 Welcome to the Cyber Underground. I'm your guest host today, Jeff Milford. Today we're going to be talking about bitcoins, and we have our guest, Kevin Doherty. He's an expert in bitcoins, among other things. Kevin, can you tell us a little bit about yourself please? Hi, my name is Kevin Doherty. I'm with T3 Information Security Services. I work with some of Hawaii's most regulated industries, helping them from an information security perspective. Excellent. Thank you. Full disclosure, I used to work for Kevin as well. Yeah. So tell me a little bit about bitcoins. Let's talk about where it started. Yeah, so bitcoin was sort of a byproduct of the 2008-2009 financial meltdown. Basically some papers were published online that espoused the need for a currency that's not tied to any sort of financial regulator. And that began the idea of digital currency or cryptocurrency, as it's now called. What bitcoin is in its most simplest form is digital money, really. It's a peer-to-peer system. What that means is if I want to send money to you, I don't have to go through Visa. I don't have to go through a bank. I don't have to go through PayPal. I don't have to use Western Union. I can simply send money directly from, in one example, my phone to your phone without any third parties in the middle. What that does is it makes for a very fast system. It's also cost-effective. There's very low fees, generally speaking. It also allows you to send money anywhere in the world. If you're trying to wear money overseas, many people have found that that is an onerous process. And also it can be very expensive. What bitcoin does is it allows you to send money very quickly, inexpensively, to anyone, anytime, anywhere. It doesn't sound like it's very highly regulated. It sounds like, as you're saying, peer-to-peer, obviously banks have a lot of regulations about the amount and maximum amounts. Kind of the onerous part that I think you're talking about. I would say that that varies country to country. China recently has announced that they are definitely regulating bitcoin. For example, the US announced just yesterday, as a matter of fact, the Fed voice chair nominee. So the Fed is keeping a very close eye on bitcoin. And that's actually good for bitcoin, to be honest with you. Right now it's in a nascent stage. There's a lot of uncertainty from an investor's perspective or even from a user's perspective. There's a lot of volatility and there's some uncertainty is not good for any kind of a financial instrument. And so there's a lot of uncertainty as it pertains to bitcoin and regulation moving forward in the US. So most advocates will say that some regulation could be good for bitcoin over the long term. What we are seeing more and more with large banking institutions is the adoption of what's called the blockchain. And just this gets a little wonky, so bear with me. But blockchain is a technology which bitcoin is based upon. And really what blockchain is, it's what's known as a distributed database. It's a secure ledger where everybody can see it, but everything within the ledger is very, very secure. By distributed database you mean it's not all in one place? It exists in different places. That's right. And so the neat part about blockchain is that the way that it prevents fraud is that because it's so transparent, there's all these third parties constantly validating the data within the blockchain. So it's very difficult to hack it or to modify it or in any way affect the integrity of the data on the blockchain. So because of that, I mean it's good for cryptocurrency, but it's also got a lot of other uses. So big banks are looking at using it for many, many applications and new features. The internet itself is starting to adopt blockchain for things like online gambling, which is admittedly not so great, but for VPN usage, for distributed file share systems. So blockchain is real exciting and it's really going to change I think in the next five to ten years the way the internet works. But back to Bitcoin. Bitcoin is based on blockchain. One of the things you're also seeing now with Bitcoin is, and anybody who's looked into this will attest that a mind-boggling number of what's called altcoins. Alt means alternate, meaning their derivative coins of Bitcoin. Bitcoin was sort of the original and then there's a lot of other derivative coins, thousands, actually over a thousand now. And that causes a lot of confusion for people who are trying to use or adopt the technology or even for investors. But it's important to be aware that they're out there, but in fact that they are derivative of Bitcoin itself. The Bitcoin, if I understand it right, has a certain value at any given time. And it seems from talking to people that that's gone up significantly over the last couple of years. So is there an investment side of the Bitcoin where you might want to hold on to them? Yeah, so that's a great question. So there's really two reasons, two primary reasons that anybody would buy Bitcoin. Number one is to use it for transactions like money. And then the second reason is to buy and hold for an investment vehicle. So we'll talk about the transactions first. So there's a lot of sites online now that