 What's the big deal about Bitcoin by Steve Patterson narrated by Steve Patterson? Introduction Bitcoin keeps making headlines Everybody is talking about it from established financial gurus to 20-something techies and they all seem to come to different conclusions Bitcoin has been called everything from a giant Ponzi scheme to the greatest technological invention in history But most people if they've heard of Bitcoin they have no idea what the fuss is all about The technology is notoriously hard to explain and understand Especially if you aren't already a tech enthusiast So this book is meant to clearly explain Bitcoin to the layman It is conceptual rather than technical and my goal is to give every reader a concrete answer to the question What's the big deal? As you read it's natural to come up with objections and skepticism about Bitcoin But I ask that you hold your objections until you read parts one and two which give a thorough Conceptual overview of the technology after that point, please unleash your full skepticism Part three deals with common objections to Bitcoin and covers the real challenges facing the technology My goal is not to endorse Bitcoin though I have become convinced the technology has been official but rather to provide enough information for readers to form their own opinion Part one Bitcoin clearly explained Bitcoin is a confusing subject It's new technology. So most enthusiasts still speak in technical jargon news coverage refers to Bitcoin without explaining What it is and even the word Bitcoin has multiple meanings. This makes it difficult to figure out Before praising or condemning Bitcoin the technology should be clearly understood This book explains it using simple concepts in part one explores future possibilities in part two and addresses common objections and challenges in part three The confusion surrounding Bitcoin can be clarified by breaking it into three distinct parts Computer software a digital currency and an online ledger Together they form a new type of payment system for the internet each of these components will be explained and connected to the others So to begin we should clarify our terms Bitcoin with an uppercase B refers to the computer software and Bitcoin with a lowercase B refers to the currency and I realize you're listening to this So I will try to make this distinction as explicit as possible Bitcoin the software can be understood in five words. It maintains an online ledger The ledger is a public record of transactions and the entire technology revolves around it So you might ask what kind of transactions are being recorded on this ledger? Well, the software creates uses and tracks its own unique type of currency called Bitcoin So the ledger is simply a record of Bitcoin transactions and it gets updated by computers running specialized software Indeed if you had to summarize the entire technology in one sentence You might say that Bitcoin is extremely advanced bookkeeping now if that doesn't sound like a world-changing invention Don't worry. It's the specific details about the software currency and ledger that have so many people excited the context Before diving into the details, we need to set the stage Bitcoin was not created in isolation. It was created within a larger context to fix a particular problem Modern payment systems are not suited for the internet We can easily send emails and files across the internet, but we can't easily send a few dollars We have to go through middlemen using credit cards, which are insecure and charge fees bank transfers Which are slow and expensive or services like Western Union Which take big percentage cuts of everything we send if you live in the United States You can instantly have a face-to-face conversation online with your friend in England without thinking twice But if you want to send them $10 be prepared to jump through hoops You have to use a third party who will take anywhere from 3% to 20% of your money Have to fill out some forms and hope that the weekend isn't coming up because that adds a few more days to the process Now a low 3% charge might not sound like much But when you're a large firm sending substantial amounts of cash that can add up to thousands or even tens of thousands of dollars On top of the expense Traditional payment methods are not secure. Think about our current system Every time you hand your credit card to somebody they immediately hold all of the information needed to spend money on your behalf forever They can store this information for later use it themselves or even anonymously sell it to somebody else in addition many companies store This sensitive information in massive databases Tens of millions of identities and numbers become centralized in one place Creating a criminals ultimate jackpot. It shouldn't be surprising that credit card fraud and identity theft are rampant Millions of people myself included have had their sensitive information stolen from these databases I am personally quite careful using my credit cards online But even using my card once at Home Depot Resulted in my information being stolen along with countless other unfortunate customers The current financial system has many moving parts and therefore it requires a considerable amount of trust in Third parties Multiple individuals or companies handle your money and sensitive data before it reaches its final destination Whether it's visa Western Union your bank the waiter swiping your credit card paypal, etc This is both costly and insecure Consider another problem modern currencies have a consistent track record of losing value due to inflation Whoever controls the issuance of money tends to create too much It's not uncommon for currencies to be completely destroyed by inflation in a matter of decades Having one group control the printing press also requires trust whether it's a central bank or a national government Even a private firm users need to trust that the total supply of their currency won't arbitrarily increase The solution Bitcoin was created to solve these problems and streamline payments over the internet It's meant to be the equivalent of digital cash a fast easy and peer-to-peer payment system Meaning that the sender and receiver exchange directly with each other paying in Bitcoin the currency is akin to Personally handing somebody cash. It doesn't require any middlemen Bitcoin also has no central issuer. There's no Bitcoin corporation or Bitcoin central bank Deciding how much Bitcoin should exist the software itself using mathematics Determines how much Bitcoin exists and at what rate it is produced. I'll cover this in more detail later The technology was designed to be independent of banks corporations governments or any centralized institution Bitcoin being digital cash is the first Trustless payment system. It doesn't require third parties handling your financial data And it uses its own currency to eliminate the possibility of arbitrary inflation How was this accomplished through an extremely clever use of mathematics and software? The technical details of Bitcoin are not the focus of this book and other people are more qualified to elaborate on them But suffice to say a number of problems that had been plaguing computer programmers for years were solved by Bitcoin the software now money can be sent anywhere in the world for almost no cost as easily as sending an email the ledger The first component to understand about Bitcoin is the most important the online ledger It's called the blockchain that name was chosen for technical reasons which are not relevant to this book But just understand whenever you hear blockchain We're talking specifically about the public online ledger which records all Bitcoin transactions And it's at the heart of the Bitcoin ecosphere unlike every other ledger in existence The blockchain does not reside in one place. It's not stored on one server The blockchain is found on every single computer running the Bitcoin software. This is why it's often called Decentralized no one group owns or controls the ledger It's not like the internal bookkeeping at a bank like JP Morgan the entire enormous network of computers spanning every continent are all in communication with each other Updating and verifying the exact same ledger This record goes all the way back to the very first Bitcoin transaction Anyone with an internet connection can download the history of every single Bitcoin transaction that has ever taken place As you can imagine this dramatically reduces or even eliminates The possibility for fraudulent bookkeeping Ownership of Bitcoin is not murky if the ledger says you own Bitcoin you do you can mathematically prove it The accuracy of the ledger can be trusted without faith in any one institution bank or government Rather, it's a network of thousands of computers Maintaining the ledger in sync with each other and this network is enormous The amount of computer power dedicated to securing the system is greater than the world's top 500 supercomputers combined by at least in order of magnitude now This is partly due to the uniqueness of the Bitcoin software Specialized computers have been developed in the last few years to run Bitcoin software And they are far more efficient at running it than your regular computer or even supercomputer Once a transaction is recorded it is set in stone In fact, it's reasonable to say that a Bitcoin transaction once verified and added to the ledger is The most secure and certain piece of digital data in existence It is permanently unalterable by anyone thanks to a use of applied mathematics The power and cleverness of the blockchain invention cannot be overstated building such a system is enormously complex Impossible before Bitcoin the software was created people have attempted to create digital currencies for the last few decades without success You have to solve questions like how do you update everybody's ledger at the same time without a master ledger? How do you prevent fraudulent transactions? What happens if two ledgers ever disagree with each other and how do you prevent changes being made after the fact? Bitcoin the software solves all of these problems for the first time And it opens up a whole new world of financial innovations built on top of the blockchain Which I'm going to cover in part 2 so in summary the public ledger is online Accessible and verifiable by everybody stored in every single computer running the software It's updated in sync across the network without directions from a central group or a master ledger and thanks to a use of clever mathematics It is unalterable and uncrackable for even the world's fastest supercomputers That's quite an invention, and it's only the ledger the currency a Ledger without a currency is a book without words Every transaction recorded in the blockchain is denominated in the same currency called Bitcoin with a lowercase b Though occasionally the term bitcoins is more appropriate as when referencing specific units So for example, I own five bitcoins versus I own some Bitcoin this currency has a number of unique properties Some of which are Unprecedented in the history of money in fact to somebody who was interested in economics It was the properties of Bitcoin the currency which first grabbed my attention This section will give an overview of the currency and explain how it works The economic implications will be covered in part 2 Bitcoin is a currency was modeled after gold Because gold has the longest and most successful track record of any currency The idea was to create in essence digital gold and gold's popularity is not coincidental It has specific properties which make it useful as a currency most importantly gold is a scarce resource There is a finite amount of gold in the world and the supply does not arbitrarily increase Nobody can declare that more gold exists by law. The supply is not determined by any individual or group Also gold is difficult to extract from the ground, which means we can predict with reasonable accuracy What the future supply will be at any given time Bitcoin as a currency is also scarce Only a finite amount will ever exist 21 million bitcoins total each of which is divisible down to 100 millionth of a Bitcoin Now scarcity is especially unique in the digital world with almost any piece of digital data We can copy and paste creating as many exact duplicates of something as we like but being able to copy and paste Digital money would be a catastrophe everybody could become their own printing press for reasons I'll explain in a minute. You cannot copy and paste bitcoins The supply is determined by mathematics and software not by any individual or group The rate at which bitcoins are created is also predictable. The supply is based on a mathematical algorithm Which regulates its own production at a pre determined rate We can estimate to a very precise degree how many bitcoins will exist at any given time This solves the problem of arbitrary inflation a recurring flaw with currencies issued by a central group So Bitcoin mirrors gold in some ways and improves on it in others while gold has been successful as a currency It also has some drawbacks for one It's clunky try paying for a pack of gum in gold shavings or paying for a house and gold bricks Even worse try using gold for international business or on the internet the idea of shipping physical metal through the mail to trade Internationally seems archaic and you can't transmit gold bits through a phone line So portability is one area which Bitcoin greatly outperforms gold because Bitcoin is digital You can send it to anybody on the planet with an internet connection instantly for virtually no cost This is possible because of the special way in which the blockchain and the currency relate to each other digital ownership While a Bitcoin owner might casually say I have a