What is Bitcoin?

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grayfox
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What is Bitcoin?

Post by grayfox » Fri Aug 18, 2017 10:09 am

There has been a lot of buzz about this thing called Bitcoin. Lately the Market Price of 1 Bitcoin has topped $4,000. Apparently a lot of people have made millions by buying and holding bitcoin. So I decided it was time to see what Bitcoin is all about.

Google searching "what is bitcoin" gives 115 million results plus this definition:
bitcoin noun -- a type of digital currency in which encryption techniques are used to regulate the generation of units of currency and verify the transfer of funds, operating independently of a central bank.
This doesn't really tell me too much. I already kind of guessed that. I tried reading a few of the 115 million hits.

The few I looked at did not do a good job of explaining what bitcoin is or how it works. A lot of handwaving, IMO. Much of it was gobbled gook. A lot was about how to get started buying bitcoin. I want to know what it is and how it works. Not necessarily all the gory implementation details, but in simple terms, what is it, how does it work? I was still in the dark about exactly what bitcoin is.

But then I found that Khan Academy has a playlist of 9 videos about Bitcoin. It is under Economics & Finance / Finance and capital Markets / Money, banking and central banks / Bitcoin. Here are the videos:

Bitcoin: What is it?
Bitcoin: Overview
Bitcoin: Cryptographic hash functions
Bitcoin: Digital signatures
Bitcoin: Transaction records
Bitcoin: Proof of work
Bitcoin: Transaction block chains
Bitcoin: The money supply
Bitcoin: The security of transaction block chains

Here is a link to KhanAcademy bitcoin videos on YouTube: https://www.youtube.com/user/khanacadem ... ry=bitcoin

I also found a YouTube video from 3Blu1Brown that gives a simple description of how bitcoin works:

Ever wonder how Bitcoin (and other cryptocurrencies) actually work?

So I will watch these and report back what I think about bitcoin.
Gott mit uns.

Jonathan
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Re: What is Bitcoin?

Post by Jonathan » Fri Aug 18, 2017 12:48 pm

Nice post. High-quality bitcoin posters, unite! :sharebeer

As investors, we want to answer this one too: Why does bitcoin have value?

To approach that one, try this technique:

Why does gold have value? Gold has been valuable for thousands of years. All gold is currently worth around $7 trillion. Gold's technological or industrial value is limited; steel is probably more valuable in that regard.

When you can make an argument for gold's value, try applying those same value attributes to bitcoin.

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grayfox
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Re: What is Bitcoin?

Post by grayfox » Fri Aug 18, 2017 1:27 pm

Jonathan wrote:
Fri Aug 18, 2017 12:48 pm

As investors, we want to answer this one too: Why does bitcoin have value?
That's certainly an important question for anyone looking to buy or sell bitcoin.

When those KhanAcademy lessons were uploaded in May 2013, 1 BTC = ~ $100
Today, four years later (August 2017) 1 BTC = over $4,000

Why it is $4,000 vs $100 is a really difficult question. Someone may say it should be 1 BTC = $1,000,000. Another may say the exchange rate should be 1 BTC = $0.10. As Bogleheads believing in Efficient Markets, we should not worry about what it should be worth and why, and just accept the current Market Price as the correct price. (But not every BH believes that absolutely.)

But for now, I'm just trying to understand what it is and how it works.
Gott mit uns.

tech_arch
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Re: What is Bitcoin?

Post by tech_arch » Fri Aug 18, 2017 1:59 pm

There's a quick primer on Wade Pfau's site on cryptocurrencies in general - https://retirementresearcher.com/should ... urrencies/. It gives an explanation of what they are discusses them as investments.

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Re: What is Bitcoin?

Post by greg24 » Fri Aug 18, 2017 1:59 pm

Jonathan wrote:
Fri Aug 18, 2017 12:48 pm
As investors, we want to answer this one too: Why does bitcoin have value?
A collective belief that it has value. The same as gold, the same as the US dollar, etc.

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Re: What is Bitcoin?

Post by Jonathan » Fri Aug 18, 2017 2:08 pm

greg24 wrote:
Fri Aug 18, 2017 1:59 pm
A collective belief that it has value. The same as gold, the same as the US dollar, etc.
That's fair, and accurate. But the collective belief in gold's value has perpetuated for millennia. We know it's not a fad.

Does gold have properties or attributes that make it valuable, beyond just collective belief in that value?

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grayfox
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Re: What is Bitcoin?

Post by grayfox » Fri Aug 18, 2017 3:48 pm

Ok, one last post about the value of 1 Bitcoin, then back to learning what it is and how it works.
I can say for sure that the value of 1 BTC is 1000 milliBTC.

Oh, we want the value in some other units like beers or USD or Euros?
This page shows the current Market Price= $4106.43. (Plus the historical daily Market Price, open high now close)

https://coinmarketcap.com/currencies/bi ... d=20170817

What if I buy some quantity of bitcoins today, to spend next week or next year? I want to know what the Market Price will be on the future date that I plan to spend them.

Now we are entering unknown waters, where we can only guess. Or do what economists would call forecasting the future price.

Don't some people believe that bitcoin will replace the US Dollar? According to Google, there are 1.2 trillion notes and coins in circulation. If we had to replace all the dollars in circulation with BTC, that will be 1 BTC = $57,143 since there a maximum of 21 million bitcoins.
Or if it replaced all 10.5 trillion dollars in the world, that would be 1 BTC = $500,000.

Buy it now at only $4106.43. It could go up 14x to 122x.