actually accept Bitcoin. So Newegg, TigerDirect, let's see, Overstock.com. You can buy airline tickets with Bitcoin, cheapair.com. And that number is actually expanding. More and more sites are looking at accepting Bitcoin as a form of payment online. Amazon, as a matter of fact, is considering adopting Bitcoin online. And by the way, the Bitcoin community is pretty excited about that. That's like the stamp of approval. It'll be huge, right? So it hasn't happened yet, and there's some theories about why it hasn't happened. I think it will happen, whether it's Bitcoin or their own alt currency, Amazon coin or whatever they're going to call it. But I think that eventually they will adopt some sort of cryptocurrency as a form of payment. So that's very exciting. And from an information security perspective as a security engineer, I can tell you that what we're doing on the internet right now isn't working. So anytime you want to initiate a transaction online nowadays, and you want to use a credit card, which is basically your only option at this point, you're required to provide name, address, phone number. So you have to provide all these details, these personal pieces of information, just to go buy a sponge on a website. And what that does for the average consumer, whether they realize it or not, in the age of the data breach, which open any newspaper nowadays, there's another one on display, what that does is it increases the exposure for the breach of individual consumers' private information every time that happens. So every time you buy something online at a new site, you're potentially increasing your exposure to data breaches, right? What I personally am excited about is changing that paradigm moving forward. When you begin using Bitcoin online for transactional purposes, the only thing that's required is for you to send money to the address. They don't even need to know your name. They don't need to know your address. They don't need to know your phone number, none of that. So that right there, I think, will be incredibly helpful from a privacy perspective moving forward into the future. So I'm pretty excited about that. You talked about the buy and hold, right? So actually, even in the last couple of weeks, Bitcoin, I think, has gone up almost 90% in two weeks. It's over to add about $11,000 a coin today, which is unbelievable, right? And so a lot of people are seeing this and they're excited about it and there's like this, they call it the fear of missing out, right? And so there's a lot of retail money piling into Bitcoin for buy and hold purposes right now. It was just announced today, as a matter of fact, that the SEC approved the futures trading for Bitcoin on the Chicago Board of Exchange, CBE, I think it's called. So that's going to open it up for institutional money to start piling into Bitcoin. So from an investment perspective, I believe there's no doubt it's a speculative investment, right? It's very volatile. People should know that before you get into it and definitely do your research and just understand that whatever money you invest, you should be comfortable losing if it goes to zero because it could. I don't think that's going to happen, but it is possible. So I think it's going to get interesting as we move forward. It looks like ETFs are going to be approved on other exchanges, Bitcoin-focused ETFs. So I think with all the institutional money starting to pile in, that it will probably reduce the volatility quite a bit, which will actually be good for Bitcoin in the long term. But what's interesting is they compare Bitcoin to gold, right? Because gold is a commodity that we can't make more of. We can't artificially go create gold, right? There's a finite amount of supply and as demand increases, obviously the price of the commodity is going to increase. Bitcoin is very similar. Maybe people don't understand this, but there will only ever be in circulation 21 million Bitcoins. There will never be more than that. So there's a finite supply of Bitcoins and as demand rises, the price of the Bitcoin will rise, right? So I think from an investment perspective that makes it interesting. The other thing I think that makes it interesting is that it's fairly what they call untethered from other markets. So there's not a lot of correlation between the price of Bitcoin and the S&P 500 or the Dow Jones, right? So those are companies and this is a commodity, right? So there's not a lot of correlation. And so a lot of people are thinking that this is going to be a safe haven in the event of any kind of market uncertainty. So that could be interesting. Can you use the term ETF, electronic transfer funds? That's actually exchange traded funds. Exchange trading. Yeah. It's sort of like a mutual fund. Oh, okay. Yeah. So it sounds like a lot of this is legitimizing Bitcoin in people's eyes. I think so. I think that it's become mainstream. You know, I still run into people all the time that have never heard of it, but on the flip side of that, you know, there's a lot of people talking about it. It's very exciting. It's new technology. It's on CNBC all the time now, so that's cool. So people are beginning to have an awareness that this, you know, cryptocurrency