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Is BitCoin Legitimate?

(Image credit coindesk.com)

It’s time to correct some misunderstandings about BitCoin.

I was interested in BitCoin and read about it, but one can only learn so much without actual experience, so I dove in and bought some BitCoin, did some mining, gave some BitCoin to my kids, and bought and sold BitCoin over the last year.

What I learned

  1. It’s absolutely, positively not a pyramid scheme. I know pyramid schemes. Pyramid schemes were a friend of mine, and you, BitCoin, are no pyramid scheme.
  2. BitCoin is not centrally located, is user supported, and cannot be shutdown by this or any other government, similar to Tor or bittorrent.
  3. It’s draw is that it is NOT controlled by a central authority like a government or Google.
  4. Everything costs money. Transactions have to be processed and that costs money, but BitCoin transactions are crazy cheap.
  5. 100% of every BitCoin transaction that’s ever taken place has been tracked and is a permanent part of the BitCoin block chain.
  6. Just as cash is not taxed, neither is BitCoin. But BitCoin purchases are no different than cash purchases. They are taxed unless the buyer and the seller agree to not report the transaction. But, the buyer usually has a tax incentive to report the purchase for income tax reasons. Same as cash.
  7. BitCoin is not a tax free paradise.
  8. BitCoin is not an illegal transaction paradise. Cash has no circulation ledger history. BitCoin has a complete and total transaction ledger and history.
  9. Illegal transactions happen in all markets, in all countries, in all currencies, including BitCoin, but only BitCoin has a complete and total history of every single transaction.

Responding to claims that it’s a pyramid scheme, anonymous, you don’t know who promotes it  nor how much BitCoin they have, and that BitCoin has no value, and that only scammers, drug dealers, and hackers use it…

A pyramid scheme works with or without anonymity. As such, anonymity is not a requirement for a pyramid scheme.
A pyramid scheme is when a smaller number of people at the top of the  scheme make money only as larger numbers of newer recruits pay in. Drawing this relationship and hierarchy on paper looks like a triangle, hence the term “pyramid”.  And since the only way people get paid in a pyramid scheme is by larger numbers of recruits, mathematically, that scheme is doomed to failure because after only a couple dozen recruit layers pass, the new numbers needed to keep it going become larger than the human population. That is not BitCoin.

A single BitCoin is an answer to an extremely complicated mathematical formula that takes an ordinary home PC more than a year to compute at full CPU speed. As such, they cannot be counterfeited.

There will only ever be 22 million BitCoins in existence. Their value is on their limited numbers and work involved to be mined.

Promoters of BitCoin are not anonymous. The creator is, but that has no bearing on the existing, known community that supports it. Coinbase, CoinDesk, etc are not anonymous entities.

Everyone that buys BitCoin usually buys it from a known entity, such as the ones I listed above. But what’s cool about BitCoin, is that you CAN buy BitCoin from some anonymous entity SAFELY. That’s the beauty of it. The worldwide BitCoin network validates the BitCoin you’re purchasing is valid, has not been already spent, and that it has successfully been transferred into your wallet. You can safely buy BitCoin in a back alley, with cash, in a foreign land, at night, while naked, if you prefer. 🙂

No one needs to know how much BitCoin the person or entity you’re transacting with has. But, if you want to know, that’s public knowledge too. It’s all in the public, permanent BlockChain. All you need to know is their wallet address. You see 100% of every transaction on that wallet. And to do any transaction, you do need to know that wallet address. So it’s all out in the open.

BitCoin, like fiat currency has no intrinsic value. Both currencies have value in them as their users see fit. Since BitCoin sells for real money by real people in a real society, by definition, society has indeed placed a value on BitCoin. At the moment, that’s $402.38.

Scammers, drug dealers and hackers are and have been using cash too. That has no bearing on the fact that we can and do legitimately use cash, just as we legitimately use BitCoin.

The EU court, just the other day, officially ruled BitCoin as a currency. Big credit cards are getting into it. More and more major retailers are accepting it like Amazon gift cards and http://overstock.com.

What can I buy with BitCoin?

It’s real, has value, is safe, is 100% recorded in the BlockChain.
I hope this has provided you with useful information.

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What is Bitcoin?

Production Of Bitcoins By Mike Caldwell of Casascius

BitCoin, also known as a “Cryptocurrency” is not as complex to understand as one might think.  To understand BitCoin, let’s first review what “real” money is (or what it’s supposed to be):

In the United States, “Real” money is paper and coins, manufactured by the Federal Reserve.  It has no real value on it’s own.  It’s a low cost representation of gold.  At least, that’s what it used to be.  When it’s backed by a real world and limited resources that can’t be duplicated, it can represent real value because the item behind the money (the gold) is rare, limited, and can’t be duplicated.  Instead of exchanging actual gold for goods and services, we exchange the paper and coin representations of that gold.

So, what about BitCoin?

Now, think of this:  You have a set of incredibly complex mathematical formulas that you want to calculate the answers to.  The problem is that it takes a high speed computer days (or more) of crunching numbers 24/7 before it can find an answer to just ONE of those formulas.  That’s what a BitCoin is!  It’s an answer to one of those complex numbers.  You can’t duplicate it.  You can’t fake it.  You have to mine it, just like you have to mine gold.  But instead of picks and axes, you use CPUs.  It’s still a LOT of work to “find” the “nuggets” of answers.  Additionally, there are a limited number of answers… about 21 million.  So, once the last one is mined, that’s it.  No more manufacturing of more BitCoins.

Now, as you know, gold is represented by paper and low cost metal coins.  How is BitCoin represented?  Well, it’s NOT represented with tangible things you can hold in your hand.  It’s just numbers… the numbers that represent the answers to the formulas.  You CAN print them out on paper and store them under  your mattress, if you like, so in a way, you CAN make paper representations of it.  But, you CANNOT counterfeit it.  When you buy something with BitCoin, you don’t just hand someone a printed piece of paper with a bunch of numbers on it.  I mean, you COULD, but that, by itself, won’t fly.  You give them the numbers (either electronically or on paper) and they then run the numbers through one of many transaction processors (actually, I think it goes through many).  The processors are servers run by many people around the world.  They VALIDATE that those numbers are, in fact, an actual BitCoin… an actual answer to one of the 21 million formulas.  Once validated, the person you’re buying form can accept it, then give you the goods or services you’re wanting to buy.

In short:

A BitCoin is a limited and non counterfeit-able asset, just like gold.  But instead of a tangible asset, it’s an answer to a complex math problem.  Your “money” in BitCoin is usually kept in digital form and is validated on each transaction as being real.

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