Bitcoin on my computer or I have 0.02 Bitcoin on my phone That's actually not true. Bitcoins are not literally stored on your hard drive or on your phone They are stored in the blockchain itself If Bitcoin as a currency is like gold then the blockchain is the gold vault Here's how it works bitcoins are located at Addresses on the public ledger you can think of an address is simply an account at the gold vault Whoever owns the account owns any Bitcoin within a Bitcoin address is just a very long string of numbers and letters For example, I'll give you half of one of my Bitcoin addresses It's one six four qx six capital R lowercase h capital y lowercase g capital X uf 2z capital X jf uppercase fwb and times that by two Anybody can check that particular address on the ledger and they can see all of the transactions to and from the account So you can think of it like an account number at a bank except a lot larger string of numbers and letters But how can I prove that I am the real owner of that address? And how can I prevent other people from spending my Bitcoin or claiming that they own the account the answer? Mathematics every Bitcoin address comes paired with another Extremely long string of numbers, but this number is not public It's private and it's the key to the vault Bitcoin addresses are created with only one Corresponding private key you can think of it like a signature when you write a check to somebody you have to sign it with your Particular signature somebody else can't sign with their name and draw funds from your account Your signature is a way to prove to the bank that you're the true owner of that account and can authorize funds to be Transferred out of it in the same way if you have the private key for a Bitcoin address It's proof that you are the true owner of that account you mathematically prove your ownership to the network Every Bitcoin transaction from every account requires a digital signature That extremely long string of numbers in order to take place But unlike a brick-and-mortar bank humans don't even need to be involved the proof of ownership is entirely automatic and digital So this means that owning Bitcoin really means owning the keys to Bitcoin stored in the ledger But don't worry the end user doesn't need to remember these long strings of numbers the software does it for you This all happens behind the scenes the end users just click a few buttons or swipe their fingers on their phone And the software takes care of the rest this makes the concept of a Bitcoin transaction fairly straightforward Let's say I own the keys to point zero one Bitcoin at a particular Bitcoin address And I want to send all of it to my friend in Japan, so he shares his Bitcoin address with me All I do is tell the blockchain. I am the true owner of 0.01 Bitcoin at this particular address Draw down my account by 0.01 Bitcoin and send it to this other address the software then checks my signature to verify I'm the rightful owner confirms that there's enough Bitcoin in my account to send and Immediately sends the Bitcoin from my address to his of course again to the end user That just means scanning a QR code with your phone or pasting in a Bitcoin address and hitting send once the transaction is confirmed Every single ledger on the entire network is updated to show the change in ownership This prevents me from ever trying to re-spend funds, which I don't have if for example I tried to spend another 0.01 Bitcoin from the same address Every computer would show in their records that I actually didn't own any more Bitcoin and the transaction would be rejected This prevents what's called double-spending, which is a problem that used to plague other earlier digital currencies Bitcoin solved the double-spending problem Push versus pull Because of the way this payment process works Bitcoin is considered a push system rather than a pull system meaning Spending Bitcoin requires funds to be intentionally pushed out of the address as opposed to a credit card or a checking system Where merchants can pull money out of your account when you give them your information like? ACH with checking accounts or auto payments with a credit card Remember every single waiter who has swiped your credit card has all of the information necessary To pull money out of your account with or without your approval when you spend Bitcoin You don't have to worry about anybody stealing your information You can send and receive digital cash without needing to trust that somebody won't loot you in the future The system also eliminates charge backs where merchants are forced to cover the cost of inaccurate credit card transactions Say a merchant sells fifty dollars worth of goods online through a credit card transaction They ship the product out, but three months later. They're contacted by the credit card company The customer says they never received the product or they claim that the fifty dollar transaction was the result of identity theft The merchant is now required to return the funds eating the entire cost of any shipped goods with Bitcoin There are no charge backs when you receive Bitcoin. It's an irreversible Transaction merchants receive digital cash that was pushed to them from their consumer This reduces overhead costs for companies and it will reduce prices for consumers security One might wonder if owning Bitcoin means owning a bunch of numbers and you can easily copy those numbers Doesn't that mean you can create more Bitcoin? The answer is no you can copy the digital keys necessary to move the Bitcoin, but not the Bitcoin itself Just like making copies of your car key doesn't create a new car Duplicating your digital keys doesn't make new Bitcoin It does however increase the risk of somebody else getting your keys No different than making a bunch of copies of your car key Storing Bitcoin safely is thus about storing your private keys safely and right now. It is not the simplest process Securing any digital data is hard though companies are starting to offer ways to secure Bitcoin more easily You can store Bitcoin keys anywhere You can store a string of numbers your hard drive a smartphone flash drive a smart watch a Camera memory card or even written down on a piece of paper if someone gets access to your private keys They can prove ownership to the Bitcoin network and authorize transactions on your behalf It's kind of like losing your debit card and pin at the same time except with Bitcoin There's no bank you can call to get your money back once Bitcoin is moved out of an address There is no way to get it back new perks Since Bitcoin is stored in the digital cloud anybody on the planet can become his own bank Usually we use banking services to provide us with security and easy access to our money But the way Bitcoin the software was created Anybody can create their own account and be the sole owner of the digital keys Necessary to spend their funds and they can spend those funds from anywhere in the world to anywhere in the world Also, there's no mechanism to freeze accounts on the blockchain Anybody can create as many Bitcoin addresses as they like and they need not reveal their identity to do so Each individual is empowered to spin receive and store his own money without Authorization or permission from anybody else if these claims sound dubious given that we're talking about computer software I would recommend diving into the cryptography behind Bitcoin the applied mathematics This book is meant to be introductory so we'll simply say that mathematics makes it impossible for unauthorized people to spend your Bitcoin This is also the reason that Bitcoin is called a crypto currency. It's a currency based on cryptography So to summarize Bitcoin as a currency is modeled after gold It's scarce and the supply cannot be arbitrarily inflated Bitcoin is stored in the online ledger Ownership means owning the private keys to a corresponding address The keys cannot be forged They give robust digital security to the funds and they allow the owner to easily spend from his account Bitcoins must be pushed from each address and they cannot be double-spent Bitcoin transactions are instant and they go directly to the recipient Bitcoin transactions are instant and they go directly to the recipient once a transaction is verified The ledger is immediately and permanently updated and this entire system is designed to be Trustless it doesn't require a central company bank or government to make it work the software The final component to understand is the Bitcoin software The software is what brought the blockchain into existence It maintains and updates the ledger secures the network from a tax and with a little bit of effort Creates new Bitcoin Bitcoin software comes in different flavors Some versions are wallets meaning they're only a place to store keys to Bitcoin addresses and use to send and receive payments Other versions store the entire blockchain on your hard drive While others spin huge amounts of computer power securing the network and bringing new Bitcoin into existence Your average Bitcoin user deals only with wallets You can download Bitcoin wallets onto your phone straight into your web browser or as a standalone program on your computer Wallets don't do anything to secure the Bitcoin network But they allow anybody to store send and receive Bitcoin payments You can even use Bitcoin the currency without running any software Companies exist which host wallets on the web for free You can log in with a regular username and password to access your online wallet though these services are convenient They're significantly less secure much of the heavy lifting on the network is done by software called Bitcoin Core Thousands of computers all over the globe run Bitcoin Core and it forms the backbone of the entire network Bitcoin Core is the software that updates the blockchain in sync and protects against double-spending It also requires every computer to download the public ledger in full Anybody can download and run Bitcoin Core on their computer This can be a bit of a hassle However, since the blockchain is becoming quite large and it's constantly growing you can think of Bitcoin Core as a new way for computers to talk with each other It's a computer protocol similar to how the internet is a computer protocol Email too is a computer protocol and it's practically universal Bitcoin is the first computer protocol designed specifically for money And it might become the standard protocol just for that purpose Bitcoin Core is also what's called open source software Which means that the code can be freely inspected by the public nothing about it is proprietary Nobody owns it you and I are free to verify the soundness of the software at any time And if you're a computer programmer, you're free to contribute to the project and approve on it Creating everything open source was meant to further reduce the amount of trust needed to use the system mining The final piece of the puzzle is what's called Bitcoin mining The process of mathematically verifying that new transactions or legitimate takes a large amount of computer power and energy So when computers undertake this process, they are rewarded with a small amount of new Bitcoin These computers and their operators are called miners Miners can also make money by receiving small payments for verifying new transactions Most bitcoin wallets have optional fees, which they add to smaller transactions The default fee is currently something like 0.0001 bitcoin So the more transactions the miner verifies the more fees they can collect right now those fees don't add up to very much So the main incentive to mine is the software's reward of freshly minted bitcoin The pace at which new bitcoins are created is regulated by the software itself Based on how much computer power is being dedicated to mining on the network The software adjusts the difficulty of getting new bitcoin In other words as computer power flows into the system the difficulty increases for getting rewarded with new bitcoin If people stop mining the difficulty automatically decreases This regulates to a very precise degree the rate at which new bitcoins are created Currently 25 bitcoins are created every 10 minutes In the early days you could easily mine thousands of bitcoin on your home computer Because nobody had heard of the technology and it wasn't valued today It's virtually impossible to receive any bitcoin from mining on your home computer The power already dedicated to the network is too large Bitcoin mining has become big business As the price of bitcoin has increased the incentive to mine has also increased As a result a huge market has developed for creating new hardware and software Dedicated specifically to mining with maximum efficiency The margins for mining are currently razor thin because of its popularity The software is pre-programmed to gradually decrease the size of the mining reward until it's completely eliminated in the year 2140 At that time the total number of bitcoins will never exceed 21 million And remember each of which can be divided down to 100 millionth of a bitcoin As impressive as this software sounds bitcoin is not a finished product In fact bitcoin core is still technically a beta version The software is being refined and new features are periodically being added So how does the software get updated? By the entire bitcoin community remember bitcoin is open source So everyone is free to contribute The thousands of miners are not obligated to run any particular version of the software Which means there's no central organization forcing changes on anyone This means development is slow cautious and with the support of the majority of the bitcoin community In a sense it's up to the entire network to decide how and when it will be updated Every computer on the network is free to leave at any time