market exists and they're asking all the right questions, right? So this is still very, very early days for cryptocurrencies. I think 10 years from now, you know, we'll really probably start seeing it come into its stride. Okay, you hopped until a few months ago. The only time I heard about Bitcoin was for the dark web. And yeah, that's unfortunate. Here's people a little bit, but we're doing a lot to change that. Yeah. So I mean, unfortunately, it's gotten known for ransomware, right? So anybody who has ransomware, they have to pay them Bitcoin. And, you know, the attackers do that because it's secure fast and private, right? Just because they use it for nefarious purposes doesn't mean that that underlying technology isn't good and useful for everyday consumers, right? Okay. Let me hold up right there. We're going to take a minute and do some breaks and we'll be right back. This is Think Tech Hawaii, raising public awareness. We have this crazy thing going on today. I was just walking by and all these DJs and producers are set up all around the city. I just walked by and I said, what's happening guys? They told me they were making music. Welcome back to the Cyber Underground. I'm your guest host, Jeff Milford. And today we're talking about Bitcoins with our guest, Kevin Doherty. Okay, when we left, we were talking about how most people didn't probably know what Bitcoins are. I think we've covered that pretty well, how they're in use and how they can be used. How do people buy Bitcoins? How do they borrow them? Yeah, so that's a great question. And something that's even stumped me, if I'm being honest, going years back. So as the technology improves, it's becoming easier and easier to access. It used to be so easy. And in fairness, it still can be kind of onerous to buy actual Bitcoins. We live in Hawaii and there's actually, believe it or not, two Bitcoin ATMs in Hawaii. Really? Yeah, so Hawaii Stamp and Coin downtown has a Bitcoin ATM and Vape Kings on King Street has a Bitcoin ATM. And so the way this works is you walk up with your phone, it's got your Bitcoin app on it. You literally insert money into the machine, put your phone up there and it sends Bitcoins to your phone. Super easy. What I will say is it's not super cheap. So they, you know, downtown, I think it's like a 22% charge to use their ATM. And the King Street one, the last time I used it was somewhere around 18%. So not the most cost-effective way to buy Bitcoin, but it is the most convenient, which kind of makes sense, right? If you have Square Cash, the Square Cash app on your phone or tablet, they just recently announced a new feature where you can buy Bitcoins directly from the Square Cash app. You can buy Bitcoins directly from people, right? So if I wanted to buy Bitcoins from you, I could give you cash, you send me your Bitcoins and we're done, right? There's actually a site called localbitcoins.com that you can go to and find people in your community that are trying to sell Bitcoins. And you negotiate the price, obviously, before you go meet them. And the other caution I would say is meet them in a public place, right? Right. Just be smart about it. You don't want to be meeting people behind garages and dimly lit streets. The best way really from a cost perspective to buy Bitcoins is to use what's called a Bitcoin exchange. And so basically what these are are websites that you send cash or use a credit card and you can buy Bitcoins. It's very cost-effective. I mentioned you can use credit cards, debit cards. The best way to do it is to actually wire money to the exchange to your account and then you basically just buy the Bitcoins using US dollars in this case. You can also buy altcoins on exchanges. So that's really the most cost-effectively. And the one other thing that I would mention is there is currently an ETF. So if you've got an IRA or 401K or some sort of an investment account and you wanted to get the benefit of the rise in the price of Bitcoins, but you didn't want to mess around with actually owning Bitcoins and securing them and so forth, you could actually invest in what's called the GBTC fund. It's actually done really well. I've been an investor on it for some time and it's very easy, right? It's just like investing in a stock. So let's talk about I guess once you buy the Bitcoin, what do you do next, right? So write this down and circle it. Once you buy Bitcoins, you do not leave them or store them on the exchange. You can technically do that, but it is not a good idea. The reason for that is because exchanges have been in the past and continue to be targets of hackers. And there's no such thing as FDIC-insured Bitcoin accounts, right? So if your exchange gets hacked and your Bitcoin are removed from your account, there's really not that much. There's no way of getting it back. In fairness, all of these exchange operators, they're businessmen and women, they've gone to great lengths to recoup people's money after hacks have happened in the past. So I think that's good, but it's still not best practice to leave your coins on an exchange. A better approach is to use what's called a wallet. So if Bitcoin is digital money, a wallet is like your software wallet that