On the other hand, if something better comes along, like a superior cryptocurrency, and everyone stopped using bitcoin, and no one wanted it anymore, the exchange rate would be something close to 1 BTC = 0 USD.

My forecast of the future price is somewhere between 0 and 1/2 million dollars.
Potential upside = 122x. Worst case downside = -100%
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Re: What is Bitcoin?

Post by oldcomputerguy » Fri Aug 18, 2017 4:09 pm

Jonathan wrote:
Fri Aug 18, 2017 12:48 pm
Nice post. High-quality bitcoin posters, unite! :sharebeer

As investors, we want to answer this one too: Why does bitcoin have value?
For the same reason the dollar or any other medium of exchange has value: because a large number of people gathered together and agreed among themselves that it has value.
Anybody know why there's a 20-pound frozen turkey up in the light grid?

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Re: What is Bitcoin?

Post by The Wizard » Fri Aug 18, 2017 4:30 pm

Does Bitcoin pay dividends?
If not, then why not?
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Re: What is Bitcoin?

Post by daveydoo » Fri Aug 18, 2017 5:40 pm

..and will it still be there when you need it?

https://www.wired.com/2014/03/bitcoin-exchange/

If you don't understand what it is, you don't understand how it can disappear (just like in the The Big Short).

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Re: What is Bitcoin?

Post by Ricola » Fri Aug 18, 2017 6:45 pm

Not FDIC insured.

AZAttorney11
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Re: What is Bitcoin?

Post by AZAttorney11 » Fri Aug 18, 2017 6:50 pm

I won't buy Bitcoin for the same reason I won't buy gold -- it does not produce anything of value (i.e., cash flows, dividends, interests in an underlying business, etc.). Digital currencies might not be going away, but I won't be buying Bitcoin. In addition to not understanding it, Bitcoin does not have any intrinsic value (it is even worse than gold -- at least gold can be made into jewelry).

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Re: What is Bitcoin?

Post by The Wizard » Fri Aug 18, 2017 7:12 pm

AZAttorney11 wrote:
Fri Aug 18, 2017 6:50 pm
I won't buy Bitcoin for the same reason I won't buy gold -- it does not produce anything of value (i.e., cash flows, dividends, interests in an underlying business, etc.). Digital currencies might not be going away, but I won't be buying Bitcoin. In addition to not understanding it, Bitcoin does not have any intrinsic value (it is even worse than gold -- at least gold can be made into jewelry).
Ok, so is Bitcoin a Ponzi scheme sort of thing?
Get in early and get out before the tide turns?
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Re: What is Bitcoin?

Post by abuss368 » Fri Aug 18, 2017 7:13 pm

I simply know of it as a digital currency and possible speculative investment. That is the extent of my knowledge. I have read many articles in the Wall Street Journal as I guess many criminals are using this new digital currency to move "money".

Best.
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Re: What is Bitcoin?

Post by The Wizard » Fri Aug 18, 2017 7:16 pm

abuss368 wrote:
Fri Aug 18, 2017 7:13 pm
I simply know of it as a digital currency and possible speculative investment. That is the extent of my knowledge. I have read many articles in the Wall Street Journal as I guess many criminals are using this new digital currency to move "money".

Best.
Criminals... gotcha...
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AZAttorney11
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Re: What is Bitcoin?

Post by AZAttorney11 » Fri Aug 18, 2017 7:25 pm

The Wizard wrote:
Fri Aug 18, 2017 7:12 pm
AZAttorney11 wrote:
Fri Aug 18, 2017 6:50 pm
I won't buy Bitcoin for the same reason I won't buy gold -- it does not produce anything of value (i.e., cash flows, dividends, interests in an underlying business, etc.). Digital currencies might not be going away, but I won't be buying Bitcoin. In addition to not understanding it, Bitcoin does not have any intrinsic value (it is even worse than gold -- at least gold can be made into jewelry).
Ok, so is Bitcoin a Ponzi scheme sort of thing?
Get in early and get out before the tide turns?
I have no idea. I do not understand how to value Bitcoin, or why it has any value in the first place other than "because other people think so." I can calculate the value of a stream of future cash flows, but I don't know how to value a crypo / digital currency that does not produce anything of value. Hell, I can value animals and their offspring, there's value there (food, clothing, etc.), but I can't value digital currency, so I won't buy it.

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Re: What is Bitcoin?

Post by abuss368 » Fri Aug 18, 2017 8:05 pm

The Wizard wrote:
Fri Aug 18, 2017 7:16 pm
abuss368 wrote:
Fri Aug 18, 2017 7:13 pm
I simply know of it as a digital currency and possible speculative investment. That is the extent of my knowledge. I have read many articles in the Wall Street Journal as I guess many criminals are using this new digital currency to move "money".

Best.
Criminals... gotcha...
The Wall Street Journal did have articles that you may find interesting.
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Re: What is Bitcoin?

Post by Phineas J. Whoopee » Fri Aug 18, 2017 8:13 pm

The Wizard wrote:
Fri Aug 18, 2017 7:12 pm
...
Ok, so is Bitcoin a Ponzi scheme sort of thing?
Get in early and get out before the tide turns?
I think the term Ponzi Scheme (capaitalization intentional) must be changing in meaning. It used to mean one particular sort of financial scam. Maybe now it means any sort of financial scam, or attempt at one, or false accusation used for the purpose of increasing one's own power.

As explained thoroughly above, Bitcoin is something that has value because people believe it does, and not everybody believes it. There are plenty who say the US dollar has no value.