They can branch off and create their own unique network if they like For example if a miner does not agree with one of the updates He can run his own version of the software and is free to persuade people to join him This creates a very strong incentive to make updates which are beneficial to the entire bitcoin network Not just a select group of people That being said there is still a core group of developers working on bitcoin The creator of bitcoin whom i will write about in a minute is no longer working on the project But those with whom he was closely working still are So they have an elevated status in the bitcoin development community Ultimately it's still up to every individual participant to decide if they want to incorporate new ideas Whether they're proposed by the core developers or anybody else And even if the core developers turned malicious and greedy and decided to change all the code to specifically benefit them In this way the bitcoin community has many checks and balances to ensure bitcoin remains beneficial for all users The creator Naturally, we'd like to know about the creator of this invention Turns out when he released his work to the world in 2009, he chose to remain anonymous We don't know his real identity. He communicated with people online through the pseudonym satoshi nakamoto Many people have speculated about his true identity, but nobody knows for sure Newsweek magazine famously ran an article in march 2014 claiming that they had uncovered the identity of satoshi His name the journalist claimed was actually Dorian satoshi nakamoto not a clever disguise after all Well newsweek turned out to be terribly wrong and dorian nakamoto is not the real creator of bitcoin The magazine is still wiping egg off its face with such an elusive creator Shouldn't we be worried about the security of the software might satoshi have planted a secret back door or weakness that nobody knows about Well, it's not likely because every part of bitcoin is open source and can be freely scrutinized Many developers and programmers have searched the code and nobody has ever found a back door Given the openness of the code, we don't actually need to know who the creator was at this point It would be interesting for sure to be able to hear his thoughts about the current state of the software or to know more about him But it's ultimately irrelevant. The software is far more important than the person It remains to be seen if he can keep his identity a secret forever I would humbly advise him not to use his credit card at home depot Part two So what's the big deal? The basic facts about bitcoin have caused plenty of buzz, but it's the future possibilities which cause the most excitement I'd like to go through a number of different examples to show how bitcoin might be used in the future Put yourself back in the 1990s Everybody used the landline phones to communicate with each other and landline phones were good for one thing making calls But today we expect our phones to do a lot more We walk around with smartphones in our pocket and take for granted that they take pictures navigate roads surf the internet play games read books and can become flashlights In a short period of time the smartphone has become the swiss army knife of technology The software running on our cell phones makes these innovations possible Hundreds of thousands of different apps can all be created and run within the same programming environment This freedom is what allows your phone to be used for various purposes The same device can stream music access your bank account and record a video all at the same time Bitcoin also is a programming environment allowing for different apps if you will to be created in a similar way It is essentially Programmable money We wouldn't expect phones to only make phone calls anymore and we shouldn't expect currency to only be used as a medium of exchange Microfinance remittances and the unbanked Before covering purely technological possibilities We need to realize that bitcoin could bring financial tools to the underdeveloped world in a big way Currently more than two and a half billion people do not have access to basic financial services Not even a bank account bitcoin can be used by every single person with an internet connection Everyone from rural sub-saharan farmers to techies on wall street can be his own bitcoin bank Able to secure transmit and receive payments from anywhere in the world Even if a small fraction of the world's unbanked ever use bitcoin That would be tens of millions of people given control of basic financial tools for the first time This opens up new doors in terms of lending and microfinance Getting capital to underdeveloped countries is notoriously difficult And it requires going through lots of middlemen who charge big fees Little infrastructure exists to connect lenders with rural farmers Businessmen or regular citizens needing a loan bitcoin requires minimal infrastructure Anybody on the planet can lend borrow or give directly to anybody else from the congo to shanghai Without fees delays or authorization from any company a farmer doesn't need to set up a bank account Provide anyone with information or have a credit score or proof of income to participate in financial markets Workers in kenya can now receive money from entrepreneurs in new york city as easily as they can send money to their neighbors They have access to the exact same public ledger This could also dramatically change the remittance market remittances are payments that workers in one country send home to their families in another country The global remittance market is estimated around $550 billion annually and the system is complicated Companies take huge cuts often more than 10 out of the amount being sent Bitcoin allows for seamless remittances instantly for almost no cost and without any interference from middlemen Companies like western union would have virtually no comparative advantage to offer Workers sending remittances directly back to their families in bitcoin This benefits the workers the families and their local economies as cliche as it sounds Bitcoin could help bring communities and countries out of poverty if it seems absurd to imagine rural farmers using bitcoin Consider two things Bitcoin the currency can be sent and received using basic text messaging services and underdeveloped countries Already have extremely high rates of cell phone ownership, which are currently being used to send money to each other A company called M. Pesa Currently provides money transmission services in Kenya, India, Tanzania, Afghanistan, South Africa, Egypt, Mozambique And a number of other smaller countries users can send and receive money using only their cell phones The service is immensely popular and growing. However, it still requires a middleman M. Pesa who needs to make money Transaction fees can range anywhere from less than a percent to more than 60 There's no reason why bitcoin could not be used instead with less friction cost and trust required And with much greater access to a global market international trade also democratizes the world a bit more Strong borders have created very sharp differences in countries financial systems And as a result workers in different countries are artificially separated from each other They aren't permitted to benefit from trade But if you can easily communicate and exchange across borders those borders become less steep and less relevant Colored coins and the global asset register The smallest unit on the public ledger is point zero zero zero zero zero zero one bitcoin That's one hundred millionth of a bitcoin This unit has been named one satoshi after the technology's creator But one satoshi does not need to equal one satoshi nor does it need to reside only in the blockchain Here's what I mean Units on the ledger can be assigned to real world goods Meaning the ownership of a real world good can be transmitted and tracked on the public ledger as securely as a bitcoin For example, say you want to establish ownership of a car instead of going to lawyers and sorting through paper records You could assign a specific fraction of bitcoin to the car Whoever owns that bitcoin would be the legitimate owner of the car No forgery. No clunky paperwork. No confusion. No lawyers Ownership becomes quite simple If you own the keys to a specific satoshi on the blockchain, you own that corresponding good Recording ownership on the public ledger means you can change ownership of any good Instantly internationally and without a bunch of lawyers The idea of assigning real world goods to bitcoin is called colored coins It's as if those particular fractions of bitcoin that correspond to physical goods have color They represent more than just bitcoin on the blockchain colored coins blend digital and physical ownership together Imagine all of the important goods that need titles houses cars boats stocks bonds, etc Ownership of a boat on the blockchain would be indisputable and unforgeable to the entire world Anybody with access to the blockchain would immediately have access to stock markets and other financial instruments The buyer of a house could instantly send $150,000 to the seller and receive his title instantly The transaction could even happen on their cell phones if they like Using bitcoin and the blockchain this way creates what's called a global asset register Where anyone can immediately verify the ownership of any good tied to the blockchain Whether it's a house a gold bar a mortgage or even smaller goods like a lawnmower think your neighbors stole your lawnmower Well, you can imagine a world where disputes over ownership can be easily resolved by referring to the global blockchain In addition whenever a bitcoin is transferred the transaction is time-stamped This means that the blockchain can be used for signing important contracts or proving that a particular exchange happened at a particular time Whenever the colored coin was exchanged at that exact moment the ownership changed the contract was signed or the deal was made No forgery is possible Smart property smart money Owning something on the blockchain might be more secure than our current system, but the idea is still very abstract Smart property makes ownership concrete Imagine you purchase a car with bitcoin your title is provable on the blockchain Now imagine the physical keys that you use to drive the car are also programmed They will only work for whomever controls the correct colored coin In other words the car will start for only the true mathematically provable owner or owners This would make auto theft immensely more difficult Thieves would have to access your coins on the blockchain in order to steal your car Imagine being able to send digital car keys to somebody You and only you could create self-expiring keys to your car from the other side of the planet And send them directly to whomever you choose and you could do it from your cell phone A valet might only have access to your car until you choose to digitally revoke permission Your kid might be able to drive until a certain time of night or within a certain specified geographic region The possibilities are endless Computers might only start for one true owner doors might only open with digital permission Who knows perhaps some property could self-destruct if used by people without corresponding ownership on the blockchain This is why it's called smart property We could in essence program physical goods to behave in a certain way for those with the correct digital key Those keys would be traded and secured on the blockchain further shrinking the gap between digital and physical A company might set up a digital wallet for employees and specify only $300 can be spent on particular office supplies. The money literally couldn't be spent for anything else Or instead of handing an employee the company credit card for his business trip You could give him a digital wallet which would only work within a specific time frame for a specific amount or at specific locations After that time ends any remaining balance could be automatically returned to the company funds A father might set up a college fund for his daughter and specified that the funds will only be usable after she turns 18 This kind of specification could literally be programmed into the money itself Even the mundane grocery run could be improved with this technology Bitcoin allows for long-distance payments enabling users to simply wave their smartphones in front of a scanner to pay for something They're called NFC payments So imagine walking into a grocery store pulling anything you need off the shelf and loading it into your cart Which automatically reads the items that you've selected You then walk straight out of the store to your car passing by an NFC scanner on the way out No need to take out your wallet hand over your personal information to somebody Worry about your identity being stolen or even interact with anybody Programmable money even seeps into the legal profession Usually we don't think of lawyers jobs as being easily automated But consider a simple example involving a death certificate and the execution of a will Imagine a computer program which searched the web for news articles and obituaries cataloging who died and when Once enough evidence was gathered a death certificate could be automatically issued and the estate could be automatically dispersed To the appropriate recipients publicly verifiable on the blockchain lawyers might not need to be involved at all Legal documents payments and contracts could all be automatically created and executed without trusting any third party in the process It's a wild idea and it's distant in the future, but it's possible with the technology Try programming a regular dollar bill to automatically transmit itself into the appropriate