you might have in your pocket. These wallets, they can be online wallets, which we'll talk about in a minute. They can be software wallets which you install on your desktop computer or your phone, as a matter of fact. So what I would say is it really depends on how you intend to use your Bitcoin as to what kind of wallet you would use. If you're going to use it for transactional purposes, then you might want to have some Bitcoin on your phone. It doesn't make a lot of sense to put all of your Bitcoin on your phone. I would use your phone wallet the same way that you use the wallet in your pocket. You don't have all the money in your savings account carrying around with you every day, right? So I would keep $40, $50, $100 in Bitcoin in your phone wallet for transactional purposes, but keep the vast majority of it in a wallet that's a little bit more secure. So these wallets, the other really important thing for people to understand is that there's things called keys that secure your Bitcoin. There's a public key and a private key. Think of these keys like the keys to your car. Whoever owns them owns the car. So if I've got the keys to your car, regardless of what your title says, I can go drive your car off, right? So it's a good practice to use wallets where you keep your own keys. And so like these online wallets, they're very convenient. But the thing to understand again is that the hosting website actually controls the keys, which makes you vulnerable to a hack. Potential hacks. Right. So not the greatest idea, although convenient, not the most secure way of storing your coins. A better way is to install the software locally on a desktop. Keep your keys. Typically what you want to do is a lot of these wallets they'll use like what's called a seed key, which is basically like 12 words, right? Write them down, put it in a file physically on a piece of paper so that you're not storing them in the same place that your wallet exists. Because that's the only way you can recover a wallet. Yes. If you lose those words, you're... That's right. You're done. You're done. So if you lose your keys and you lose your phone, you lost your Bitcoin. Right, whereas if you lose your phone and you have your keys, you can actually just install the software, put your keys in and your Bitcoin magically appears, right? The... Oh, so and then the other kind of wallet is what's called a hardware wallet. And what this is, it's actually like a little USB type device with OLED display on it. They're typically about $100. They're very inexpensive and they're a very secure way of storing your cryptocurrency offline. So that's a real good option if you're worried about theft and the security of your coins. Especially if you have a lot of it, right? The value continues to go up. Probably not a bad investment to spend $100 and get a hardware wallet. And that's encrypted? It is encrypted and actually the way that it connects to your computer is through what's called HID, which is getting a little wonky, but it's actually a very secure way for it to connect to your computer. It doesn't mount like a storage device, which is inherently problematic. So they're very well designed, they're very secure, and they're very easy to use, too. I wanted to get back to the ATM question for a minute. So I have $500. I want to go to the ATM downtown. So when I put in my $500, they're going to take 22%. So 110 of that goes to them. Then I'm going to get $390 worth of Bitcoin. And whatever the current value is, that'll just be some decimal point. Yeah, so that's a good point. So people think you don't have to create transactions in even numbers of Bitcoins, which would be really problematic at $10,000 or $11,000 coin, right? So they have what's called MBTCs, which is micro-Bitcoins. So because there's a finite supply of Bitcoins, you can imagine, especially as the price continues to increase, that basically you might be doing transactions, which are .0001 Bitcoin, which is roughly about a dollar. So it scales in that you can indefinitely continue to trade smaller and smaller amounts of Bitcoins. Okay. What else should people know as far as how to get involved? Yeah, well, let me just talk about a couple of other just general security principles. When you're using Bitcoin for transactions or even transferring it around between wallets, you should never really use the same address twice. Very easy to change addresses. You just hit Create New Address. You should always turn on two-factor authentication, which will send you a text or you'll use some other form of authentication when you're logging in to your exchange account or to your wallets. Never store your keys on your computer. Always try to print them off. Okay. All good habits to have. Yes, yes. Even outside of Bitcoin. Yes, that is true. These are generally good security principles. Okay. Well, that about wraps it up for us today. I hope you all learned something. I know I did. I had a lot of miscaceptions before today, but Kevin steered us in the right direction and gave us some good info. Please return again next week. I don't know whether Dave Stevens will be back or not, but I'll be back on January 5th with another topic. Thank you very much. Thank you.