Money is nothing other than a social construct. It has three functions: a medium of exchange (if on Friday my employer gives me money rather than a couple of chickens, some potatoes, and some carrots I can trade it for them); a store of value (if on Saturday I can still take the money to the grocery store and exchange it for a couple of chickens, some potatoes, and some carrots); and a unit of account (if I have a house worth the same as a lot of chickens, a lot of potatoes, and a lot of carrots I could sell it and buy them).

The bitcoin or gold or litre of potable water advocates will say my unit of exchange has no value, but theirs does.

Will you sell me an apple for 50 cents? If so, you think the apple is worth less, and I think it's worth more. Otherwise there would be no reason for either of us to absorb the friction of the transaction. It's the basis of commerce.

PJW

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Re: What is Bitcoin?

Post by fsrph » Fri Aug 18, 2017 8:20 pm

If it wasn't mentioned previously, Netflix had a documentary on Bitcoin.

https://www.netflixreleases.com/banking ... coin-2017/

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Re: What is Bitcoin?

Post by The Wizard » Fri Aug 18, 2017 8:21 pm

Phineas J. Whoopee wrote:
Fri Aug 18, 2017 8:13 pm

Will you sell me an apple for 50 cents? If so, you think the apple is worth less, and I think it's worth more.
No.
I only have tulip bulbs for sale.
You will pay me $10 for five of them and thank me in future years for the offer...
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Re: What is Bitcoin?

Post by Phineas J. Whoopee » Fri Aug 18, 2017 8:24 pm

The Wizard wrote:
Fri Aug 18, 2017 8:21 pm
Phineas J. Whoopee wrote:
Fri Aug 18, 2017 8:13 pm

Will you sell me an apple for 50 cents? If so, you think the apple is worth less, and I think it's worth more.
No.
I only have tulip bulbs for sale.
You will pay me $10 for five of them and thank me in future years for the offer...
Mmm! Tulip bulbs!
PJW

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Re: What is Bitcoin?

Post by Wakefield1 » Fri Aug 18, 2017 8:31 pm

I don't know whether a Bitcoin is like a Dollar or a Ruble
I don't think Bitcoin is like Gold because I can hold Gold in my hand,it is amazingly heavy for such a small coin and it has a beautiful picture of Marie Curie on it--(actually it has a protective plastic capsule on it and is probably only 90% pure)
but I have several False Teeth made of gold and I don't think anyone has a false tooth made of Bitcoin
I understand part of the power of the Dollar is that the U.S. Government accepts Dollars as payment of taxes it demands
is Bitcoin some vibration of electrons in someone's video card?
is Bitcoin based on the Dollar?


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Re: What is Bitcoin?

Post by grayfox » Fri Aug 18, 2017 9:38 pm

So what is Bitcoin? Here is the surprising answer.

Bitcoin is nothing more than a Transaction Ledger. For example, if you ever used an accounting program like gnucash, with a series of transactions, it's basically like that. Except that the transactions are signed with a digital signature for security.

Example from Khanacademy lesson: Bitcoin - Transaction records

Carol gives 25 Bitcoins to Alice -- Alice now has 25 BTC
David gives 20 Bitcoins to Alice -- Alice now has 45 BTC
Ted gives 20 Bitcoins to Alice -- Alice now has 65 BTC
Alice gives 50 BTC to Bob and 14 to Alice plus 1 transaction fee -- Alice now has 14 BTC and Bob has 50. Miner collect 1 BTC as a fee.

There are no actual Bitcoins anywhere, neither real nor virtual, not even inside the computer. The only way to know how many Bitcoins someone has is to look at all the transactions from the latest all the way back to the beginning of Bitcoin time, which was in January 2009.

Obviously there are a lot more details, like Transaction Records are grouped into Transaction Blocks, which are chained together. So the Transaction Ledger is called The Block Chain. All this makes use of Hash Functions, public/private key coding, etc. so that no-one can forge signatures, or double spend or cheat the system in other ways. Watch the Khan Academy videos.

What about Bitcoin Miners? I think the name is misleading to make it sound like Gold Mining. Miners assemble Transaction Records into Transaction Blocks and add the new blocks to The Block Chain, i.e. Ledger. They are Keepers of the Ledger Book, or you could say Bookkeepers. Bitcoin Miners must expend computational effort and collect some newly created Bitcoins for their effort.

Another thing, there is no central repository of The Block Chain. Instead, everyone that is fulfilling the role as a Bitcoin Miner has a copy of it. That means no central authority, but it is distributed. That is probably why Libertarians might like Bitcoin. If there is a dispute, there are rules that govern which is the real Block Chain. The Rule is the one that took the most computational work is the real one.

:!: Did anyone else not know that is a Transaction Ledger. I did not know that.
But not so hard to comprehend once you know.

Don't take my word for any of this, I only just learned about it. But if you watch the Khan Academy, it is all very clear. Admittedly, it is only describing Bitcoin at the conceptual level. But it wasn't my intention to dig into all the code details. Khan Academy is a good overview of how Bitcoin works.

:?: But if that's how Bitcoin works, and there is no coin, real or virtual, then what are these shiny things that show up in every article about Bitcoin?

Image
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Phineas J. Whoopee
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Re: What is Bitcoin?

Post by Phineas J. Whoopee » Fri Aug 18, 2017 9:45 pm

They are parodies.
PJW

Jonathan
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Re: What is Bitcoin?

