computer, like you mentioned, Adam, just a regular old computer or maybe a graphics card that was made for gaming. Now, you really need specialised equipment to mine, and these are machines that are built specifically for Bitcoin mining and no other purpose and, furthermore, they’re getting rapidly obsoleted as the technology continues to improve at a rapid pace. In a couple of months, these machines are obsolete because they can’t keep [pace] with the now-increased difficulty as time goes on on the Bitcoin network. The point is: if you invest in specialised mining equipment, and if your mining equipment is able to keep up with the difficulty of the Bitcoin network, you can make Bitcoins by mining. However, is it profitable? It’s not really designed to be profitable. It’s designed to create an incentive to participate in mining, but not so much of an incentive that it’s wildly profitable. It’s kind of one of those things that, if it’s being done right - and the Bitcoin network adjusts automatically, so it’s usually being done right - it’s not wildly profitable. It’s barely profitable and it may take a while to break even on the investment somebody makes on the hardware that’s required to mine. -So, mining is a way to acquire Bitcoins, yes, but it’s not a way that I would recommend for people that are new to Bitcoins.

ABL: Yeah, it’s not a simple way, and it’s a function of Bitcoin’s popularity – really, that’s what it is, because if Bitcoin wasn’t seeing so many people wanting to mine then it wouldn’t be hard to mine. -But because everybody -- I mean, the first thing that people talk about when they get in there is, ‘oh, you can create these with your computer and they’re worth how much?’ What you don’t pay for in money you pay for in time, basically, so the people who are really seeing the crazy profits from the arbitrage, from mining, are people who mined fairly early. And fairly early is relative - fairly early is like a year ago, or like six months ago in some cases. [PR note: Hello, again – FYI, this episode aired on November 24, 2013)

SM: -Or like 2009.

ABL: 2009, certainly - that is very early, comparably. I mean, you said that mining is designed to be barely profitable, and I agree with you in the short-term. I think that, again, this gets back to that fact that Bitcoin is deflationary, which means that, over time, the price will probably go up because there’s more demand than there is supply. [twitch] If you look at it from that perspective - if you don’t have to sell the coins that you mine immediately to pay for electricity, you can sit on them for six months then probably they’ll be worth a lot more in six months than they are now, so maybe it is highly profitable, just not immediately profitable. To your point about people mining or not, yeah, it’s totally a highly specialised field. You absolutely should not get into it, if you do you should talk to a consultant. Are there mining consultants, yet? There should be mining consultants.

SM: Yeah, yeah. I believe there are mining consultants - I’m sure. You know, one other thing I wanted to mention about mining: there have been a lot of stories and I think this will continue to be true in the in the future even more so, but there have been a lot of stories about people who pre-order mining equipment, they pay with bitcoins and then the company doesn’t ship the product for a while - and meanwhile, the price of bitcoins goes up, so not only have they basically overpaid for their mining equipment but they also missed an opportunity cost, because if they would have just taken that cash and put it into buying some bitcoins at the time when they bought the mining equipment and then waited until the time when the mining equipment actually ships, then they would have a lot more money than if they had just bought the mining equipment and waited and then tried to figure out how to break even on it. In many cases, it can be more profitable if you’re thinking about making an investment in mining equipment, take that cash and put it into Bitcoin and see how that does.

ABL: Yeah, that’s very true, that’s very true... so I actually have an experience surrounding this directly. Back in July of 2012, I pre-ordered a Jalapeno from a company called Butterfly Labs. Now, a Jalapeno - it was supposed to be a little coffee-cup warmer that was powered by USB and would mine Bitcoin and also warm your cup of coffee that would sit on top of it. At the time, bitcoins were worth about $4. I pre-ordered one of these very small units for - I think it was something like 25 bitcoin. They were supposed to ship in, I believe it was October, and that date slipped and slipped, and in November, I asked for my money back and they told me they wouldn’t give me my money back. By the time we get to November, the price of bitcoin was up to about - I think it was $14 or $15, so the value of the money that I had spent in bitcoin had tripled. What had been a like $250 purchase was, in fact, now more in the range of a $600 purchase, so I was unhappy about that and I tried to get my money back from them but they wouldn’t give me my money back and so I waited another two months and the price of Bitcoin was up another 50%, or something like that, and so I finally got them to give me my money back but they would only give me back 11 bitcoins. I paid them something like 25 and they would only give me back, 11 and I wasn’t going to get the product from them, so I took a loss of 15 Bitcoins. But then...

