An idiot asks the smartest people she knows about Bitcoin

Sami Yewman here: I run the social media communications here at Sweetwater Investments, and I sat down with our esteemed staff to chat about the newest fad in investment: bitcoin. Since I, admittedly, had little to no knowledge of just what a bitcoin was, much less whether or not to invest in it, I asked Jeffrey Alton, Kathy Lee Steine, and Dennis Gibb to walk me through the basics of bitcoin and cryptocurrency. Here I’ve outlined that conversation, summarized their responses, and provided some links for more information, in the hopes that it’ll be useful to someone out there who is just as confused as I was.

The reader’s digest version is this: When it comes to bitcoin, there’s a lot to consider, and while cryptocurrencies are still in their adolescent phase, they stand to revolutionize the financial world as we know it.

O.K. first and foremost, what is a cryptocurrency?

This is a fancy way of saying a decentralized currency that is not based on gold, or banks, or anything else. Imagine that instead of having your bank account balance being monitored and controlled by the bank, your account was( is) hosted in a balance sheet shared by people across the globe. The crypto part comes from the fact that the balance sheet is unhackable and only those with the proper credentials can access it.

When did cryptocurrencies start?

It doesn’t take an expert to tell you that distrust in banks, govrnments and institutions is low. So, when an anonymous user posted this paper online in 2008 in the wake of the wall street collapse, outlining a currency that did not depend on the big banks or the gold standard, people liked the idea of a currency that was not controlled by an authority. In 2009, the first bitcoins were able to be exchanged, and in 2010 they were traded for the first time. A full timeline can be found here.

How does it work?

For this we’ve found a diagram brought to you by the geniuses over at Blockgeeks.com, who made this easy to understand flowchart. There are, of course, nuances and this incredibly complex technology is not easy to sum up, but this covers the basics.

Why are these so popular?

In the midst of the banking crisis, distrust of financial institutions skyrocketed. Bitcoin capitalized on that, and to this day, cryptocurrencies are quite trendy with young people who don’t like banks. Cryptocurrencies are also appealing to the black market, as they provide an anonymous and unregulated method to store and transfer money.

How many cryptocurrencies are there? How many bitcoin are there?

Roughly 1,300. Bitcoin is just the most prominent — it has 16.7 million coins in circulation with a current value of $189 billion (however, that statistic changes hourly). There will only ever be 21 million bitcoin, since that’s the way it was set up. An estimated 60 percent of bitcoins are in deep storage. They were created, put on a hard drive, and they’re just going to sit there. There are also a fair amount (estimated 2 million) that have been lost, either to scammers or because the owner has lost the key that gives them access.

Can I buy things with Bitcoin?

Yes but it’s not easy. Since the value of bitcoin fluctuates so rapidly, the price of items becomes tricky. Dennis gave this example: you live in Dubai, and I live in Seattle. You decide to buy something from me. We agree that 2 bitcoin is the price, so you transfer me 2 bitcoin, but in the meantime, the value of Bitcoin has dropped from 18k to 13k. The transfer is not instantaneous because your transaction depends on a miner picking up the transfer and adding it to the blockchain.

Is this a bubble?

It very well could be. But if it’s not, think of what that could mean. It’s like a language. If one day we woke up and there were no more languages, instead there was just one, and everyone knew how to speak it. There’s endless possibilities here: if it’s not a bubble, that’s a good thing!

What about the environmental impact?

Mining bitcoin comes at a cost to the environment, since it takes massive amounts of energy to mine them. Since most bitcoin are mined in China, where they largely use coal as an energy source, the carbon footprint of bitcoin is shocking. Projections from lead scientists show that the way Bitcoin and other cryptocurrencies use energy is unsustainable. Eric Holthaus writes that “ By July 2019, the bitcoin network will require more electricity than the entire United States currently uses. By February 2020, it will use as much electricity as the entire world does today.” in his now-viral essay for grist.org.

Why do people perceive it as risky?

1. People are scared of what they don’t understand. Says Dennis, ‘it’s like when email started. People were hesitant to trust it at first, but over time as the technology became more sophisticated, and people came to understand the power this technology had, they trusted it more.
2. The banks came out strong against it, which spooked people at first. Kathy recalls that she was interested in investing early on, but since her husband works for a big bank, she was afraid of retaliation that might arise because of her investment.
3. There have been security breaches involving the entry points into the blockchain. It’s important to note that this is a fair criticism, but with time the entry points will only become safer and more advanced.

But it is safe?

The blockchain is going to be very difficult to hack into. It’s like putting gold in a vault. It’s pretty secure. Obviously nothing is 100% safe, and every technology is subject to human error, but this is as close as we’ll get.

What’s the biggest benefit of using bitcoins/cryptocurrencies?

Jeff: The blockchain is invaluable. It is a huge advancement in networking and the next advancement in accounting.

Dennis: The idea of an electric ledger that can’t be hacked is priceless. That’s the real advancement. Bitcoin may fade, but the ledger will live on.

What do we still not know about bitcoin/cryptocurrencies in general?

Kathy: The question remains on regulation and the transfer rate.

Jeff: The buying and selling system is still clumsy.

Dennis: The volatility is going to slow at some point, we just don’t know when.

So, will these grey areas be clarified as time goes by?

All 3: Yes.

Would you invest?

Jeff: I already did!

Kathy: I was going to earlier on, but now feel that I missed the window.

Dennis: No

Thanks for reading! If you’ve got more questions, feel free to leave them in the comments, and we’ll answer them to the best of our ability.