Bitcoin Crash Course Q&A
A few days we (Lunafi) hosted a Meetup here in San Diego called SD: Crash Course on Bitcoin where we taught people about the history of Bitcoin, why it was created, and how to purchase and use it. In this blog post I’ll be answering the questions people had for us. These questions range from mining, security, transaction fees, other applications of blockchain technology, ICOs, and many others, so hopefully you’ll learn a thing or two!
(If you’re in Southern California, come join us at one of our events)
What is Lunafi?
That’s us! We’re a company in Southern California and our mission is to make investing in and using cryptocurrencies easier than ever. You can read more about us in our blog post titled Welcome to the Lunafi blog. We produce educational content on cryptocurrencies, host local Meetups to help people get acclimated and comfortable with cryptocurrencies, and we’re building an online platform that will be the easiest way to get a diversified investment portfolio of cryptocurrencies to date. We haven’t released any information on this platform (this is actually our first public mention of it!) but keep a look out in the weeks to come.
Should the industry be worried about Bitcoin being hacked with all of the growing interest in the field?
Bitcoin is fundamentally secured through cryptography and mathematics, and hacking the blockchain isn’t something anyone should be worried about. It’s impossible to change things once they’re on the blockchain, and getting fake transactions confirmed would require one to control more than 50% of the entire global network, which is technically possible but impossible from a practical standpoint. I’m sure as Bitcoin gains popularity people will continue trying to find ways to hack it, but unless the laws of mathematics and computing change our funds are secure on the blockchain.
Do you think Bitcoin is in a bubble?
Oh boy, this is probably the question we get asked most. Many professional investors will tell you that Bitcoin is in a bubble because it’s price continues to rise. A few weeks ago Bitcoin’s price crashed about 30%, is that considered the bubble popping? Does it have to crash any certain amount to be considered popped? I think that Bitcoin’s price is currently valued at its future potential, similar to many investments. Let’s do some hypothetical math here (correct me if my numbers are off!):
$7.7 trillion of the world’s wealth is in gold. Many people see Bitcoin as a possible digital replacement for gold.
Let’s consider that some day, perhaps a decade from now, 20% of those gold investments were transferred to Bitcoin. That would leave us with $1.54 trillion worth of Bitcoin.
There will only ever be 21 million total Bitcoins, but if you lose your private key to your wallet your Bitcoin are gone forever, nobody can ever access them. This is a common occurrence, let’s assume 20% of all Bitcoins are lost forever (see here for more info). So that leaves us with a total of 16.8 million Bitcoin.
$1.54 trillion (the wealth transferred from gold to Bitcoin)/ 16.8 million Bitcoins = $91,666 per Bitcoin. So in this hypothetical scenario, one Bitcoin would have to be at least $91k to represent that wealth.
These numbers are certainly a best-case scenario and some people would call me crazy for thinking Bitcoin could replace 20% of the world’s gold, but these numbers should give you an idea of Bitcoin’s future potential and what investors might be thinking.
Bitcoin mining. Where to start? Are there other cryptocurrencies to consider?
I wouldn’t recommend anyone try mining Bitcoin, the software self-adjusts to require more and more computing power over time to mine. At this point you need very expensive specialized hardware and access to very cheap power in order to be profitable. There are some services that allow you to rent cloud servers that mine Bitcoin, but these are almost never profitable. I would recommend looking into coins like Vertcoin, which is aimed around keeping it so that anyone can mine on their regular computer, or Monero which similarly is still possible to mine on a regular CPU or GPU. Vertcoin, and some other coins, has a “one-click miner” software that you can just download and click a button to get up and running, things like these are great for beginners.
Bitcoin/cryptocurrency networks charge fees. If it’s different than banks and fiats why the fees? Why the fees for both deposit and withdrawal? Isn’t thet the same as central banks?
Every transaction on any cryptocurrency network requires real computers somewhere in the world to do the work of processing and confirming those transactions, in the form of miners. Ask yourself: why would anyone every donate their hardware and power bill for free to process these transactions? The answer is they wouldn’t, so this is why miners charge fees. The fees are a way to create an incentive for people to put the effort into running these miners that process transactions on the network. So instead of one company getting the profit from helping maintain the network, any individual anywhere in the world is free to help out and they can get paid to do so. This is a stark contrast from central banks where they control everything and choose their fees however they see fit. Cryptocurrency networks create a free market of people competing to have the best hardware that can confirm transactions faster so they can get the rewards. Fees are also a way for you to declare the importance of your transaction. If you need your money sent fast, include a large fee and miners will pick it up quickly. If you don’t need it to be sent right away, you can include a small fee (or no fee at all) and wait awhile until the miners eventually process your transaction. This is another form of creating a free market through transaction fees and another different from central banks. Nobody decides the fees of transactions, they’re determined by how much everyone on the network is sending and what fees they’re including at that time.
When you convert one cryptocurrency to another, what types of fees are involved?
Cryptocurrencies don’t currently have any concept of trading one for another. They can just send from one wallet to another wallet of the same currency. So when you trade one for another, you typically do so through an exchange company that provides the service of matching you up with another individual who is looking buy the currency that you’re selling. These companies can decide their own fees, but typically you can find exchanges with fees between 0.25% and 1% of the transaction. Note that some countries may consider each trade as capital gains, so when you trade make sure you talk to a tax professional and record every trade you make. I use cointracking.info to track all of my trades, they’re a great service.
When I send cryptocurrency to an account on an exchange in another country, how does that affect me?