Post by Jonathan » Fri Aug 18, 2017 10:09 pm

Nice work on Khan Academy. There is little or no existing concept of an asset categorized as "the money ledger", which is perhaps why bitcoin sees so much friction from traditional investors.

Those shiny things are known as Casascius Coins. Years back, a guy minted physical coins from brass/silver/gold, embedded within which was a piece of paper with a private key containing 1, 10, 25, 100, or the famous 1000 bitcoins coin, and an anti-tampering hologram. Eventually, FinCEN intervened, and informed the creator that he qualified as a money transmitter business, and needed to register as such to continue selling the coins. So, he stopped selling them in 2013. They're collectors items now, and they sell for a decent premium over their value. More: https://www.casascius.com

The image of the shiny coins, plus the photogenic shiny anti-tampering hologram, have made Casascius coins the go-to stock photograph for reporters covering bitcoin. They say "vires in numeris" on them - "strength in numbers".

Another excellent resource is the bitcoin wiki: https://en.bitcoin.it/wiki/Main_Page

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Re: What is Bitcoin?

Post by aristotelian » Fri Aug 18, 2017 10:24 pm

oldcomputerguy wrote:
Fri Aug 18, 2017 4:09 pm
Jonathan wrote:
Fri Aug 18, 2017 12:48 pm
Nice post. High-quality bitcoin posters, unite! :sharebeer

As investors, we want to answer this one too: Why does bitcoin have value?
For the same reason the dollar or any other medium of exchange has value: because a large number of people gathered together and agreed among themselves that it has value.
The dollar bill itself has no value. It represents goods and services with equivalent value to a dollar. I guess you can say the same about Bitcoin. Although I can't answer why people recognize 1 Bitcoin is worth $4000 of goods and services in the same way that a dollar bill is worth $1 of goods and services.

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Re: What is Bitcoin?

Post by linenfort » Fri Aug 18, 2017 10:26 pm

Jonathan wrote:
Fri Aug 18, 2017 10:09 pm
Those shiny things are known as Casascius Coins.
...
https://en.bitcoin.it/wiki/Main_Page
I have always wondered about those. Thank you!
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Re: What is Bitcoin?

Post by grayfox » Fri Aug 18, 2017 11:47 pm

So I'm finding out that Blockchain is a new powerful technology that can be used for lots of things beyond cryptocurrency. Blockchain is supposed to disrupt every area business and commerce. I never heard of this stuff before today.

There are numerous Ted Talks on YouTube about Blockchain.

Blockchain: Massively Simplified | Richie Etwaru | TEDxMorristown



Another Video that goes into even more detail about Bitcoin: How Bitcoin Works Under the Hood
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Re: What is Bitcoin?

Post by IMO » Sat Aug 19, 2017 12:55 am

grayfox wrote:
Fri Aug 18, 2017 9:38 pm
So what is Bitcoin? Here is the surprising answer.

Bitcoin is nothing more than a Transaction Ledger. For example, if you ever used an accounting program like gnucash, with a series of transactions, it's basically like that. Except that the transactions are signed with a digital signature for security.

Example from Khanacademy lesson: Bitcoin - Transaction records

Carol gives 25 Bitcoins to Alice -- Alice now has 25 BTC
David gives 20 Bitcoins to Alice -- Alice now has 45 BTC
Ted gives 20 Bitcoins to Alice -- Alice now has 65 BTC
Alice gives 50 BTC to Bob and 14 to Alice plus 1 transaction fee -- Alice now has 14 BTC and Bob has 50. Miner collect 1 BTC as a fee.

There are no actual Bitcoins anywhere, neither real nor virtual, not even inside the computer. The only way to know how many Bitcoins someone has is to look at all the transactions from the latest all the way back to the beginning of Bitcoin time, which was in January 2009.

Obviously there are a lot more details, like Transaction Records are grouped into Transaction Blocks, which are chained together. So the Transaction Ledger is called The Block Chain. All this makes use of Hash Functions, public/private key coding, etc. so that no-one can forge signatures, or double spend or cheat the system in other ways. Watch the Khan Academy videos.

What about Bitcoin Miners? I think the name is misleading to make it sound like Gold Mining. Miners assemble Transaction Records into Transaction Blocks and add the new blocks to The Block Chain, i.e. Ledger. They are Keepers of the Ledger Book, or you could say Bookkeepers. Bitcoin Miners must expend computational effort and collect some newly created Bitcoins for their effort.

Another thing, there is no central repository of The Block Chain. Instead, everyone that is fulfilling the role as a Bitcoin Miner has a copy of it. That means no central authority, but it is distributed. That is probably why Libertarians might like Bitcoin. If there is a dispute, there are rules that govern which is the real Block Chain. The Rule is the one that took the most computational work is the real one.

:!: Did anyone else not know that is a Transaction Ledger. I did not know that.
But not so hard to comprehend once you know.

Don't take my word for any of this, I only just learned about it. But if you watch the Khan Academy, it is all very clear. Admittedly, it is only describing Bitcoin at the conceptual level. But it wasn't my intention to dig into all the code details. Khan Academy is a good overview of how Bitcoin works.

:?: But if that's how Bitcoin works, and there is no coin, real or virtual, then what are these shiny things that show up in every article about Bitcoin?

Image
Clueless on Bitcoins, I decided to watch a couple of the Khan Academy youtubes, and a couple of ted talk videos on bitcoins.