SM: Aw, man. At least you got that 11 back, but still, that’s painful.

ABL: Yeah, but in hindsight – yeah, it was painful at the time, but I was like, 'I’m glad to be over with it,' it was stressing me out, I was like, ‘man, I can’t believe I did this because my bitcoins are tied up and I’m never going to get them back.’ I get my money back and at this point they’re still saying, ‘oh, well, we’ll release in you know, in four weeks or two weeks' and it just kept getting pushed out. I got my money back and I watched over the next six months as the price went up to over $200 and I was like, ‘wow. If I had kept my money in there, this would have been, like a $20000’… it was crazy, the amount of money that would

be spent on this particular unit just because I didn’t understand the future value of the money that I was spending at the time that I spent it. Absolutely floored me. -So, if there’s one thing you can learn from my experience, and I was very happy that I had gotten the refund because I wound up earning exponentially more than what the Bitcoins were worth than at the time that I sold them so it actually wound up being a positive transaction for me. -But a lot of people didn’t have that same sort of luck in getting a refund and so a lot of people were stuck through that and that’s a terrible thing. When you’re dealing with Bitcoin or any sort of deflationary currency, because I think these are going to be getting more common in the years to come, really make sure that you don’t treat them like normal money, because when you treat them like normal money then you want to spend it. With these things, you want to spend them when you can get a really good deal that captures future value. If someone’s going to give you 30% off for something in Bitcoin relative to something else, then that’s probably a deal that I would take but if someone’s going to give me 5% off for Bitcoin, probably not. I’d rather spend dollars if I have them available to spend.

SM: I think you’re absolutely right about that. You’ve really got to incentivise someone to part with their precious bitcoins.

ABL: Yeah, I mean, it’s just different, and you don’t feel good when you make a bad decision like that. If you’re buying a product and you get it then that’s something - that’s something that you paid for and you got it and there’s an immediacy that makes the price okay. -But if you’re talking about pre-orders especially, I will never pre-order anything again in bitcoin. Any pre-order I make is now in dollars, especially for things like mining equipment. I mean, again, with Bitcoin the key is will the value of the bitcoin be better than what potentially spending the bitcoin now will give you. If that answer goes in favour of bitcoin then you probably shouldn’t spend it.

SM: That’s a great thing to talk about because there’s so much “buyer beware” in the world of Bitcoin that people might not be prepared for if they’re completely new to it and unfamiliar. A lot of people compare it to a Wild West or something like that - and I wouldn’t say it’s a Wild West, but you do have to watch out for yourself you know, and you do have to take these things into account: the potentially deflationary nature of Bitcoin, the irreversible nature of transactions, and also security and protecting your Bitcoins and protecting your passwords and so forth.

MUSCIAL INTERLUDE

ABL: This is really the final point and it’s one of the key points. Right now, this is as hard as it’s going to be. There are so many people who are working on solutions towards making it easier to really be able to safely feel secure about the value that you’re storing in bitcoin because, right now, it’s kind of terrifying. If you just have your bitcoins on your computer, especially as the value’s going up, it’s like ‘wow, am I safe? What can I do to better protect myself?’ Stephanie, what are you doing with your bitcoin these days?

SM: Well, actually, as the price has gone up, I’ve become more and more paranoid about bitcoin storage. There are a lot of ways that your security could potentially be compromised when using bitcoins. Don’t let that scare you away from using bitcoins, just take some reasonable precautions. Those precautions would be any time your private keys or your passwords are on a computer that’s connected to the Internet there’s maybe some risk of malware that could log your passwords or log your keystrokes or whatever. If your bitcoins

are stored on a so-called web wallet, which is an online wallet like blockchain.info or the infamous former service that doesn’t exist anymore, instawallet, or wasn’t there another one like mybitcoin.com or something like that?