bank account upon somebody's death You'll quickly see why techies are excited about the idea of programmable money Multi-signature As explained in part one every bitcoin address has two corresponding strings of numbers one public address and one private key But this is only the default setting if desired the software allows multiple private keys per address This is called a multi-signature wallet or multi-sig for short A multi-sig wallet requires multiple digital signatures in order to spend any funds Like a check which must be signed by multiple people in order to be valid The software can create a bunch of different combinations For example, it can create a wallet which requires two of three digital signatures in order to send payments Meaning the wallet creates three corresponding private keys and it would absolutely need at least two of those keys In order to recognize a transaction is valid Or it could create a four of five wallet a one of six seven of seven ten of fifteen or any other combination Multi-sig wallets can be used for company funds family budgets or even basic bitcoin security A husband and wife, for example, could set up a two of two wallet for their vacation together They could specify for any big expenditures The software would need both of their signatures requiring them to agree unanimously Or say they simply want to secure their funds They could create a two of three wallet the husband would hold one key the wife another And a trusted friend could hold the third in case anything happened to either of them The trusted friend couldn't steal their money because he only has one of the two required keys And if either of them lost a key, they would still be able to access their funds This is how some online bitcoin wallets secure their clients money They create two of three wallets give two keys to their client and only keep one key themselves That way even if the company gets hacked users still retain control over their funds Bitcoin escrow and arbitration services work the same way Say you're a contractor who's being paid in bitcoin a two of three wallet is created by your employer You have one key your employer holds one key and an escrow or arbitration service holds the third Your employer would deposit money into the wallet Which then couldn't be withdrawn without a second party's agreement if the work goes smoothly The employer and contractor authorize the transaction and the money is immediately sent If however a dispute arises Either the work wasn't finished properly or the employer refuses to pay for some reason Either party can contact the escrow service which holds a third key The arbitrator could then review the dispute and decide whether to authorize a transaction paying the contractor or return the employer's funds The security of a multi-sig wallet is very flexible If you want to be extremely secure with your digital money You could create a five of five wallet keeping one key on your computer one on your smartphone Another on a flash drive deposited in a safety deposit box at your bank One on a camera memory card and one with the numbers physically written down on a piece of paper Then in order to spend your money somebody would require access to every single one of those keys Which is an absurd scenario unless you're the rightful owner Granted it would be quite tedious to ever spend money from the wallet But the security would be extraordinary of course such security wouldn't be required for everyday use But that's the flexible nature of programmable money You can use whatever level of security you need for this reason multi-sig wallets are already being used in the bitcoin ecosphere Sound money As neat as the technology is it was the economics behind bitcoin which originally caught my eye Currencies are important to any modern economy and successful currencies tend to share similar properties To understand the benefits of bitcoin the currency we need to dive a little bit into basic economics First a definition Currency is simply a tool used for what's called indirect exchange Meaning the currency is used as a middleman to get what we want Instead of directly bartering with my local farmer trading my shoes for his eggs I can trade my shoes for us dollars and then trade my dollars for his eggs And that example we would say that the us dollar was used as a medium of exchange So when people buy computer parts online, for example with bitcoin They've used bitcoin as a medium of exchange the most successful currencies usually share the same five properties They are scarce divisible portable Durable and they remain valued over time I'll briefly explain each of these properties and how bitcoin the currency relates to them The first property has already been mentioned, but it's arguably the most important Successful currencies must be scarce Meaning there can't be an unlimited supply of currency units Think of monopoly money. Why isn't it used as currency outside of the board game? Well, it's simple anybody with a scanner can print up as many copies of the currency as they like I might be a monopoly billionaire But that doesn't mean much if everybody else is also a billionaire A billion units of a worthless currency won't buy you a pack of gum Bitcoin like gold is fundamentally scarce No more than 21 million bitcoins will ever exist. This scarcity is mathematical. It's not physical It's ultimately based on software and computer programming Now it's one thing to say the supply of bitcoin cannot be arbitrarily inflated And it's another to understand just how historically significant this is currency after currency has been destroyed because of inflation When a central authority gets out of control and prints too much money Whoever holds on to cash gets decimated on average currencies that aren't backed by hard assets Don't last more than a few decades because their central issuers can't help but print more money This is true from the days of the roman empire through modern-day argentina and zimbabwe The united states has been experimenting with so-called fiat money since the 1970s Money, which is not backed by any hard asset and since then the price of gold Which is a traditional measure of inflation has gone from $32 an ounce to currently over $1,200 an ounce with ominous signs on the horizon Countries in latin america have experienced round after round of double digit inflation And zimbabwe notoriously had inflation so severe they were printing $100 trillion notes Being inflation proof has very large benefits, especially for smaller developing countries with unstable money supplies The second property of successful currencies is divisibility You have to be able to easily divide a currency into smaller units Take a scarce resource for example cows It would be very difficult to make precise exchanges using cows as a medium of exchange What might a loaf of bread cost a hundredth of a cow and which hundredth the ears are the tail As you can imagine trying to meaningfully divide a cow up into currency units Would not only be gross but impractical bitcoin is eminently divisible down to 100 millionth of a bitcoin This means that once all 21 million bitcoins are mined 2.1 Quadrillion individual units will exist And if somehow that weren't enough if the value of each unit was too high to make tiny transactions For example, then a simple change to the code would allow bitcoins to be divided into even smaller fragments The next property of successful currencies is portability You need to be able to easily transport a currency around Imagine using something clunky like cinder blocks is currency. How would you pay for your groceries? By rolling wheelbarrows full of cinder blocks through the aisles Bitcoin is extremely portable given its digital nature In fact, bitcoin might be the most portable currency ever You can carry an unlimited amount with you on your phone on a laptop a flash drive or stored in the web Remember owning a bitcoin doesn't come with any physical possession It's owning the digital keys required to move the bitcoin on the ledger So you can store bitcoin keys anywhere you can store numbers even on physical paper if you choose Plus not only can you store bitcoin without physical encumbrance You can also send them anywhere on the planet instantly Transacting with somebody on the other side of the globe literally takes a few clicks or swipes of a finger No other currency in history has ever been so portable The next property of popular currencies is durability You can't have your storage of currency significantly degrade over time Imagine using something like bananas as currency. They're scarce useful somewhat portable But they have a lifespan bananas turn to mush after a few weeks And nobody wants to trade rotting fruit with each other Bitcoin being mathematical is entirely durable. Remember owning bitcoin means you own the digital keys tied to the bitcoin And numbers do not degrade over time Hardware however might still with simple precautions It's safe to say bitcoins will never lose their durability and they certainly won't rot This particular combination of scarcity portability and durability has never been seen in the history of money There's usually a trade-off between the security of money and its convenience For example carrying around paper bills is more convenient than carrying around gold nuggets But paper bills can be printed off a press gold nuggets cannot Bitcoin happens to combine both of these properties and even improve on them When compared to bitcoin paper is clunky You can't instantly send paper directly to another person on the other side of the planet The final property of successful currencies is that they remain valued over time Goods can lose their value for many different reasons. They can degrade become less useful Or they can be discovered to have an undesirable property take lead paint for example It used to be a highly valuable good until people discovered that it was dangerous Then it's value plummeted whether or not bitcoin will remain valuable over time is an open question It was created only a few years ago It took about a year before one bitcoin had any market value whatsoever Many years will need to pass before we can confidently answer whether or not people continue to value it But within the limited time that bitcoin has existed Its value measured in terms of price has been growing The price has gone from essentially zero for one bitcoin to less than a penny to a few dimes through the one dollar mark past ten dollars a hundred dollars two hundred dollars five hundred dollars and all the way up to over $1200 a bitcoin as I write the price for one bitcoin is around four hundred dollars Thus it has a very strong track record so far A common objection to bitcoin is that the price is too volatile I'll address this in part three along with the other popular misconception that a currency must have Intrinsic value bitcoin scores highly on the traditional properties for a sound currency But it also adds a few new ones. It's digital the issuance is decentralized and it's programmable Never have such properties existed in a currency because it resides on the internet and is even accessible through text messaging Bitcoin destroys any barriers to entry for owning a sound currency Anybody with a phone on the entire planet can own bitcoin and trade internationally and there's no clear way to stop them That's potentially life changing value created for billions of people Meta currency side chains and mesh networks The current international financial system is very clunky Dealing with multiple currencies is a bookkeeping nightmare Bitcoin could become a universal medium of exchange for dealing with multiple currencies at once a kind of currency of currencies Instead of trying to convert us dollars to 10 different currencies to send internationally You simply send bitcoin and allow the recipient to settle in the currency of their choice In that way bitcoin could become a kind of standard for international trade that wouldn't rely on the politics or good governance Of any particular nation in fact given all the benefits It's not unreasonable to imagine a time when bitcoin becomes the preferred medium of exchange In contrast to centralized currencies with such a stable money supply We might even end up denominating traditional currency in terms of bitcoin Many currencies have used a gold standard formally declaring a fixed exchange rate between their currency and gold This was used to protect the currencies from arbitrary inflation Well, if bitcoin is digital gold might some currencies want to denominate their currency with a bitcoin standard for the same purpose? It sounds wild, but it's certainly possible Bitcoin might also end up being the reserve currency for future technological innovations built on top of the blockchain Right now programmers across the globe are building new services and platforms to be used with the blockchain That could be integrated with bitcoin as so-called side chains This means they would offer additional services not allowed by the basic bitcoin software But they could still seamlessly transfer in and out of the same blockchain Take micro payments as a concrete example Bitcoin is not well suited for transactions involving only a few cents at a time It can be done, but it's inefficient for technical reasons. The blockchain, however, is perfectly suited for micro transactions So a programmer might create some software call it bitcoin micro That easily processes transactions dealing with pennies or even fractions of pennies Those tiny transactions could be recorded on the side of the main blockchain on a separate protocol And then added back into the blockchain after the fact without tampering with or disrupting the main bitcoin system Side chains would allow programmers to continue to innovate in ways in