In the last few weeks, I’ve had multiple people reach out to me about buying some Bitcoin for their spouse/friend as a holiday gift. I figured it was worth putting a few thoughts together about this so that people can make an educated, informed, and efficient decision about how to get this done.
What follows is my own interpretation of the current Bitcoin reality. There are lots of opinions out there, and mine is not the only one. This is my conceptual understanding and it may or may not line up with everyone else.
If you don’t know what something is, but you see other people doing it, that is a terrible reason to do anything. You should question if Bitcoin is something you want to get into at all. Bitcoin is not a get rich quick scheme. If you apply yourself, you can make some money, but that goes with just about anything you invest time in.
The fact that you are here, means you are curious. Curiosity is good! Experimentation is good! Following and learning from the latest trends and looking for opportunity is good! Just don’t do anything crazy. Never invest more in any risky, speculative thing than you would be OK seeing evaporate tomorrow should it all come crashing down. With that said, let’s go!
Some terms to know
In beginning your Bitcoin odyssey, you are going to come across some strange words and concepts. I’m not going to try and explain them all. Heck, I don’t even know enough to know how to stitch all this together. But you are going to come across some of these ideas when you purchase your Bitcoin, so it is good to get out ahead of that.
Bitcoin is one of many cryptocurrencies (there are hundreds), that run on a blockchain that you can use to buy things. Because you can buy things with Bitcoin, it means it can store value and has utility. You have to purchase your Bitcoin off an exchange, and keep it in a wallet. In order to buy things with it, you have to send the money from your wallet address to the other person’s wallet address. The blockchain that Bitcoin uses is completely decentralized. No one owns it, or the operation of it. It exists outside governments, and any corporation. Bitcoin works because there are open source programmers that work on it, miners that maintain the payment network, and people like you and me that want to use it.
Let’s break those terms down with the help from various wikis. I also suggest reading the Bitcoin Wikipedia article:
Cryptocurrency —”A cryptocurrency is a digital asset designed to work as a medium of exchange that uses cryptography to secure its transactions, to control the creation of additional units, and to verify the transfer of assets” — This is the money. A Bitcoin is cryptocurrency (also called “crypto”).
Blockchain — “A blockchain is a continuously growing list of records, called blocks, which are linked and secured using cryptography. By design, blockchains are inherently resistant to modification of the data.” — This means you can trust that if I have crypto, and pay you with it, that the transaction is recorded and my balance goes down and yours goes up. This sounds like a simple thing, but today we trust banks to do this for us. A blockchain does it without a bank.
Store of value — “A store of value is the function of an asset that can be saved, retrieved and exchanged at a later time, and be predictably useful when retrieved. More generally, a store of value is anything that retains purchasing power into the future. The most common store of value in modern times has been money, currency, or a commodity like a precious metal or financial capital.” — Bitcoin is a store of value because I can buy it with dollars, and hold it, and exchange it for dollars (or anything else later). It is a store of value because there is trust that you can’t fake a bitcoin.
Utility — “Utility is a term used by economists to describe the measurement of useful-ness that a consumer obtains from any good” — Bitcoin only works if there are enough people that see any use in it. The more people, companies, countries, governments, that accept Bitcoin, the higher the utility is, the more valuable it becomes.
Exchange — “Cryptocurrency exchanges or digital currency exchanges are businesses that allow customers to trade cryptocurrency or digital currencies for other assets, such as conventional fiat money, or different digital currencies.” — This is how you turn US Dollars into Bitcoin.
Wallet — “A cryptocurrency wallet stores the public and private keys which can be used to receive or spend the cryptocurrency. A wallet can contain multiple public and private key pairs” — This is where you store your Bitcoin, and how you transfer it to other people.
Wallet address — “A Bitcoin address, or simply address, is an identifier of 26–35 alphanumeric characters, beginning with the number 1 or 3, that represents a possible destination for a bitcoin payment.” — This is a unique location, known to the Bitcoin network, where Bitcoin is sent from or received to.
Decentralized — “Decentralization is the process of distributing or dispersing functions, powers, people or things away from a central location or authority.” — This makes Bitcoin instantly global, and relatively uncontrollable.
Open source — “The term open source requires that no one can discriminate against a group in not sharing the edited code or hinder others from editing their already-edited work. This approach to software development allows anyone to obtain and modify open-source code. These modifications are distributed back to the developers within the open-source community of people who are working with the software. In this way, the identities of all individuals participating in code modification are disclosed and the transformation of the code is documented over time.” — The important thing to know here, is no one owns the code for Bitcoin, and everyone can see it or offer to upgrade/change it. This makes it more secure because you can’t hide anything in it or make it do things without everyone seeing.
Miners — “Mining is the process of adding transaction records to Bitcoin’s public ledger of past transactions (and mining rig is a colloquial metaphor for a single computer system that performs the necessary computations for mining).” — This is a more complicated part of Bitcoin. The way the blockchain is maintained is by computers all over the world validating all the transactions. They are rewarded for this by being paid in Bitcoin. This is how new Bitcoin is created. There is also a fixed supply of Bitcoin. There will only ever be 21 million Bitcoin made. The last Bitcoin will be mined in the year 2140.