ABL: The core take-away for me about the web wallets: okay, so there are three descriptors, they are secure web wallet... You can have two of these, but not three, and at it’s core that’s the problem, it’s that bitcoin is, because it’s such good money, when you store it online you’ve got a bunch of people all storing bitcoin in the same place, it’s like a giant piñata. As the price of bitcoin goes up, the more popular the service gets, the bigger the prize is for breaking it open and getting inside. That’s what we see happening; it’s that as we see these services get large, especially as the price goes up, the incentive for hacking into them and stealing the Bitcoin that are inside just go through the roof. It’s very, very difficult to run these services in a way where they’re invulnerable. We’ve even seen services that were specifically saying they were specialising in security and doing everything right, they still get compromised. -So, just in general, save yourself the headache and don’t store your coins in online wallet. Store your coins somewhere that you have control over and ownership of.

SM: I would add a little change to that which would be that there can be usefulness to online wallets or web wallets, but really not for more than so-called pocket change amounts of bitcoins. Don’t store all your Bitcoins in a blockchain.info wallet, please, unless you have 0.01 Bitcoins or something like that and you’re not that worried about it if you lose it. -But there can be a real convenience to web wallets - that’s the thing - like if you have a blockchain.info account you can get an e-mail whenever you receive bitcoins to that address or something like that. Same thing with Coinbase; they have kind of a web wallet service. These things can be really convenient and you can take some steps to secure them, like two factor authentication.

ABL: But they’re a target. It’s just that they’re a target.

SM: They really are.

ABL: They’re a target, and so there are lots of software solutions that allow you to run Bitcoin on your computer. You can get physical Bitcoins if you don’t even want to deal with running the software although they do come at a premium.

SM: Yeah, that’s a very expensive way to get into Bitcoin. You can actually accomplish the same thing, a physical Bitcoin... a physical representation of Bitcoin is basically a Bitcoin wallet and a private key that exist on paper or on a little token that’s called a Casacius Coin, or some other way in the physical world that’s not digital; it’s physical. Through this, you can actually import the private key into a computer-based wallet and you can move the bitcoins from there. -Or you could just give someone a physical bitcoin. You can transfer them that way, you just can’t break them up.

ABL: Right, physical bitcoins - they’re not really like tokens because, really, what it is is that they need to be redeemed. They’re like redeemable bitcoins. What I mean when I say redeemable: if I were to hand you a physical bitcoin right now, we wouldn’t actually be making a transaction on the Bitcoin network. Instead, what we would be doing is I would be giving you a wallet that is known to contain, say, one bitcoin. You could then trade that to someone else for one bitcoin worth of something, but at some point in that chain, if someone wants to use the bitcoins online, then that physical bitcoin does need to be redeemed which

involves peeling off the sticker and recovering the private key which then lets you have control of the wallet. -But as long as it’s not redeemed, whoever holds the coin controls the wallet, even though they can’t access it, yet. If they choose to redeem it they can access it, and at that point the coin stops being valuable because you can’t prove that the money is there and you haven’t already spent it or don’t have the ability to spend it.

SM: Getting back to storing your bitcoins, there are different levels of security. The least secure would be an online or web wallet, also probably one of the most convenient. Another slightly more secure way would be to store the bitcoins on a desktop client on your computer, so there’s a couple of those - there’s the original “bitclient” called BitcoinQT [PR note: QT is now called “Core”] or sometimes called the Satoshi client. This used to be the only program that you could download to your desktop for storing bitcoins. The problem is that is also download a copy of the entire blockchain to your computer, which is now something like 12GB or more [PR note: 18.9GB as of April 8, 2014 – size increases exponentially until transaction rate “peaks”], it takes up a lot of space on your computer and it takes a long time to synchronize and download that whole blockchain. People, for that reason, tend to shy away from that client a little bit more, although some people do still use it. You can come up with a passphrase and encrypt your wallet on that. So long as your passphrase isn’t maybe stored on your computer or written down where people could gain physical access to it, then that’s pretty secure I would say.