which bitcoin does not allow While still accessing the same blockchain The possibilities are extremely advanced and beyond the speculation of this book side chains are not currently implemented But the bitcoin community is working on them and debating their pros and cons as I write Another futuristic invention incorporating bitcoin is called mesh networks A mesh network is created when one person shares his internet connection with other people through wi-fi Then the recipients reshare that connection with even more people creating a kind of web of peer-to-peer internet access Bitcoin can be integrated to allow seamless behind-the-scenes payment for this service For example, if you don't have internet access, you could pull up an app on your smartphone See which networks were available and pay a small fraction of bitcoin to whomever shared their internet with you The payment might be per minute or per kilobyte and it would be as easy as swiping a finger Similarly, if you have access to the internet, you could make some money by simply swiping your finger and sharing your connection with people Everyone with a cell phone could become a paid wi-fi router for complete strangers if they wanted This technology too is being developed as I write Decentralized markets and blockchain voting The concept of decentralization can be applied to more areas than just money One complementary technology being built alongside bitcoin is called open bazaar and it applies the concept of decentralization to an online marketplace The idea is to create a peer-to-peer marketplace to use alongside our peer-to-peer currency Connecting buyer and seller directly without middlemen fees or overseers controlling who trades with whom A farmer in china could set up an online store with open bazaar and be connected directly with his customers all over the world And because the technology would be decentralized without a central point of failure Overreaching governments could do little to shut his store down This could be particularly powerful in countries with strict stifling economic regulations that prevent people from freely trading with one another The blockchain might even be applied to the functioning of government One idea is to bring voting on to the blockchain to benefit from the openness transparency and security of decentralized record keeping Imagine votes were cast by moving specific tokens along the public ledger Each voter would have his own secure digital signature that would be used to cast a vote And he could personally verify that it was tallied correctly voter fraud could be seriously diminished and if implemented correctly The level of transparency would be exponentially greater than modern voting systems The rate of adoption An entire industry has sprung up around bitcoin Companies are trying to radically disrupt financial markets with bitcoin Merchants are accepting bitcoin for their products and venture capitalists are pouring hundreds of millions of dollars Into new bitcoin startup companies The current development around bitcoin is often compared to the early days of the internet Back in the 90s only a handful of geeks knew about the internet and could use it the internet was slow Incredibly clunky and nearly impossible to navigate before search engines were created Nowadays the internet is easy to use and ubiquitous Because the bitcoin ecosphere is still in the early days of development It's not yet easy to use for beginners though. This has started to change of the last couple of years A now legendary article was written for newsweek in 1995 entitled why the web won't be nirvana The author laments the chaos of the internet and is entirely unconvinced that business will ever happen online He wrote quote every voice can be heard cheaply and instantly The result every voice is heard the cacophony more closely resembles Citizens band radio complete with handles harassment and anonymous threats. How about electronic publishing? Try reading a book on disk at best. It's an unpleasant chore the myopic glow of a clunky computer Replaces the friendly pages of a book and you can't tote that laptop to the beach Yet nicolas negrapant director of the mit media lab predicts that will soon buy books and newspapers straight over the internet Uh, sure in quote 20 years later and we laugh at his short-sightedness Yet in the midst of these criticisms many entrepreneurs saw the potential of the internet Only a few decades later the internet has become essential to the global economy and practically universal in developed countries Further comparing the early internet to bitcoin Venture capital is being invested in bitcoin startups at a similar pace to internet startups in the early 90s as of december 2014 over 400 million dollars has been invested in bitcoin startups more than three quarters of which was invested in 2014 alone The industry is now worth several billion dollars between the companies capital investment and speculation surrounding bitcoin Naturally tech companies have been the first to accept bitcoin for payment Companies like microsoft del new egg tiger direct and zinga all accept bitcoin in some way But acceptance is not limited to the tech world Dish network xpedia virgin galactic and even the sacramento kings accept bitcoin for their services non-profits like the american red cross greenpeace united way and wiki leaks accept bitcoin for donations The payment processor giant paypal allows some of its merchants to sell digital products for bitcoin Some u.s political candidates have also begun accepting bitcoin donations for their campaigns like jeff curzon from york city At this point most merchants use payment processors to handle their transactions and they immediately convert bitcoin to their local currency Bit pay is the largest bitcoin payment processor in 2013. They processed more than a hundred million dollars in transactions And in 2014 they crossed one million dollars per day in bitcoin transactions microsoft ceo bill gates recently called bitcoin a quote technological tour to force And virgin ceo richard branson has been one of the leading venture capitalists investing in bitcoin startups Overstock.com ceo patrick bern is such a bitcoin enthusiast that he gives public speeches on the topic And his company doesn't immediately convert all the bitcoin from their sales to cash They hold on to a portion in bitcoin the comparison between bitcoin and the early internet has one more important parallel Right now about three billion people use the internet almost half the world's population But only a tiny fraction of them understand how it works I for one have no idea how the computer protocol tcpip works But that's the protocol which everybody accesses to use the internet Not only do most people not understand tcpip They don't care to understand the internet just works and the same can be said for bitcoin at some point People will neither understand nor care to understand the protocol if it works. That's what matters Imagine you're writing somebody an email next to their email address There's a little box where it says enter the amount to send if you want you have the option of zapping them some Money just by typing in the amount assuming it works. Do you really care how or perhaps more accurately? Will the vast majority of people really care how this payment system works? I think the answer is no and that's a good thing Advanced technology is supposed to work quietly in the background and bitcoin can do just that One major reason there's so much hype around bitcoin is because global markets are massive Even without including all the currently inaccessible markets the potential for a radical new technology is huge Basic online commerce is large and growing and the traditional financial system is not well suited for the digital environment Bitcoin by contrast is literally made for the internet and now that bitcoin is entering the mainstream a bit more The excitement is no longer limited to a tiny group of techno geeks Part three common objections and real challenges Bitcoin has been criticized a hundred different ways Some objections are good. Some are not so good This part is broken up into two sections. The first deals with the most popular objections Nearly all of which are misguided and the second covers the real challenges facing bitcoin The technology isn't perfect and we need to be careful discerning good objections from bad Intrinsic value Perhaps the most common objection is this Bitcoin has no intrinsic value. You can't eat bitcoins. You can't wear them. They have no industrial use Heck, you can't even see a bitcoin. So why would anybody value one in the first place? So this criticism rests on a fundamental misunderstanding of value and the limited understanding of bitcoin Technically speaking, it's true that bitcoin has no intrinsic value But this is not a meaningful objection. Nothing has intrinsic value Intrinsic value is a contradiction in terms It implies that certain goods contain value in themselves separate from humans evaluation of them Water is a popular example. Supposedly water is intrinsically valuable all by itself because of its properties But imagine a world without life if water were Intrinsically valuable if value were an internal property of water Then even in a world without living creatures it would remain valuable But this idea is absurd without living things who would be around to value water and for what reason It's just hydrogen and oxygen after all The confusion resolves itself when you understand that value is subjective by definition Goods are valued by human minds. They don't possess value Value is not an objective property of something It's a human evaluation and humans have wildly different preferences and reasons for valuing one thing over another To me bright orange nail polish is ugly. It's stinky and it's unhealthy. I don't value it at all But other people do some people think that bright orange nail polish is beautiful and it smells nice I think they're crazy, but that's beside the point Nail polish is valued differently by different people So yes, it's true. Bitcoin has no intrinsic value. Either does anything else Bitcoin gold silver and every other currency are only valuable because of human minds not by virtue of their internal composition Though to be fair what most people probably mean when they say bitcoin has no intrinsic value is something like this Bitcoin has no tangible use value You can't do anything with it other than send it to somebody else and a currency must have at least one other use But this objection also fails both empirically and theoretically Lots of different things have been used as currency throughout history some more useful than others In the micronesian islands, for example Gigantic stones were once used as money. Some stones weighed more than four tons and were over 12 feet in diameter These stones changed ownership orally. The stones never needed to physically move One stone even fell off a canoe and ended up in the ocean But its ownership still circulated through the economy because everybody agreed the stone still existed Just somewhere underwater. So I ask of what use value is a two-ton stone at the bottom of the sea? None But such a currency worked by convention. They simply agreed to use it Paper currency does not get its value because you can use it as kindling Gold is not used as a currency because it can also make pretty jewelry While it's true that most currencies have some kind of use value This is only a side effect of traditional currencies being physical Bitcoin is not physical. So naturally it doesn't have any physical use value It does however have lots of digital use value as explained in part one and two It represents ownership on the biggest most secure public ledger in the world It can be used to track the legitimate ownership of any asset on the planet and transfer it instantly to somebody else It is transparent bookkeeping on a global level Accessible to everybody So if people value these properties and the supply of bitcoin is limited then each unit of bitcoin must have some value Now it's a completely different question to ask. What should the price of one bitcoin be? Nobody knows the answer. Markets are currently trying to figure that out. Remember the base unit of bitcoin is one satoshi And as of december 2014 one u.s. Dollar can buy around 250,000 satoshis should it be more or less? I haven't a clue Ponzi scheme What about the popular criticism bitcoin is nothing but a ponzi scheme? This objection can be easily refuted. No bitcoin is not a ponzi scheme by definition A ponzi scheme is a financial instrument that's designed to pay out returns to investors Based on the future influx of new investors. So for example Say I tell you about an offshore investment Which pays high returns an initial investment of a hundred dollars yields ten dollar dividends every quarter sounds great, right? So you invest a hundred dollars and start receiving your dividends as promised Well, where does the ten dollars keep coming from? The investors who entered the scheme after you and where do their dividends keep coming from? The investors who entered after them and so on Ponzi schemes like this can run for a long time making early adopters enormous amounts of money until finally the whole scheme just falls apart Whoever entered the market last to get stuck holding the bag Bitcoin has little in common with such a scenario. There's no bitcoin company No central control or dividends being paid out. There are no promises of returns being made Quite simply so far bitcoin is an appreciating asset It's true that if you got in early you could have made a huge amount of money Selling your bitcoin to somebody after you but that's no different than buying apple stock early and selling it to somebody else Or buying a home and