…ok now you know the basics. :)
Why should I care about any of this?
We are really early in the world of all things Bitcoin and blockchain. Here is a chart of the total number of wallet users from 2012 until this last summer. You can see from the chart that the total number of people in any position to utilize Bitcoin and its underlying technologies is 15 million people.
Remember when the the internet first arrived in 1995 with the invention of the web browser? Do you remember people saying “Who is ever going to need a website?” or “Why would a business ever want a .com domain name?” Remember what happened after that? An entire industry was forged in the coming decades. The following chart shows the penetration of the internet over time.
You can see back in 1995, there were 16 million people using the internet. That is about the same number of people using Bitcoin today. This is why you should pay attention.
Bitcoin right now is where the Internet started in 1995.
Think about how the internet transformed the world, generated new technology, destroyed industries and replaced them with new ones. Cryptocurrency and blockchain have the potential to transform everything again. That is why you should be paying attention.
Ok, i’m convinced how do I get involved?
Given the early nature of all this, getting started isn’t exactly easy. There are three main ways to become involved.
- Don’t do anything, just learn. Start educating yourself by reading, watching, listening to whatever you can to learn what this is, how it works, and why it matters. Check out https://www.coindesk.com/ for info. they have a great 101 section! After you learn a ton about this and if you even care, then check out options #2 and #3.
- Start mining some cryptocurrency! Any computer can give it a try. I can’t promise you will earn anything useful, but you can go to https://minergate.com/, download the software that matches your computer, and be up and running in minutes! If you want to get serious you can build yourself a mining rig, but that is a story for another time. The moment you start mining, all sorts of other concepts are required that are beyond the scope of this write up.
- Buy some cryptocurrency off an exchange. This is why you are really reading this, so let’s jump right in.
Buying your first (piece of a) Bitcoin
You could go off and buy lots of different cryptocurrency, but for the sake of simplicity, we are going to focus on Bitcoin. Since the price of Bitcoin at the time of writing this is thousands and thousands of dollars per coin, you can start by buying a part of a coin. In fact you can buy 1/100,000,000th of a Bitcoin which is called a Satoshi. So here are the steps
- Get a Coinbase account — Coinbase is the most popular mass market online exchange and wallet for buying and holding Bitcoin in the United States. Go to https://www.coinbase.com/ to get started.
- Once you register for Coinbase, you will need to connect a bank account so that you can transfer dollars into the account, and exchange them for Bitcoin.
- You will also need to submit to an identity verification process so Coinbase knows you are a US citizen/person, and therefore can legally use the system.
- Once all that is set, you can transfer in your US dollars from your bank account. It will take up to a week for your first deposit to clear. You can also try linking a credit/debit card, but their policies on this are always changing. It can also be difficult to get your credit card provider to validate the charge. I would start with a bank account first.
- Once your US dollars are in Coinbase, you can easily go to the Buy/Sell tab, type in the amount of dollars you want to exchange into Bitcoin, and you will instantly receive the Bitcoin into your Coinbase Wallet.
Congratulations! You are now apart of the new crypto economy!
Here are some things you can do. I’m not going to explain them in depth, but the world is your crypto-oyster!
- You can hold the Bitcoin you’ve purchased and maybe it will increase in value. (I track my cryptocurrency portfolio with Blockfolio).
- You can use it as a new (and totally cool) way to send money to a friend. Just ask them for their public wallet address! I bought my PAX East tickets this way.
- You can spend your bitcoin on a bunch of different things!
- You can get your currency trading on with GDAX (the backend exchange that Coinbase runs on). http://gdax.com
- You can research the hundreds of other cryptocurrency options out there and see the breadth of technology and innovation. Check out https://coinmarketcap.com/
Remember, buying some Bitcoin is just the beginning. It is the equivalent of making yourself a gray website out of HTML with a <BLINK> tag on it back in 1996. Every day, more and more cryptocurrency options are entering the market. Each one of them brings new technology and approaches. Dozens of industries like finance, insurance, shipping, logistics, healthcare, legal, and transportation, have to potential to be fundamentally transformed. It will be fun to watch.
Is Bitcoin a bubble?
Consider this your warning. Is Bitcoin a bubble? My guess is yes… there is a bubble forming as people throw money at things they don’t understand. As of writing this, cryptocurrency has a market cap of $400B. When the dotcom bubble popped in 2000–2001, trillions of dollars were lost. If Bitcoin is building a bubble, there is still a long way to go. There will no doubt be a pop for cryptocurrencies, but just like with the Internet, when the bubble burst, the technology didn’t go away. Companies with real businesses kept innovating, and out of the ashes of the bubble rose Amazon, Apple, Facebook, Google, and other landmark technology companies we know today. The Amazons, Apples, Facebooks, of the Crypto industry haven’t been built yet. When those companies are built, and they IPO, know enough to buy their stock!
I hope this quick guide and supporting information and opinion is helpful. Merry Christmas, Happy Holidays, Live Long and Prosper, and May The Force Be With You, Always.