ABL: Let’s talk about encrypting your password real quick because this is a commonality among all the wallets that you’re going to do. Most of them will start not encrypted and so what that means is that, if I have on my computer an unencrypted Bitcoin wallet and I launch that program, then I can send Bitcoin and receive Bitcoin without having to type in a password, which also means that if somebody else either sits down at my computer and opens that software, or accesses it remotely by hacking into my computer, which apparently is something that still happen... I saw somebody else had it happen to them a couple of days ago, then they essentially - all they have to do is access my computer and then they have just as much ability to send any of my bitcoins as I do. -But if you encrypt it, essentially what you’re doing is you’re taking your private key, which is that thing that lets you [spend bitcoins] behind the scenes, send your bitcoin by assigning them to someone else, and it encrypts them with this password, basically. In order for you to decrypt and then spend your bitcoin, you need to enter this password first. -So instead, if someone sits down at your computer or hacks into your computer then they need to enter that password, too. Because of this, it’s very, very important that you encrypt your walled because it means that there is that additional barrier to entry where, unless you’ve let out your password somewhere else or your computer is really infected with something that’s logging your keystrokes, which is pretty bad as far as infections are concerned, then you’re probably safe. Even if someone has access to your computer, they still can’t necessarily spend your bitcoin unless they crack your password.

SM: Some examples of that would be the BitcoinQT client a.k.a. the Satoshi client. There’s also a couple of other programs that I think are worth mentioning and those are MultiBit, Electrum, and Armory. Electrum and MultiBit, as I understand, are desktop-based clients: you can do the encryption and everything, you can encrypt your private keys on your computer and your password never goes to any server or anything like that, as I understand it, with those programs. It’s not as though your password is being uploaded somewhere where somebody could potentially hack it and get your password and steal your bitcoins. But what they do do is access a copy of the blockchain that is stored on a public server. It’s kind of the

best of both worlds: you’ve got the encryption going on on your computer but you are accessing the blockchain somewhere else so that you don’t have to host the entire blockchain on your machine. It’s faster - it’s faster set up. If you download one of these, all you do is connect to a server and you can start sending and receiving bitcoins right away. They also have some other cool features where you can store a bunch of different addresses within the same wallet. All of these desktop clients allow you to do that, and usually, with a web wallet, it’s one address - sometimes they have a couple of addresses in there, but some web wallets are only one address or it’s a pain to figure out how to get multiple addresses in them. -So, we’ve got Electrum, MultiBit, and Armory is one that I know you use, Adam. Personally, I use a couple of different clients: I do have a blockchain.info account that I barely use for anything. I also have Electrum, Armory and the BitcoinQT client - haven’t really used MultiBit. What else, I also use an Android wallet called Mycelium - that’s one for your phone. There’s also blockchain.info apps for Android and iPhone and also there’s some other ones that may not be available yet, but they’re coming soon for iOS devices. I also have physical Casacious coins and a paper wallet, so I use everything, and I honestly think security through distributing bitcoins into different wallets and different methods of storage is a good idea as well.

ABL: You can’t have 100% convenience and 100% security, at least, yet. There is always a downside. Armory is great because it’s really all about making sure that you’re not going to lose your Bitcoins and so they have great backup features and Alan Reiner, the lead developer on it, has been pioneering some really innovative and very new-to-Bitcoin features into the client as well. The good part about it is that it’s really focused on security, it’s easy to use once you get the hang of how things work and it’s pretty self-explanatory - they’ve done a good job with the interface.

SM: You can somehow store Bitcoin in offline wallets: what is that?

ABL: When you create a wallet, you get the option of how you want to back it up and what they encourage you to do is essentially to print a paper back-up where, at any point in the future, if you take this paper back-up and you type in, I think it’s a 32-digit long code split into groups of four, then you can recover your wallet without knowing the password, without doing any of that stuff. -So it’s like a failsafe, so if I die and my wife doesn’t know my password but we’ve got one of these in the safety deposit box, she can go and get that out and recover it, even if, for whatever reason, she doesn’t know my password or any information about it. Armory let’s you do that, and they’re also working on features because the concern there, of course, is that what if somebody I don’t want to gets a hold of this paper, then they have access to my Bitcoin and they’re not protected by encryption or anything like that. -So what Armory’s done to address this is they’ve done multi-parts, or fragmented backups, where instead of printing one piece of paper you print three pieces of paper, or five pieces of paper, and each piece of paper is different and, in order to get the combination - in order to recover the wallet, you need to have, say, 2-of-3 or 3-of-5, something like that. -So you can have a little more security. Again, you can tell that even in that case it’s less convenient but it’s probably more secure. -So Armory, as far as this security-versus-convenience side, is definitely on the security side, but it’s getting much easier to use.

