Continuing our “Bitcoin ABCs” series, we now reach I – L. Bitcoin is complicated, but this list should help anyone understand the basics of BTC, without going into the more technical aspects of cryptocurrency.
I is for Individual to Individual, or Peer-to-Peer
One of the key advantages of Bitcoin is the method of operation for transaction processing. If two people wish to engage in trade and commerce, using Bitcoin, they do so. They don’t need a licence, they don’t need permission. They simply need to agree on a price. Once a buyer has agreed to buy and pay with Bitcoin and a seller has agreed to sell and accept Bitcoin, the transaction can proceed.
That same situation is not necessarily true in the case of mainstream commerce. In the case of a brick-and-mortar store, the seller may be required to have a business licence, agree to collect sales taxes, agree to be inspected by the fire marshall, meet building codes and occupancy standards, comply with hiring guidelines, withhold taxes from income, and do any number of other things that are required by various federal, state, and local laws, regulations, and ordinances. Simply getting into business may be very costly and time consuming.
For example, Tesla Motors was founded in 2003. It raised and spent tens of millions of dollars before releasing its first vehicle in 2008. Significant time and money was spent complying with regulations, even before the first Teslas Roadster hit the streets.
In addition to significantly greater freedom in choosing whether to become a seller, and on what terms, Bitcoin uses a peer-to-peer architecture, which allows anyone to be involved. There is no central bank controlling Bitcoin. There is a group of software developers who develop updates to the Bitcoin Core software, and evaluate changes to the essential Bitcoin protocol. However, as with the vast majority of other open source software systems, anyone can participate as a developer – code is judged on its merits, not on the ancestry or political views of its authors. So, if you like coding and want to get involved, you can propose code changes. Whether your code is accepted by the user community is up to them.
Peer-to-peer networking also applies. Peers are both producers and consumers of resources, as opposed to the client-server model in which users have limited access to resource production, which is centralized at the server side. Although the development of application-specific integrated circuits (ASICs) for solving hash functions has encouraged the growth of large computer operations in Bitcoin mining, it is still possible, through cloud computing, to participate in mining, even with a modest investment. Whether Bitcoin mining is worth it to you is something that each person must decide on their own.
The peer-to-peer architecture is inherently empowering. By way of contrast, centralization tends to hoard power among a few players. For example, transaction processing for Bitcoin is spread over hundreds of thousands of computers globally. Transaction processing for credit cards is highly centralized. The fee charged for processing a recent payment in Bitcoin was 0.0001 bitcoin, equivalent to US$0.02 at today’s exchange rate. By way of contrast, store-front businesses are typically charged 1.60% to 2% of the transaction, plus something like 10-30 cents per transaction, plus some monthly fee of $5 to $15 whether they process any credit card transactions that month or not. Online stores that accept credit cards, because the card is not present where the business is located, generally pay even higher fees.
So, if you accept Bitcoin for a $1,200 sale, the transaction processing fee is about two cents; if you accept a credit card for that same sale, you probably pay $19.30 or more, if you have a storefront, or as much as $30.10 if you sell online, plus a monthly fee. Centralization is costly, and only benefits a few players in the economy.
J is for Java
Bitcoin-Qt, also known as Bitcoin Core, is known as the reference implementation. It was written in the programming language C++. However, there are clients and API libraries written in Java.
If Bitcoin isn’t language-dependent, then how do we know what a Bitcoin client is expected to do? The performance of the software is derived from the reference implementation. So, this page which describes the Bitcoin protocol, is careful to note that it is not the specification itself. It uses English language and mathematics to describe the protocol based on the C++ code in the reference implementation.
If you are interested in Java implementations of Bitcoin, you should consider bitcoinj, BCCAPI, and “Bits of Proof,” all of which are built in Java.
The Bitcoin Client API or BCCAPI is a java library designed for making secure light-weight bitcoin clients. BCCAPI connects to a server that holds the block chain and tracks the client’s wallet balance. The server only has knowledge of the clients public keys, and is in no position to spend funds owned by the client’s wallet. As the blockchain grows, now past 30 gigabytes, it makes sense for some users to leave the blockchain on a server.
Bits of Proof is intended for the powerful server of the near future. It is described by author Tamás Blummer as “a modern, modular implementation of Bitcoin having advanced features such as hierarchical and deterministic wallet, password encrypted private keys, and easily memorised pass phrases.”
If you don’t prefer Java, you may be able to find an implementation of Bitcoin in a software language that you like. Since the protocol is open source, feel free to roll your own.
K is for 401K
Yes, Bitcoin is coming to your 401K. According to an article in Forbes magazine, “SecondMarket recently launched a Bitcoin fund, but it’s only available to accredited investors who meet a net worth requirement. The Winklevoss twins, famous for their involvement with Facebook, are launching a Bitcoin ETF available to all investors. This startup fund faces significant difficulties navigating regulatory and technology hurdles because this is simply uncharted waters. However, if they manage to be the first adopters of this new asset class and they spread Bitcoin fever to the masses they could be richly rewarded.”
There are, however, caveats. As of January 2014, it was unclear how the IRS would treat an investment in Bitcoin – as a currency, as a collectible, as a commodity, or as an investment? Since self-directed IRAs can invest in companies that have assets they hold in Bitcoin, it is probably the case that you can include Bitcoin in your 401K. If laws and regulations are your particular source of joy, you may wish to review the March 2014 opinion of the IRS on the topic.
L is for Legal
Bitcoin is legal. It is legal to own it, legal to spend it, legal to trade with it. Of course, it is possible to use it for illegal activities, but that has always been true of any money.
Although various sites (Washington Post’s Wonkblog, The Atlantic magazine, come to mind) have recently made Bitcoin their favorite target for false assertions about it being only used by Ponzi schemers and illegal narcotics traffickers. The truth is that Bitcoin isn’t nearly as popular for illegal activities as the world’s number one currency for all things lurid, criminal, and fraudulent: the USA dollar. So much of the large denomination dollar bills in circulation are used in illegal narcotics transactions that you may find airport drug-sniffing dogs alerting to your wallet simply because you brought some cash with you.
Of course, the reaction by government agencies, including financial regulatory agencies, to Bitcoin has been mixed. Some in Congress have objected to Bitcoin being used on sites like the Silk Road, and the Silk Road 2, to facilitate what they regard as illegal commerce. New York State has issued, and withdrawn, and proposed again regulations to licence Bitcoin. To get a sense of whether your use of Bitcoin may be legal, regulated, limited, or prohibited, in your area, or in a place where you plan to travel, you might like this handy Bitcoin Legality map and reference listing.
Yes, Bitcoin is legal. Yes, it is possible to use Bitcoin in activities that are illegal. Of course, if you are worried about having your Bitcoin transaction on the public blockchain, you may wish to consider off-blockchain transactions – which we will discuss in our next installment.