To clarify, this is my opinion, no offense to those who are pro bitcoin:

1. As I watched the Khan Academy explanation, it was hard for me to not laugh out loud. It's a brilliant concept, it sounded like very intelligent techy "nerd" (no offense) had a project to see if they could set up some internet/computer based currency. It's like your the middle aged guy, asking their teenager to explain to you about some video game or sci-fi movie/book where the US currency system has failed and in the "new" internet world how someone was going to replace the old faulty system. "Bit coin miners solving complex problems to unlock more coins, Block Chains, some guy who may or may not have actually started it, how the transaction fee is variable, how about every 4 yrs the bitcoin miner payment gets cut in half, how there's a set 21 million (or something) bitcoins only, digital signatures" Okay, cool, I get it, kind of like people playing the make believe "Dungeons and Dragons" when I was younger.

2. Then there's the Ted Talk videos. An MIT tech guy on one, some other guy who's started a company from it and bought an island with all his money (I think dollars, but maybe it was bitcoins?). A business can avoid credit card transaction fees, Bitcoin machines where you can insert US Dollars to purchase more bitcoins. How bitcoin is legitimate because some merchandisers like Home Depot / Paypal have accepted Bitcoin (never really discussed how the current exchange rate for bitcoin for dollar works). How "nobody" owns bitcoin, just like nobody owns the internet . . .

3. Then there's the stock. 18,000% return since 2009 or so, 1,800% over 2 years. Astronomical returns based on something that I can't comprehend.
Has that Ponzi scheme "variation" feel, like watching the stock rise/bust on Herbalife, but it just hasn't gone bust yet. People are potentially making a killing on this, just keep the hype going, keep the conspiracy against the US dollar, Gold/Silver, etc. "The dollar is just a piece of paper, gold is just some metal of minimal real value, your index fund is basically electronic nothing backing it, etc, etc."

4. Is there any value (in my opinion)? Sure, popular games have value. Bitcoins are like a game, but with some ability for techy people to use them as an "cool" and alternate money in the real world in very limited situations. The less of them, the more valuable for a collector. Then there's the illicit use, you can transfer money outside the country for less than the current "banking system", you can buy illegal things like illicit drugs, and probably pay for the illegal sex slavery trade without anyone knowing.

And my final conclusion: If you were questioning if we were or weren't in the "new" dot.com or tech bubble, Bitcoins are the "canary in the coal mine."

Those who haven't, I advise looking at the Khan Academy video(s) and a Ted Talk(s). I'm still in disbelief . . .

So those in favor of bitcoins will simply conclude, I'm still just as clueless as I was before watching the video's as after watching, and this guy is just too stupid to "get it".... I can live with that.

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Re: What is Bitcoin?

Post by senior83 » Sat Aug 19, 2017 3:22 am

The Wizard wrote:
Fri Aug 18, 2017 4:30 pm
Does Bitcoin pay dividends?
If not, then why not?
No. Because that's not how the code works. The code is the bare minimum to enable a decentralized record keeping system that cannot be easily tampered with - any other behavior would have to be added on after the fact. But there is no central authority. Maybe you could earn interest from a bitcoin money market account or something, something like it probably exists.
The Wizard wrote:
Fri Aug 18, 2017 7:12 pm
Ok, so is Bitcoin a Ponzi scheme sort of thing?
Get in early and get out before the tide turns?
Not intentionally. There may be a collapse of the value of the "currency" for any number of reasons, but the code is open source and has been put under a microscope by many brilliant computer scientists. Because bitcoin is not centrally controlled, the most that can be done is to have pre-"mined" a bunch of bitcoins before releasing the software, which the shadowy creator indeed did. But that's it. He can trade those coins for dollars or whatever (and people can see that they are moving because of the way the ledger works) but there's no Ponzi to that.

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Re: What is Bitcoin?

Post by senior83 » Sat Aug 19, 2017 3:25 am

AZAttorney11 wrote:
Fri Aug 18, 2017 7:25 pm
I do not understand how to value Bitcoin, or why it has any value in the first place other than "because other people think so." I can calculate the value of a stream of future cash flows, but I don't know how to value a crypo / digital currency that does not produce anything of value. Hell, I can value animals and their offspring, there's value there (food, clothing, etc.), but I can't value digital currency, so I won't buy it.
A number of people who understand economics a lot better than I have called bitcoin more of a commodity (like food or livestock) than a currency. I don't know why, but there you have it.

And yeah, BTC is something you buy only with money you are 100.0% comfortable with losing.

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Re: What is Bitcoin?

Post by senior83 » Sat Aug 19, 2017 3:34 am

aristotelian wrote:
Fri Aug 18, 2017 10:24 pm
The dollar bill itself has no value. It represents goods and services with equivalent value to a dollar. I guess you can say the same about Bitcoin. Although I can't answer why people recognize 1 Bitcoin is worth $4000 of goods and services in the same way that a dollar bill is worth $1 of goods and services.
More and more people are trying to trade dollars (and yuan, and yen, and euro) for bitcoins, partly due to ever-increasing volume of transactions and partly due to occasional large influxes of investment. It's been China pushing it up within the past 6 months maybe? I don't know any details, but from what I recall, mom and pop Chinese investors were buying in to bitcoin as it was, and some regulation changed which made it a lot more attractive all of a sudden.

Pretend bitcoin is barrels of oil and we're now in post-apocalyptic petroleum-staved Mad Max. If an economy springs up around trading barrels of oil (or fractions thereof), and you now want to participate in this economy even just to buy bread, you need to get yourself some oil. Thus, your entry into the market increases demand for a finite amount of oil.