watching the price appreciate because your local real estate market is growing It's an asset which has so far appreciated in value because of increased demand. It's that simple Criticizing early holders of bitcoin is no more sensible than criticizing owners of gold when it was under a hundred dollars an ounce Bitcoin is in no way a Ponzi scheme Not a real currency One fashionable criticism of bitcoin is to say that it's not a real currency or that it shouldn't be called money But this simply stems from a lack of clear definitions Currency and money are often used interchangeably in our common vocabulary But if we want to be precise, they do indeed have different definitions unequivocally bitcoin is a real currency But that's not saying much lots of things are used as currency and have been throughout history seashells wheat salt stones paper gold cigarettes sugar All of these things have been used as currency as explained in the section sound money a currency is simply a medium of exchange So in different situations different things are used as currency In prison cigarettes are a popular currency in washington dc Tied detergent is used as a black market currency Online bitcoin is used as a currency Factually speaking bitcoin is traded for goods and services online and goods and services online are traded for bitcoin Therefore, it's a real currency But does bitcoin also qualify as money the answer equally clear at this point is no Money is just a word we use to reference the most popular currency in an economy and in almost every circumstance Bitcoin is not the most popular currency Of course, this should be no surprise given that bitcoin didn't exist just a few years ago The only difference between currency and money is the degree of popularity So it's no criticism to point out that bitcoin is not money This might change in the future if it becomes more popular and widely accepted, but it's not there yet Bitcoin is not backed by anything Another common criticism is that bitcoin isn't backed by anything because it's not redeemable in any commodity Detractors say it's unsuitable as a currency. I'm very sympathetic to this idea Hard money enthusiasts are very right to point out that currency is not backed by anything Often collapse within decades The best solution so far has been to tie currency to something with a physically limited supply Gold and silver are prime examples But we need to take a step back and ask why do unbacked currencies collapse? The answer is universal inflation They don't collapse because they're unbacked. They collapse because they are easily inflated. This is a key distinction Granted it's reasonable to assume that unbacked currencies can be easily inflated, especially given their history But it's not a necessary connection We can envision a currency not redeemable in any commodity and yet safe from inflation As explained in part one that currency is bitcoin In fact, it's safe to assume that bitcoin is the first currency which solves the problem of inflation Without relying on its physical scarcity Bitcoin is inflation proof thanks to mathematics and the absence of a central issuer So if we don't have to worry about inflation, whether or not bitcoin is backed by anything becomes irrelevant Volatility Another common criticism is to say the price of bitcoin is too volatile for it to be used as a currency Nobody wants their money to fluctuate up and down 10 percent or more every day Sound currencies are supposed to have a relatively stable purchasing power and bitcoin has gone through a series of enormous Booms and busts There was a lot of truth to this objection. The price of bitcoin has Unquestionably been volatile for the last four years to give you an idea Here are some of the past swings in the market price for one bitcoin July 2010 five cents February 2011 a dollar June 2011 $29 and 59 cents November 2011 two dollars August 2012 13 and a half dollars April 2013 $230 July 2013 $66 October 2013 $116 November 2013 $1,147 April 2014 $360 and December 2014 $381 If the price of bitcoin never stabilizes It's safe to say that bitcoin will not be the most attractive option to use as a long-term currency If we understand why the price has fluctuated so wildly in the first place It's not unreasonable to think that it will eventually stabilize The most important reason is this even after all the hype the bitcoin market is still small It's tiny by comparison to other markets The total market capitalization of bitcoin Which is the number of bitcoins in circulation times the price is currently just over five billion dollars Now to put that in perspective global stock market capitalization is over 63 trillion dollars Bitcoin has less than point zero one percent of the capitalization of global stock markets That means small amounts of money a few million entering or exiting the market causes huge swings in the price Thus it shouldn't be surprising that the price has behaved erratically And it will likely continue to do so in the near future The amount of money currently sitting in bitcoin could increase 100 fold and it would still be a fraction of larger markets Also worth noting to date each bitcoin boom and bust has had a common theme The bottom of the bust ends up higher than the top of the preceding boom One bitcoin went from $1 to $29 back down to two Then from $13 to $230 back to 66 Then from $116 to $1,147 down to 360 Now this does not mean that the trend will continue indefinitely But it does imply that the interest and demand for bitcoin continues to grow even with these large swings While the price is still volatile companies have developed ways to mitigate the risk of holding bitcoin A company called coinapult has created a system called locks Where customers can permanently lock in the purchasing power of their bitcoin They tie the value of your bitcoin to another asset like us dollars or gold So a $1,000 purchase of bitcoin would be worth $1,000 next year regardless of the nominal price of bitcoin This prevents holders of bitcoin from either losing or gaining money due to volatility The company bit pay has completely eliminated volatility risk for businesses accepting bitcoin They allow companies to accept bitcoin and immediately cash it in for the domestic currency of their choice In other words, the merchant can enjoy all of the benefits of bitcoin Especially for international transactions while not needing to hold bitcoin directly Allowing payments to be accepted from anywhere in the world with zero percent transaction fees And let's not forget traditionally stable assets like gold and silver have also been volatile in recent years In january of 2006 an ounce of gold was around $515 By september of 2011 it was up to $1,800 That's more than a tripling in price as of december 2014 one ounce of gold is around $1,210 Silver has been even more volatile in january of 2006 an ounce of silver was worth around $8.80 By march of 2008 the price shot up to $20 Then by that november it crashed back down to $9.35 The price then shot up five fold by april of 2011 to $47.50 an ounce As of december 2014 the price is back down to around $16 an ounce That's a drop of more than 66 This kind of volatility does not suddenly mean that gold and silver make bad currencies There's simply been a lot of speculation in these markets and a lot of other factors at play Until the market capitalization of bitcoin grows substantially holding bitcoin carries risk It's a speculative asset at this point But we should not mistake volatility in a small new market as an intrinsic problem with the currency Create your own currency Bitcoin is open source Which means anybody can take the code tweak it however they want and then run their own version as a result Many people have concluded well if anybody can create their own currency the total supply is unlimited But this objection also collapses under scrutiny First of all, it's true that anybody can create his own cryptocurrency Over a thousand alternative cryptocurrencies exist right now besides bitcoin. But here's the difference Alternative currencies operate on different blockchains and different networks This means all the computer power the entire security of the bitcoin network Is being used to secure one blockchain Not one thousand practically all of the new development too is being focused on the bitcoin blockchain However, there's more here that meets the eye alternative cryptocurrencies called altcoins Actually benefit bitcoin in a big way their laboratories for experimentation Any of the algorithms in bitcoin can be tweaked to try to create the best currency possible If for some reason somebody creates an extremely beneficial tweak There's no reason why it couldn't be incorporated into bitcoin out of the 1000 plus altcoins Which exist only a handful have any meaningful changes to the code The vast majority are simple pump and dump schemes fraudsters will create a new altcoin Greatly overstate its benefits which is called the pump and then they'll sell all their coins while the price is temporarily high Called the dump. There's even a coin called barbecue coin Remember no altcoin can access the bitcoin blockchain and the security of their network is tiny by comparison The amount of bitcoin in existence will never change due to somebody creating alternative software An alternative blockchain and an alternative network Some altcoin enthusiasts have argued that bitcoin is just too expensive to buy But again, this argument doesn't hold water either As stated earlier one dollar will currently buy you over a quarter million units on the bitcoin ledger The freedom for anybody to create his own currency is a wonderful thing and everybody benefits in the process Say you don't like the idea of 21 million bitcoins And you don't like that it will take around 100 years to mine them all You can right now create your own currency which has say 97 billion units and they all come into existence all at once Or you could have the mind over a millennium And afterward you're free to persuade as many people as you like to use your currency Imagine that somebody does manage to create something superior to bitcoin And it's so radically different that the developers of bitcoin can't merge it into their network Well, that's a wonderful thing Such an innovation would benefit everybody except the speculators in bitcoin This creates radical beneficial competition Something the monetary world has not seen in a very long time One success story has been an altcoin called dogecoin It was created as an absurdist internet meme, but it caught on Enough people got involved with dogecoin that the community ended up raising over 25 000 To send the jamaican bobsled team to the 2014 winter olympics Now compared to bitcoin the community is still very small But that's what we would expect in a market without any barriers to entry Perhaps large companies will start issuing their own coins in the future We don't know we can't really predict how the technology will be used So yes anybody is free to create his own currency But in doing so they create an entirely separate public ledger and network And unless they offer significant advantages altcoins serve little purpose Criticizing bitcoin because of the existence of altcoins is like saying If anybody can create their own car then gm won't be able to compete Well, actually if gm produces a good product they won't be harmed at all by your competition What about mount gox But what about the infamous mount gox fiasco for those who aren't familiar mount gox was a popular online Bitcoin exchange that went bankrupt and a lot of people lost their bitcoin in the process The media has been especially harsh in criticizing bitcoin because of the virtual bank run on mount gox This scenario too is easily cleared up while it's a shame that so many people lost their money The failure of mount gox has absolutely nothing to do with the soundness of bitcoin as a currency mount gox was a company that went bankrupt Criticizing bitcoin because of a company bankruptcy would be like criticizing gold Because a warehouse went bankrupt and people lost their gold In particular mount gox was a terribly managed company by its ceo mark carpelles Who may or may not be an outright criminal? Investigations are currently underway to figure out the answer To put it in perspective understand that mount gox was the very first online exchange to swap bitcoin for fiat currency It was essentially run by hobbyist nerds who wanted to trade their quirky online money In fact mount gox was originally a platform to exchange trading cards with each other mtgox mount gox stands for magic the gathering online exchange This was a company run by magic card traders who just picked up another hobby It's no surprise that the company eventually folded Nearly all of these first generation bitcoin companies are dead But as bitcoin has grown more legitimate businesses have taken their place To add more controversy to the mount gox scandal the company claimed that their failure was due to an actual problem with the bitcoin software An important claim if true They cited transaction malleability as the culprit Unfortunately for them transaction malleability was a well known well documented part of the bitcoin software Which every well constructed bitcoin business knew about there was even an entire wikipedia article on the topic Over a year prior to the failure of mount gox So either they intentionally misled the public and blamed a scapegoat for their failure Or they were plagued by poor software engineering either way in the long run It's a good thing that the company doesn't exist anymore though. It is a shame that so many people lost their funds Ultimately mount gox was a case of bad management bad technical use of bitcoin bad accounting And potentially criminal leadership. It had nothing to