I’ll say the same thing I said in the previous answer, you should really talk to a tax professional! As long as you’re recording your capital gains you’ll probably be okay, but I would always recommend talking to an expert to make sure you’re following the rules and paying your taxes correctly. One thing I’ll add is that if you keep your funds on an exchange somewhere like China or Russia, and that exchange gets hacked or shut down by the government, it’s very unlikely you’ll ever get your funds back. Since I live in the U.S. I only use U.S.-based exchanges that are reputable and preferably insured so that even if something does go wrong you still have a chance of getting your money back or at least challenging it in court.
How can I access my funds? Is there any chance of liquidity issues?
If you’re trading on the large exchanges like Bittrex, GDAX, Gemini, etc. then it’s likely that you’ll always be able to make the trades you want back to USD and these exchanges are unlikely to have liquidity issues. There are insane amounts of money running through these exchanges every day. Many exchanges have do withdrawal limits though to fight money laundering, so you may only be able to withdraw something like $10 thousand in one day. Most of these companies will increase your withdrawal limits over time as they deem you trustworthy, but that’s something to consider. If you’re selling a really massive amount of coins, you might want to look for an in-person transaction so that you don’t have to deal with an exchange and you can get your money right away. Websites like localbitcoins.com are great for finding buyers and sellers in your area that you can meet face to face.
Any thoughts on ICOs (Initial Coin Offerings)?
ICOs are very similar to a company’s IPO (Initial Public Offering). The company is using a digital token to represent a share of ownership. Some of these can make you good returns, but know that these are not currencies like Bitcoin or Litecoin, they’re simply a digital representation of ownership in a company. Some ICOs will promise that when that company does eventually create a cryptocurrency, they’ll trade their new currency one-to-one for the digital tokens you own. So if you’re buying an ICO, make sure you do your homework on that company, there are many stories of companies building a lot of marketing hype and doing an ICO to raise money, only to run away with the funds. One popular example of an ICO gone wrong is Tezos.
What are your thoughts on blockchain company investments?
I think if you can find an opportunity to invest in a blockchain-based company, you should at least consider it and do your research since many of these companies are not seeking public funding. This industry just began its rise in popularity this year and it looks like it will continue to expand rapidly for the next few years. Investments in blockchain companies may be a less profitable but also safer investment than investing in cryptocurrencies directly. Many people see cryptocurrencies in 2017–2018 as the equivalent of the internet in 1996. This is a very exciting time and it’s creating many interesting and investment opportunities.
Do you see Bitcoin Cash overtaking Bitcoin?
This is a holy war that we’ve made the decision not to comment. It’s hard to have an opinion on this topic without offending someone. Bitcoin was the original cryptocurrency, Bitcoin Cash was a derivation of Bitcoin that attempts to solve the problem of scaling to lots of new users in a way that the core Bitcoin development team didn’t agree with at the time. Bitcoin Cash has been actively trying to re-brand itself as the true Bitcoin. When you’re reading online make sure to remember the bitcoin.org is the original Bitcoin website, and bitcoin.com is the Bitcoin Cash website.
What are your thoughts on the application of blockchain in non-financial such as music or healthcare?
We teamed up with ProAdvisor CPA to publish an article on the application of blockchain technology in the accounting industry, you can find it by following this link. This excerpt is from that article:
The Blockchain was the innovation that allowed Bitcoin to be the first truly secure and functional digital currency. At its core, the blockchain is a digital ledger that is immutable (can never be modified) and is able to be kept in sync with every computer on a network without any single computer or database determining what is correct. This decentralized system of trust is what makes Bitcoin so special, you can verifiably trust that your financial transactions are legitimate without needing to rely on a central processor such as Visa or PayPal. Although Bitcoin uses the blockchain to keep track of account balances and transactions, that’s just one possible use case. Any system that requires a system of trust or verifiable data can use the blockchain to store data without requiring a central company or database to keep track. Possibilities include using the blockchain to track who owns what real estate and transfer ownership when appropriate, to track where your groceries were sourced from and have travelled before you purchased them, recording and verifying insurance claims, and many others.
Are cloud mining sites valid?
Cloud mining website allow you to rent cloud servers that mine cryptocurrencies, and you get any profits they generate. I think that in general these are very difficult to be profitable, and you’d make more money if you committed to purchasing your own hardware to mine. See my answer previously in the post above about mining to see if you think mining is right for you.
Where do you see BTC by mid 2018
The moon! In all seriousness, I think a price of $40,000 seems realistic by the end of 2018, with $30 thousand seeming inevitable and $50 thousand a bit far-fetched but not entirely out of reach. There are so many new companies using Bitcoin and 2018 will be the year that Wall Street gets serious with involvement in Bitcoin, so there’s lots of growth to come. With all of the recent rapid price movements though, I wouldn’t be surprised if we see a major crash of 30% or more before these highs are reached.
What are the benefits of a hardware wallet, and which would you recommend?
The main benefits of hardware wallets are that your private keys (your passwords) are in your control and nobody else has them. If you use a wallet on your mobile phone you’re the only person with your private keys, but phones are connected to the internet and can potentially be hacked and accessed by someone else. If you keep your coins on an exchange that exchange has all of the control over your coins, you’re just trusting them that they’ll give them to you when you want them. A hardware wallet has no connection to the internet and is the only place in the world where your private keys exist. Some popular wallets are the Ledger wallets and the Trezor wallet.
What other cryptocurrencies to watch?
I published a blog post recently titled I’m CEO of Lunafi, and these are my cryptocurrency investments. I recommend giving that a read, I list out every investment I own and the reasons I like them.
How cryptocurrencies work?
We have a PDF covering the basics of Bitcoin on our website titled “Bitcoin Crash Course”, give that a read! This is a topic that can span multiple books, it’s too much to cover in this one post. Perhaps I’ll write up a separate post later on just to cover the basics of how cryptocurrencies work.