Key to understanding this is that the amount of bitcoins is finite.

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Re: What is Bitcoin?

Post by Valuethinker » Sat Aug 19, 2017 7:42 am

senior83 wrote:
Sat Aug 19, 2017 3:34 am
aristotelian wrote:
Fri Aug 18, 2017 10:24 pm
The dollar bill itself has no value. It represents goods and services with equivalent value to a dollar. I guess you can say the same about Bitcoin. Although I can't answer why people recognize 1 Bitcoin is worth $4000 of goods and services in the same way that a dollar bill is worth $1 of goods and services.
More and more people are trying to trade dollars (and yuan, and yen, and euro) for bitcoins, partly due to ever-increasing volume of transactions and partly due to occasional large influxes of investment. It's been China pushing it up within the past 6 months maybe? I don't know any details, but from what I recall, mom and pop Chinese investors were buying in to bitcoin as it was, and some regulation changed which made it a lot more attractive all of a sudden.
That regulation is called Foreign Exchange Controls. The Yuan is under huge pressure to devalue due to China's shrinking trade surplus and other factors. The Chinese government is desperately trying to prevent this. One way to do so is to prevent Chinese companies and individuals from investing their savings abroad-- both in stocks but more typically in real estate. The way to do that is to tighten exchange controls.

Currencies like the dollar, pound and Euro "free float"-- with the exception of occasional market interventions by Central Banks, holders, even in their own countries, are free to buy and sell currencies, and the rate at which they do so changes every second. C. 5 trillion dollars of FX dealing takes place every day.

The yuan (and I really cannot explain the difference between the yuan and the renimbi, but basically they are the same thing) is by contrast held to a nearly fixed rate of exchange, particularly against the dollar. China is both the world's second largest (or largest) dollar invoicing exporter, and the world's second largest (may be largest by now, now that US oil imports are falling) dollar importer (all those raw materials).

Bitcoin has become a way for Chinese companies and individuals to get around exchange controls. Something like 80% of all bitcoin manufacture and exchange is now in China [EDIT: that is, the main exchanges are in China]. Needless to say, this has not gone unnoticed by Chinese authorities.
Pretend bitcoin is barrels of oil and we're now in post-apocalyptic petroleum-staved Mad Max. If an economy springs up around trading barrels of oil (or fractions thereof), and you now want to participate in this economy even just to buy bread, you need to get yourself some oil. Thus, your entry into the market increases demand for a finite amount of oil.

Key to understanding this is that the amount of bitcoins is finite.
Except oil is consumed. Its value lies in its consumption. It is not primarily an investment asset.

Gold or silver would be a better analogy, although they also have decorative uses.
Last edited by Valuethinker on Sat Aug 19, 2017 8:27 am, edited 1 time in total.

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Re: What is Bitcoin?

Post by Valuethinker » Sat Aug 19, 2017 7:47 am

senior83 wrote:
Sat Aug 19, 2017 3:25 am
AZAttorney11 wrote:
Fri Aug 18, 2017 7:25 pm
I do not understand how to value Bitcoin, or why it has any value in the first place other than "because other people think so." I can calculate the value of a stream of future cash flows, but I don't know how to value a crypo / digital currency that does not produce anything of value. Hell, I can value animals and their offspring, there's value there (food, clothing, etc.), but I can't value digital currency, so I won't buy it.
A number of people who understand economics a lot better than I have called bitcoin more of a commodity (like food or livestock) than a currency. I don't know why, but there you have it.

And yeah, BTC is something you buy only with money you are 100.0% comfortable with losing.
Commodities are consumed though. Their value, in the end, is in their consumption. Oil isn't intrinsically valuable, it powers the world economy.

Gold or perhaps silver would be better analogies. Limited utility value, except for decoration, some industrial uses. You buy gold, you stick it in a store room. It is a store of value down the centuries.

You might make an analogy with copper. But, again, copper creates value by being used in things. That's much less true of gold, or bitcoin at present.
Last edited by Valuethinker on Sat Aug 19, 2017 8:27 am, edited 1 time in total.

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Re: What is Bitcoin?

Post by blueberry » Sat Aug 19, 2017 8:13 am

There are a couple of podcast interviews about bitcoin and alt currencies here:

https://www.bloomberg.com/podcasts/odd_lots

I've been looking for an excuse to post the above link - I think odd lots is a really entertaining listen, fun interviewers and great interviewees.

-bb

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Re: What is Bitcoin?

Post by The Wizard » Sat Aug 19, 2017 8:50 am

I misspoke in an earlier post.
I should have inquired on how Bitcoin is a Greater Fool scheme, not a Ponzi scheme.
The two are different...
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Re: What is Bitcoin?

Post by rustymutt » Sat Aug 19, 2017 8:57 am

I know that 2 of them is twobits, and that's a quarter. lol :sharebeer
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Re: What is Bitcoin?

Post by grayfox » Sat Aug 19, 2017 9:14 am

senior83 wrote:
Sat Aug 19, 2017 3:22 am
The Wizard wrote:
Fri Aug 18, 2017 4:30 pm
Does Bitcoin pay dividends?
If not, then why not?
No. Because that's not how the code works. The code is the bare minimum to enable a decentralized record keeping system that cannot be easily tampered with - any other behavior would have to be added on after the fact. But there is no central authority. Maybe you could earn interest from a bitcoin money market account or something, something like it probably exists.
The way bitcode was designed, new bitcoins are created (mined!) after a miner solves the computational challenge puzzle, and the new block is added to The Blockchain. That's how the bitcoin money supply grows. But it is capped at 21 million bitcoins.