do with bitcoin being flawed Just like in ron's failure had nothing to do with electricity being flawed mount gox was a big story, but it wasn't the only bitcoin bank run Dozens of different companies have either gone bankrupt or disappeared with their clients money in every case these failures happen for the very same reason Bitcoin keys are held by third parties at mount gox One person controlled all of the keys to everybody's wallets an obviously dangerous idea The whole point of bitcoin is to allow users to be the sole secure owner of their money Outsourcing this ownership to a third party is a big risk once bitcoin is spent. There's no getting it back Bitcoin should be thought of as cash You wouldn't leave a big pile of cash lying around for a third party to watch You put your cash in your wallet where it belongs and the same is true of bitcoin Don't let somebody else hold on to your keys at the end of this book I'll share some resources where you can find out more information about how to properly secure bitcoin deflation One criticism is strictly economic some argue that bitcoin is a deflationary currency and therefore it won't work A deflationary currency gains value over time, which means prices denominated in bitcoin would steadily fall It's the overall price level falling that they're concerned about the textbook worry about deflation goes something like this As prices fall consumers realize that their money can purchase more stuff in the future So they choose to hold on to their cash rather than spend it which causes prices to fall even faster Then wage rates supposedly fall alongside consumer prices further reducing how much money people can spend This in turn reduces the amount of goods produced in the economy creating a kind of downward spiral But this story is inaccurate both theoretically and empirically The very foundation of the argument is wrong When prices fall consumers don't all refrain from spending take the electronics industry for example Everybody knows that the price of computers falls rapidly if you wait a year that laptop your eyeing will be heavily discounted from its current price Yet laptops and computers still get sold The electronics industry is booming Even though consumers know prices will be much cheaper if they only wait a few months or a year Falling prices don't paralyze the economy for a simple reason at some point consumers will spend their money Nobody holds on to cash The whole purpose of saving your money is to spend it in the future As prices fall more people get enticed to buy stuff Personally, I think that most computer graphics cards are too expensive. So I haven't purchased a nice one But if the right deal comes along if prices drop far enough I'll buy one For this reason falling prices draw buyers into the market. They don't push them out If consumers don't radically change their behavior because of falling prices the hypothetical scenarios about dangerous deflation don't hold much merit And historically speaking falling prices are almost always accompanied by an increase in production and people's standard of living Prices fall because entrepreneurs find the more efficient ways to produce. In fact, falling prices should be an expectation in a competitive market Deflation isn't benign. However customers and merchants still have to deal with adjusting prices and negotiating contracts to take into account Unappreciating currency, but this is not an insurmountable problem Again, the electronics industry has been dealing successfully with falling prices for many decades And because the production of bitcoin is predictable It's reasonable to expect the rate of deflation to be slow and predictable In proportion to the natural rate of growth in an economy Of course, this could only happen if the volatility of bitcoin stabilizes The astute reader might say but what about the great depression? wasn't that caused by deflation? The answer without going into too much detail is yes and no The word deflation is ambiguous In the most popular sense Deflation simply refers to falling consumer prices But deflation can also mean a contraction of the money supply and when the money supply shrinks less money circulates through the economy And so prices tend to fall So what that means is a deflation of the money supply results in a deflation of prices And this is what happened during the great depression Consumer prices fell but it was caused by a contraction in the money supply This contraction devastated the financial world largely because the system was built on top of so-called fractional reserve lending in a fractional reserve system banks only hold onto a fraction of their customers deposits And they lend out the rest This system works fine unless customers start worrying about the safety of their deposits If a bunch of depositors withdraw their money from banks all at once if they create a bank run A fractional reserve system can quickly implode All deposits aren't held in reserve So when the bank runs out of money some deposits essentially disappear which shrinks the overall money supply And this is what happened during the great depression. There were nationwide bank runs caused by worries about different banks financial health Of course, even the contraction of the money supply wasn't the ultimate cause of the great depression It was just one part a full elaboration is not appropriate for this book But keep in mind one often overlooked fact The entire decade prior to the great depression was marked by an inflation of the money supply during the 1920s The united states central bank expanded the money supply and helped create an unsustainable boom Which infamously burst in the stock market crash of 1929 of the many contributing factors to the great depression The u.s central bank was a large one Bitcoin however does not face these systemic problems. It's not a fractional reserve currency You cannot lend bitcoin you don't have any bitcoin bank runs like the failure of mount gox Won't result in a kind of system-wide collapse which seems to plague fractional reserve systems And deflation measured by falling prices Certainly poses no threat on the contrary. It would be a sign of increased productivity The disaster scenarios constructed about deflation are largely based on economic and historical confusion Criminals and terrorists Another common objection is well, what about criminals and terrorists won't they be drawn to bitcoin? The answer is yes, though probably more so in the future Digital cash if it becomes anonymous will undoubtedly interest those with ill purposes But in its current form bitcoin is not anonymous As explained earlier every transaction is recorded in the blockchain and law enforcement has had reasonable success Identifying the owners of addresses on the ledger in its current state bitcoin is far more easily traceable than cash And several underground black markets using bitcoin have already been busted and shut down by law enforcement However, let's say that bitcoin became anonymous in the next year or two It's reasonable to assume that somebody will develop a reliable way to make it anonymous People are currently working very hard at this So let's assume that people could safely launder money Purchase illicit goods fund terrorism, etc. With bitcoin We need to ask ourselves Is it worth it? Should all of the benefits of bitcoin be thrown away to try to hamper the efforts of a very small group of people Who will be using bitcoin illicitly? I'd say no keep in mind physical cash is by far the most popular currency for criminals They use it almost exclusively to launder money fund terrorism and buy illicit goods But that's no criticism of physical cash If we wanted to say Ban bitcoin because criminals might use it that would put regulators in a very awkward position The same exact argument could be used to ban all cash in credit cards and bank accounts And the entire internet and casinos and even tied detergent Which is used as a black market currency in washington dc The fact is this criminals will always find a way to exchange currency with each other It doesn't make sense to turn around and criticize the currency for it Just like we shouldn't try to ban email because criminals use it to communicate with each other We shouldn't try to ban bitcoin because criminals exchange it with each other and to be realistic Bitcoin by its nature is very difficult to ban the technology is already online and it's not going away It would be far more productive to think how we could benefit from the currency and protect ourselves from any bad actors We should indict the criminals not the currency Real challenges Now that the most common misconceptions about bitcoin are cleared up I'd like to address the realistic challenges that bitcoin faces bitcoin supporters have a tendency to see the technology as Invincible and perfect Well, it's neither and if we want to clearly understand bitcoin We must see the real obstacles that it needs to overcome The 51 attack The most plausible challenge to the bitcoin network is what's called the 51 attack The details are technical, but the concept is fairly straightforward As explained in part one the ledger is maintained by a decentralized group of computers running the bitcoin software And these computers which are called miners contribute a massive amount of computer power Verifying transactions and securing the network Well, the 51 attack could happen if one group controlled a majority of this computer power Part of the brilliance of bitcoin is that the system works by consensus The ledger is not maintained by any central authority It's maintained by the decentralized group of miners who must rely on majority agreement This has great benefits, but it also comes with risks If a single group were to contribute the majority of computer power to the network They could tamper with some very important parts of the system For example, such a group could get away with double spending Allowing the same bitcoin to be spent twice in a short period of time Because miners determine which transactions are legitimate a majority of miners could allow double spending to happen They could also block certain transactions from being verified Potentially blacklisting specific bitcoin addresses from spending their funds However, they could not steal bitcoin from users' wallets Reverse transactions which had already been confirmed in the blockchain or create new bitcoin out of thin air The record of past bitcoin transactions wouldn't change But they could meddle with the pending and future transactions The greatest damage, however, would be the resulting loss of public confidence A 51% attack might not ruin the technology, but it would certainly shake everybody's trust in the system This is especially important in the early years of bitcoin, while people are still evaluating its trustworthiness Now, some bitcoin enthusiasts will respond Well, a 51% attack wouldn't happen because those miners involved would be shooting themselves in the foot The bitcoin price would plummet along with their revenue And they often add, any group with such a massive amount of computing power would make more money Legitimately mining than by orchestrating a 51% attack These claims are partially true, and in fact, we've already witnessed economic incentives regulating miners behavior Thousands of miners currently pool their computer power together These mining pools contribute huge percentages to the overall computer power on the network And one mining pool briefly crossed the 50% mark And many of its members then voluntarily left and joined other pools to quell any worries As of December 2014, that mining pool now contributes about 20% to the overall computer power But, these economic arguments overlook a crucial possibility What about malicious actors? Right now, miners motivated by profits would gain nothing by launching a 51% attack But it's not difficult to imagine powerful groups in the future wanting to ruin the system outright Bitcoin could be perceived as a threat to powerful entities, whether governments, established corporations, or maybe organized crime Monetary loss would be irrelevant to a large government creating thousands of computers specifically designed to mess with the bitcoin network It's unclear what would happen in such a scenario, but if a successful attack did happen It would seriously reduce the amount of trust in the system Bitcoin developers are aware of this, however, and they are currently working on potential software changes Which would lessen the risk of a 51% attack In addition, bitcoin is an open source project, which further limits the amount of damage malicious actors can cause The rest of an uncompromised network could immediately fork the software, creating an alternative version along with a new network The 51% attack is not a big enough vulnerability to render bitcoin technology useless But if it were successfully executed, I believe the short-term consequences would be severe Governments Perhaps the biggest unknown factor in bitcoin's future is the response of governments Nobody knows how governments across the globe will react to bitcoin and the few countries that have commented on the technology Have waffled on their positions China, Russia, Germany and Mexico have all issued warnings about bitcoin And at one point it was unclear whether or not Thailand had banned the currency outright In the united states bitcoin is considered property similar to a commodity for tax purposes And regulators are in the process right now of creating more definite rules for it Given enough time, it's safe to assume that all governments will regulate bitcoin in some way The current size and growth of the market is far too large to ignore We can imagine a number of different governmental responses some more threatening than others