SM: All these issues, developers have a great incentive to help solve these problems for people, to help make Bitcoin easier to use and more user friendly, and it’s just going to get easier from here on out like you said.

ABL: I don’t even know I’m using Bitcoin. A lot of times I’m using Bitcoin, it’s just something that’s kind of running in the background and powering my transactions. Eventually, it’s going to happen. I hope I can always spend bitcoin because I really like the feeling of these direct person-to-person payments in an Internet-connected system. At the same time, it sure would be nice if I didn’t have to think about it quite so much sometimes.

SM: One thing maybe we ought to mention with bitcoin storage is the concept of creating paper wallets.

ABL: All a paper wallet is – you can take a piece of paper, just a plain piece of printer paper or whatever, and just write down your private code on it and now it’ll functionally be a paper wallet because that’s all you really need to do. The reason why paper wallets are desirable [is] because if you have this number on paper then you can, if you want to, remove that number from your computer. If that number isn’t on your computer then it’s not an issue of whether or not you’ve encrypted your wallet or not because, if someone does compromise your computer, the numbers simply aren’t there for them to take because you’ve taken them offline.

SM: If someone compromises your house or somebody compromises your physical wallet then they might gain access to it, so it’s just a different set of problems. -But, that’s probably, I would say - would you say it’s the gold standard now? For Bitcoin secure storage to generate key pairs with an address and a private key offline with a computer that’s never touched the Internet that’s known to not be compromised, then print them off and dig a hole and bury them, something like that and somehow physically secure them so that malicious people cannot gain access to them - I think that’s the most paranoid you can get but then paranoia’s only paranoia if you’re wrong, right? People have had their bitcoins stolen from their computers, so...

ABL: This is very true, absolutely, but the thing to keep in mind is that with Bitcoin, you get to figure out what your risk tolerance is, you get to figure out how much convenience you want versus not and just treat it based on what your particular needs are and really, that’s the key, it’s that Bitcoin lets you do whatever the heck is that you want. If you want to use it, I mean, whatever you want to use it for, however you want to use it, even if you’re breaking the rules - I mean, this is why it has trouble with the conventional system: there are limits to how much money you’re supposed to be able to send and there are people who you’re not allowed to send money to. -But Bitcoin really doesn’t care about that because, again, it’s just these rules that live in the sky and if criminals decide to follow the rules then criminals get to use the system, too, just like cash.

VOOZA:

Bitcoin? What isn’t Bitcoin? Next!

And so people just, you know, you hit your keyboard and it’s sort of an easter egg type thing, where once in a while there’ll just be coins that pop out of your keyboard, and then you can use those to buy drugs.

SM: I think we’ve covered the basics, but if you have any questions, like if you want to know something about how Bitcoin works that you don’t think we’ve addressed here, let us know. You can send mail at mail@letstalkbitcoin.com or you can send a web inquiry through our

website which is letstalkbitcoin.com and let us know if you have specific questions. On some of our older episodes, we used to do a segment called newbie questions or something like that, or just Bitcoin questions, and I wouldn’t be opposed to bringing that back if people have questions that they want to send us.

ABL: Yeah, absolutely. I think that we’re going to be moving towards a more interactive show again. Let’s Talk Bitcoin is kind of floating around in terms of the format we’ve followed. We’re segment-based - that’s like the one thing I can comprehensively say; we are segment-based and that will probably stay the case. -But yeah, Bitcoin is a very-much evolving situation and Let’s Talk Bitcoin is probably going to grow along with it, so Stephanie, I look forwards to doing the next one of these when there’s a whole slew of innovations that we have to talk about because they’re so new that nobody’s heard of them yet.

SM: Right. Absolutel. We look forwards to hearing from you.

Thanks for listening to Episode 61 of Let’s Talk Bitcoin. The New User Show was produced by Adam B. Levine and edited by Matthew Zipkin. It featured Stephanie Murphy and Adam B. Levine. “What is Bitcoin?” was performed and provided by Vooza and while very funny, is quite wrong. Music was provided by Jared Rubens and Zhou Tounged. What did you think of Zhou Tongued? I’ve got several other Bitcoin-related parodies that I think are quite good but I’m not sure if they’re appropriate for the show. Questions or comments? Email adam@letstalkbitcoin.com. Have a good one.