:idea: Well, it seems to me that someone could invent a cryptocurrency that pays interest at some rate. If you hold 1 coin, a year later it could automatically become 1.01 coins. They would just have to program that into the system. Then the money supply grow at some exponential rate, like 1% per year. There is no reason that there would have to be a cap on the size of the money supply. That's just something that Satoshi Nakamoto did to make bitcoin gold-like and scarce, but it's not necessary.

:?: I don't know what the effect of paying interest would be, if it would be good or bad. But it's an interesting idea. If nothing else, it might be a good gimmick to get people to adopt your cryptocurrency. This is the first time I heard of this idea, so if it catches on, give credit to The Wizard for thinking of it.
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Re: What is Bitcoin?

Post by grayfox » Sat Aug 19, 2017 9:35 am

So I learned that bitcoin is based on this thing called a Blockchain. Blockchain is just a way to make an Immutable Ledger, i.e. a ledger that no one can tamper with. Actually, if someone tampers with the Ledger by changing an earlier entry, it is easily detected because every block contains the hash code from the previous block. To change an earlier block, you would have to re-do all the work for the subsequent blocks, which could take years of computer time.

Now in my imagination, bitcoin would work like a ticket at the horse track. If you have ever been to a racetrack, when you place a bet, you give the cashier $2 and the machine prints out a ticket with a barcode. If your ticket pays off, say $4, the machine reads the barcode and tells the cashier to give you $4. The ticket is cancelled and can only be paid one time.

So I thought bitcoin was similar to that ticket, but was a file on your computer with a code that says PAY 5 BTC. The file would be encrypted and only you have the password. You could un-encrypt the file and then give the code to someone else. Or you could print it out as a barcode and put it into a machine that spits out 5 dollars (if 1 BTC = 5 USD).

But it doesn't work that way at all! :oops: I wonder why it couldn't work that way. The racetrack ticket with the barcode is as good as $4 cash. It seems like a simpler system that would work. Maybe I am missing something.

:?: I guess I am asking, why does bitcoin have to be a ledger? Why can't it just be like a ticket that says IOU 5 BTC.
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Re: What is Bitcoin?

Post by Valuethinker » Sat Aug 19, 2017 9:54 am

The Wizard wrote:
Sat Aug 19, 2017 8:50 am
I misspoke in an earlier post.
I should have inquired on how Bitcoin is a Greater Fool scheme, not a Ponzi scheme.
The two are different...
There is value in the technology, potentially.

And maybe there is value in what Bitcoin itself does in terms of lowering transactions costs. That seems to be the key-- if it lowers transaction costs enough that's a significant saving.

Other than that, it seems to be just another form of money, but it doesn't serve as a store of value (one of the key functions of money, along with means of exchange & unit of account). Or at least, given its volatility, it doesn't seem like a very good store of value.

To the extent that it is used to bypass law (be it exchange controls, anti money laundering etc.) then that seems to be a major downside.

I agree there does not seem to be any external yardstick for its valuation.

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Re: What is Bitcoin?

Post by Oicuryy » Sat Aug 19, 2017 10:06 am

grayfox wrote:
Fri Aug 18, 2017 9:38 pm
:!: Did anyone else not know that is a Transaction Ledger. I did not know that.
Did you also not know that those green pieces of paper in your wallet, the ones with the pictures of dead presidents on them, are part of a distributed transaction ledger?

Ron
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Re: What is Bitcoin?

Post by The Wizard » Sat Aug 19, 2017 10:08 am

Valuethinker wrote:
Sat Aug 19, 2017 9:54 am

...Other than that, it seems to be just another form of money, but it doesn't serve as a store of value (one of the key functions of money, along with means of exchange & unit of account). Or at least, given its volatility, it doesn't seem like a very good store of value...
I guess I don't grasp the UTILITY of Bitcoin at all.
I have a stack of Euros upstairs leftover from my June trip. I'll take them with me to Spain in March. Their value may fluctuate vs the USD, but there's true utility here.

My stack of Bitcoin is nowhere to be found.
And if I did find them, I'd have to ponder the moment.
I need to see if I can pay for stuff on amazon.com with Bitcoin.
Jeff is a leading edge guy, right?
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Re: What is Bitcoin?

Post by grayfox » Sat Aug 19, 2017 10:31 am

Oicuryy wrote:
Sat Aug 19, 2017 10:06 am
grayfox wrote:
Fri Aug 18, 2017 9:38 pm
:!: Did anyone else not know that is a Transaction Ledger. I did not know that.
Did you also not know that those green pieces of paper in your wallet, the ones with the pictures of dead presidents on them, are part of a distributed transaction ledger?

Ron
What? I thought those were like IOU's. Like a deposit ticket when you leave your mink coat at the Fur Storage, so you could retrieve it for next winter. Ot when you deposit 1 ounce of gold at the bank for safe keeping, and they give you a deposit receipt that says pay to the bearer 1 ounce of gold. Bank notes.

How are they part of a distributed transaction ledger?
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Re: What is Bitcoin?

Post by Jonathan » Sat Aug 19, 2017 10:50 am

Seems like we do a little better on each of these discussions. :sharebeer

Regarding pre-mining - it means that developers mine coins for themselves before publicly releasing a cryptocurrency. It's kinda frowned upon. Bitcoin is NOT a pre-mine coin. Anyone could have mined bitcoin at first, but only the inventor did; it was the first cryptocurrency in circulation! Developers of competing coins like to justify pre-mining by characterizing bitcoin as "essentially" pre-mined, but the comparison is off. There's something similar called insta-mining, but bitcoin isn't really that either.