Some countries might only lay out very basic rules for taxation Others might demand strict consumer financial protections A few might outlaw it and place strict penalties on using or accepting the currency In china at one point it was illegal for banks to use bitcoin, but it was legal for citizens One possible scenario is for governments to universally end up hostile towards bitcoin Especially if the currency becomes popular for evading taxes instead of merely regulating it They might try to shut down the entire system If that happens it's unclear what would result The technology won't disappear, but it might render bitcoin essentially useless for regular citizens and drive it underground If it seems conspiratorial to imagine governments outlawing bitcoin, remember During the great depression the u.s. government criminalized private possession of gold They put people in jail for owning it and confiscated the metal on multiple occasions It's not unrealistic to imagine bitcoin being outlawed This range of potential regulations is the reason many consider governments to pose a real challenge to bitcoin Some countries will be lenient drawing bitcoin businesses into their countries But others will undoubtedly make using bitcoin difficult and the united states, for example Regulators in new york city are drafting a quote bit license proposal Requiring commercial holders of bitcoin to follow a large amount of financial regulations Bookkeeping rules and know your customer requirements The bit license at least in its first iteration has been almost universally criticized by industry leaders as being too stifling for the new technology It's unclear what the final version of the bit license will be But it's plausible that the united states will not end up being the most bitcoin friendly country for business But one thing is clear no government can effectively ban bitcoin. There's no central organization to shut down It's simply a piece of software. It's international and peer-to-peer Anybody can access the network if they have an internet connection Domestic governments might be hostile towards bitcoin and criminalize users But their rules will not extend beyond their borders Ultimately, if people can access the internet, there's no feasible way to prevent them from using bitcoin even if it's declared illegal Transaction limits confirmation times Scale ability is another real challenge facing bitcoin Right now the bitcoin network can only process a maximum of seven transactions per second By comparison paypal processes over a hundred per second and visa processes over two thousand Visa's infrastructure can handle a peak capacity of over 40,000 transactions per second The current frequency of bitcoin transactions doesn't come close to seven per second But it's reasonable to assume that this number will be reached and surpassed in the future The transaction limit is changeable, but it requires careful software development, which the bitcoin community is currently debating This particular change in the software will be significant and it will come with some trade-offs For example, one proposed solution could end up inadvertently centralizing mining power by making it difficult for smaller players to compete Which is contrary to the original vision of the bitcoin network Another challenge facing bitcoin is what's called confirmation time The time it takes for transactions to be verified as legitimate and safe from double spending While sending and receiving bitcoin is instant its confirmation can take a while On average one miner's confirmation takes around 10 minutes for best security It's recommended that a transaction be verified at least six times before being considered permanent That's an hour's worth of work in comparison to traditional payment methods Waiting an hour to securely transmit a hundred million dollars is lightning quick But waiting an hour to get a cup of coffee would be absurd It's not realistic to imagine a successful payment system Which requires customers to wait around for even a minute after their transaction much less an hour Fortunately, there are solutions to this problem. Small scale transactions are usually safe even with zero confirmations Executing a double spending attack takes a lot of effort and it wouldn't be worth it for trivial amounts of bitcoin Companies like bitpay which process merchant transactions will accept unconfirmed transactions on their client's behalf Taking on the risk of double spending and allowing instant transaction speeds However, by not waiting for several confirmations the risk of fraud becomes higher It's possible that a company like bitpay could be subject to an elaborate double spending attack Given their high transaction volume This tradeoff between speed and security will remain a legitimate challenge for bitcoin And developers are currently discussing ways this can be improved It's worth noting that one fault solution to the issue of confirmation times has been advocated by some altcoin creators Instead of 10 minute confirmations They might change the code to allow one or two minute confirmations or even less But these changes are entirely superficial An altcoin with a one minute confirmation requires 10 times less computer power to verify It's 10 times easier to manipulate and it is 10 times less secure So instead of waiting for six confirmations to be super secure you would need 60 The security of cryptocurrency transactions does not come from the nominal amount of confirmations But rather the amount of work put into the verification process Neither the transaction limits of the bitcoin network nor the confirmation times are insurmountable problems But in order for bitcoin to successfully scale Both of these areas will need to be addressed by developers and bitcoin companies in the future The year 2140 As explained in part one the rate at which new bitcoins are created gets incrementally slower until the year 2140 when the very last bitcoin will be mined At that point miners will only be rewarded for their work with transaction fees not newly minted bitcoin So the question is will transaction fees be a large enough incentive for miners to continue securing the network? We're talking about more than a century in the future So we can't predict with any certainty what will happen But we can imagine a few different scenarios in the simplest scenario Transaction fees might indeed be large enough to sustain a decentralized group of miners The transaction fees would likely be tiny per transaction But the volume would be sufficient to make up for it if transaction fees aren't enough However, the bitcoin community will need to find new ways to support mining Businesses will have a very strong incentive to keep providing easy and secure payment options for their customers So perhaps they'll process their own transactions in house Or companies might contribute to the maintenance of the bitcoin network simply for good pr Whatever happens the industry will not be hit by any abrupt changes because the transition to transaction fee only mining will be gradual Miners will have many decades to prepare for it And if bitcoin is still popular a hundred years in the future It's reasonable to assume entrepreneurs will figure out how to make the system work However, making any predictions about payment systems a century from now is entirely speculative It's doubtful that anybody reading this book will be alive by then Given all the unknowns concern about what happens in the year 2140 is reasonable cryptography bugs and hackers The pillars supporting the entire bitcoin infrastructure is mathematics If the mathematical cryptography behind bitcoin were faulty the entire system would collapse So is the cryptography perfectly secure? I don't know neither does anybody else At the bottom of bitcoin's architecture is a mathematical algorithm Specifically, it's a very complex function the stronger the function the stronger the security to date Nobody has found weaknesses with bitcoin's algorithm But other cryptographic algorithms have been found faulty and exploitable Fortunately these flaws have not been catastrophic or resulted in immediate collapse So any flaw with bitcoin's algorithm would likely be discovered long before it became an issue for bitcoin users And the software being open source would allow miners to change the underlying algorithm without too much difficulty But let's be realistic few people understand all of the technical details behind bitcoin I'm not one of them cryptographers have spoken very highly of bitcoin's security But most people are unable to verify for themselves that the mathematics are indeed solid Of course, the same could be said for almost any technology Windows for example is ubiquitous software that what's often full of bugs But few people inspect the code for themselves. We end up trusting the computer programmers The software not just the underlying mathematics might also contain flaws No bugs or backdoors have been found to date, but that doesn't mean they won't be in the future Software bugs by their nature are often discovered after the fact Furthermore, even if it's true that the mathematics and software are sound right now We can't predict what kind of technology will be invented in the future What happens when young hackers have a decade to work on exploiting bitcoin? What happens if governments spend billions of dollars researching ways to break the technology? Governments in particular have enormous amounts of money to spend on projects like this And it's unclear whether the software can withstand such a challenge Quite simply, we don't know how bitcoin will be attacked in the future and we shouldn't act like we do So far the technology has been incredibly resilient and trustworthy and i'm very optimistic about bitcoin's future But the ultimate security of the system is not guaranteed Other information Buying using and storing bitcoin The purpose of this book was to give a conceptual overview about what bitcoin is Not necessarily how to use it But for the interested reader, I will share a few resources and tips for how you can buy use and store bitcoin Purchasing bitcoin has become quite simple If you want to buy bitcoin, you can easily set up an account at websites like coinbase.com or circle.com You sync up your bank account as you would in a ch deposit and the company will sell you bitcoin by automatically drawing money from your bank account These services also serve as online wallets, though they are less secure than storing the bitcoin yourself Using bitcoin is also quite easy. It requires opening up your wallet, pasting in a bitcoin address, entering an amount and hitting send If you store bitcoin on your phone, you can scan a qr code instead of pasting in a bitcoin address Services like coin kite.com also allow you to send bitcoin through email That way the recipient doesn't even need a bitcoin address to start off with a word of warning However, once you start using bitcoin, you may find yourself frustrated by the traditional payment system After sending and receiving instant payments. It can be difficult to go back The most important part of owning bitcoin is proper storage and right now it is by far the most difficult part Nearly all of the methods for super secure storage require a number of steps that aren't easy for somebody unfamiliar with the technology Undoubtedly, there is a learning curve at this point in bitcoin's development For the technophobe keeping small amounts of bitcoin with online companies like coinbase or circle Might be the best option though. One must realize the risks are dramatically higher for loss or theft Large amounts of bitcoin should never be kept with third parties For those interested in securely storing their bitcoin or for those wanting to store large amounts I recommend googling quote paper bitcoin wallets and quote cold bitcoin storage and following the instructions or you can contact a reputable bitcoin consultant online who can help you out Many people have written in-depth guides on how to safely store bitcoin But such a walkthrough is not part of the what is nature of this book In 2015 a bitcoin ETF is expected to come out essentially allowing investors to own bitcoin Indirectly like owning a stock this will further reduce the barriers to entry for ownership as the technology grows It's reasonable to assume that bitcoin's storage won't require much technical skill But we aren't there yet in its current form bitcoin is not that friendly for the non tech savvy consumer This shouldn't be surprising. However, from a broader perspective the technology is still in its infancy Conclusions Understanding a new type of payment system is not an easy task Imagine trying to concretely understand all of the moving parts of our current financial system Including all of the networks clearing houses intermediaries regulations security features and weaknesses Most of us myself included don't know how the current system works in detail Just that it works, which is what we ultimately care about I expect the same will happen with bitcoin the system works and most people will neither understand nor care to understand How it functions bitcoin might end up being the payment system of the future more it might not it remains to be seen But hopefully this book has provided enough information to help you make an informed opinion either way Post script and author information I sincerely hope that you found this book helpful Please feel free to share it with anybody you like free of charge And do consider leaving a review at the marketplace where you purchased it You can find my other work and contact information at steve-patterson.com If you appreciate the information in this book You can send me a bitcoin tip and you can find my bitcoin address at steve-patterson.com Thank you for listening