Regarding market cap - it's important to understand this one in light of pre-mining. Let's say I make JonathanCoin. I pre-mine 1 million JonathanCoins, and I sell 1 JonathanCoin to my goldfish, for $1 million. Therefore, the market cap of JonathanCoin is $1 trillion: 1 million JonathanCoins, at $1 million each.

Regarding dividends - a few weeks ago, bitcoin forked off into bitcoin cash. People who held bitcoin up to few weeks ago now own coins on BOTH blockchains. For each bitcoin you held, you now also hold 1 bitcoin cash. This is somewhat analogous to a dividend. The truth is that most bitcoins are now worth the bitcoin price PLUS the bitcoin cash price, which brings the true price to about $4,900.
grayfox wrote:
Sat Aug 19, 2017 9:35 am
I guess I am asking, why does bitcoin have to be a ledger? Why can't it just be like a ticket that says IOU 5 BTC.
Look at the concept of Double spending. Let's say you duplicate your 5 BTC IOU, and then you cash it in at one spot, then 1 hour later, you cash in the duplicate somewhere else. How do we verify that you haven't already spent your 5 BTC? Either with a trusted central authority, or a decentralized system that timestamps your transaction and records it in a shared database.

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Re: What is Bitcoin?

Post by Oicuryy » Sat Aug 19, 2017 10:58 am

They are a record of the transactions where you transferred the mink to the storage company and the gold to the bank. The records are distributed because each person holds his own claim checks.

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Re: What is Bitcoin?

Post by grayfox » Sat Aug 19, 2017 11:40 am

Jonathan wrote:
Sat Aug 19, 2017 10:50 am
grayfox wrote:
Sat Aug 19, 2017 9:35 am
I guess I am asking, why does bitcoin have to be a ledger? Why can't it just be like a ticket that says IOU 5 BTC.
Look at the concept of Double spending. Let's say you duplicate your 5 BTC IOU, and then you cash it in at one spot, then 1 hour later, you cash in the duplicate somewhere else. How do we verify that you haven't already spent your 5 BTC? Either with a trusted central authority, or a decentralized system that timestamps your transaction and records it in a shared database.
So the reason there needs to be a Ledger, an Immutable Ledger, is because not all people will be honest. There's a lot of overhead and cost because of a few bad apples. I suppose there could also be honest mistakes that the system would catch.

I wonder if there are other simpler ways of making sure that people will be honest and accurate. Maybe put the fear of God in them to keep them honest. Caught double-spending bitcoin? The secret bitcoin police break down their door, and haul them off to the Goolag. Or just weed out the dishonest ones before they can make any transactions. People can be tested for honesty. I'm thinking of a Hungarian movie I saw called The Exam. Those are just some ideas.
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Re: What is Bitcoin?

Post by Jonathan » Sat Aug 19, 2017 12:25 pm

grayfox wrote:
Sat Aug 19, 2017 11:40 am
So the reason there needs to be a Ledger, an Immutable Ledger, is because not all people will be honest.
Yes, exactly, you're really nailing the core concepts. You can also phrase honesty as trust. Previous monetary systems relied on trust. Bitcoin is considered "trustless". It doesn't have to struggle with outing the untrustworthy actors, or locating the trustworthy ones.

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Re: What is Bitcoin?

Post by Oicuryy » Sat Aug 19, 2017 1:24 pm

The value of bitcoin, like the value of everything else, is determined by supply and demand. The supply of bitcoin is determined by the algorithm that creates it. The upper limit is 21 million. Currently there are about 16.5 million.

The demand for bitcoin is determined by human nature. IMO, most of the demand is from speculators hoping to sell it at a higher price to someone else. Its main non-speculative use seems to be to circumvent government regulations on money transfers.

Dollars are another imaginary thing whose value is determined partly by human nature. The supply of dollars is determined by the U.S. central bank. There is no upper limit. Currently there are about 3.8 million million.

IMO, most of the demand for dollars comes from its usefulness as a medium of exchange.

Records of ownership of bitcoin are kept in its blockchain. Records of ownership of dollars are kept in two forms. One form is reserve balances held by banks in accounts at Federal Reserve banks. The other form is ownership certificates held directly by the owners. In this form ownership can be transferred by simply handing the certificates to someone else.

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Re: What is Bitcoin?

Post by HomerJ » Sat Aug 19, 2017 1:35 pm

Jonathan wrote:
Fri Aug 18, 2017 12:48 pm
Nice post. High-quality bitcoin posters, unite! :sharebeer

As investors, we want to answer this one too: Why does bitcoin have value?

To approach that one, try this technique:

Why does gold have value? Gold has been valuable for thousands of years. All gold is currently worth around $7 trillion. Gold's technological or industrial value is limited; steel is probably more valuable in that regard.

When you can make an argument for gold's value, try applying those same value attributes to bitcoin.
It's not a bad comparison except people can't create gold v2, gold v3, gold v4 at the drop of a hat.

Bitcoin is not unique. People can, and have, created many multiple alternate crypto-currencies. The rarity and limited quantities of bitcoin are being compared to the rarity and limited quantities of gold, but it doesn't hold up.

In my opinion, the whole thing is just tulip bulbs all over again. But that's just my opinion.
Last edited by HomerJ on Sat Aug 19, 2017 1:44 pm, edited 1 time in total.

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