Can someone explain Bitcoin to me?

[stevensfo]

I understand how pound and euro banknotes work, i.e. the notes have no real value themselves but represent countries with established economies, power, stability, potential etc, are accepted as such and can therefore be used as a means of exchange. The alternative would be to pay for my shopping with a few rabbits or 20kg timber.

Can some kind soul explain how bitcoin works? Despite being a regular on TMF and TLF, my background is in Biochemistry, not Economics and I just can't get my head around how bitcoin works. Why should I ever agree to accept payment in it?

With apologies to those who DO understand it!


Steve

[JohnB]

I strongly disapprove of Bitcoin on environmental grounds. You might like to weigh https://digiconomist.net/bitcoin-energy-consumption with any arguments from others as to why Bitcoin is a good thing.

[stevensfo]

I strongly disapprove of Bitcoin on environmental grounds. You might like to weigh https://digiconomist.net/bitcoin-energy-consumption with any arguments from others as to why Bitcoin is a good thing.

I fully agree with you, John, having read about the ridiculous amounts of electricity required.

However, in this case, my question is more about the monetary side.

Even if solar power were used, what exactly IS Bitcoin and why should someone accept it as payment?

Steve

[Midsmartin]

I would say that a bitcoin is a digital token. Nobody can create a "fake"one, and so any you hold can be trusted by anybody to be the real thing. There is a finite supply of them, so any value you perceive cannot be eroded by "printing"ever more.

There are more technical ways of describing it, but that seems to sum it up in as few words as possible.

The only reason you might take one as payment is that you feel confident that someone else will take it off your hands at a later date in return for goods, services, or another currency.

That's it. Their only value lies in trusting that everyone else also see value in them. The same can be said of the pound sterling, but as HMRC require payment in sterling, and I'm paid in sterling, I'm willing to stick with that for now as having generally accepted value.

[Urbandreamer]

Everything to do with "money" is a matter of opinion. It doesn't matter if your money is huge lumps of rock (the Rai), tobacco, shells or bits of paper.

You seem to have already accepted that soverign currencies have no intrinsic value. Indeed you seem to accept that there are some that perform very poorly. Examples that come to mind are the Bolivar and the Turkish Lira.

Now consider why they perform badly. You won't be the first to consider the question. The german Mark provided an example and the Ecconomist Hayek argued that governments really couldn't be trusted to control money. The urge to debase it is just too strong. He argued for compeating private money.
https://en.wikipedia.org/wiki/The_Denat ... n_of_Money
The book is available from Amazon or I think as a pdf for free.

Of course if we introduce private money, as he suggested, then the problem still exists of how to prevent it being debased. We could use a commodety that is in limited supply. Gold comes to mind. However it's really difficult to use that to pay for anything over a distance. You need to ship the physical commodity from place to place, with obvious risks.

Indeed the same risk exists with the Rai. One of them sits at the bottom of the sea. Dispite this that Rai is still owned and it's ownership can pass from person to person. How? Well it's ownership is recognised, we would say entered on a ledger.

If things can simply move on a ledger, why does the original object need to actually exist. This is how most of our banking currently works. Banks do not provide wheelbarrows full of notes to solicitors so that they can hand them to other solicitors when a house changes hands. Its simply a change on a ledger of who owns the money and another on the land registry.

Isn't this sounding a lot like the bitcoin blockchain?

Ok, so the mechanism isn't so very strange at all. Now lets address a few things specific to bitcoin.

There is a HARD limit of how much bitcoin can exist. Nobody, private or state, can debase the currency by printing more or creating more electronically and using it to buy their own debt (QE). This isn't true of all crypto "currencies"and won't be true of "Britcoin" the proposed UK central bank digital currency.

It also costs a significant amount to change entries on the ledger. The talk about energy use isn't hot air, it's how a cost is applied. Why make it cost? Well so that the cost of being a bad actor outweighs the cost of being a good one.

It's also decentralised. If, as has happened, China bans ownership or mining (keeping the ledger), bitcoin doesn't disapear.

So, why should you accept payment in it? Well you don't have to assuming that you live in the UK. Now if you lived in El Salvador you would have to be able to produce a reason why you couldn't. Not wouldn't, but couldn't. Of course you could then convert it to US $'s at your bank or at the ATM.

I have a tiny amount of bitcoin. I'm investigating it as insurance against inflation.

[doug2500]

I think that's a great explanation Urbandreamer.

I still hate it on environmental and social grounds, but I understand it a little better.

[AsleepInYorkshire]

There are two things to consider

Is Bitcoin "money" or is it "currency"?

AiY(D)

[Lanark]

^ I think this comic explains the attraction better than anything else I have read.

Selling drugs, buying things on the dark web, extorting money with cryptolocker and other online scams, avoiding the taxman, transferring currency across national borders without either govt being aware - then bitcoin is very useful.

For regular people who just want to buy and sell goods and invest and who don't live in Venezuela I don't see any benefit.

The environmental aspects are not just in the mining of new bitcoins, which many will argue is just like mining for new gold, but in all the energy to maintain the blockchain and the replication of every transaction happening on it. The whole thing is unsustainable.

There are several other crypto currencies which are more environmentally sound and have a more stable price e.g. Ripple and Stellar, but they don't have the same gold rush appeal.

[Lanark]

Also to add to this Cryptocurrency tumblers, an essential tool for online scammers.

https://en.wikipedia.org/wiki/Cryptocurrency_tumbler

tumblers are mostly processing bitcoin and ethereum

[Urbandreamer]

There are several other crypto currencies which are more environmentally sound and have a more stable price e.g. Ripple and Stellar, but they don't have the same gold rush appeal.

Indeed Mr Hayek's vision has come to pass. Yes you can deal in currency owned by a private company (Ripple), owned by nobody (Bitcoin) or indeed owned by a state.

This article considers the difference between Ripple and Bitcoin, however I thought that this thread was on DAK and asking questions about Bitcoin.
https://www.investopedia.com/tech/whats ... nd-ripple/
If you are interested in the differences Lanark's link is also worth following.

If we want to talk the merits of differing crypto there is a board for that.

If you follow either link it's plain XRP (Ripple) is a medium of currency exchange and not a currency itself.

Is Bitcoin "money" or "currency"?

Well it isn't currency in the UK, though arguably it is in El Salvador.

Is it "money"? Well at the moment it doesn't perform well as such, though may in the future.

Money is said to have 3 properties.
1) Store of value.
2) Unit of account.
3) Medium of exchange.

https://www.stlouisfed.org/education/ec ... s-of-money

[Lootman]

Is it "money"? Well at the moment it doesn't perform well as such, though may in the future.

Money is said to have 3 properties.
1) Store of value.
2) Unit of account.
3) Medium of exchange.

https://www.stlouisfed.org/education/ec ... s-of-money

By that definition community currencies and LETS currencies count as money then. There is value, a ledger and a way to credit and debit them.

Although typically you cannot use them outside the community, nor trade them into sterling.

[scrumpyjack]

Is it "money"? Well at the moment it doesn't perform well as such, though may in the future.

Money is said to have 3 properties.
1) Store of value.
2) Unit of account.
3) Medium of exchange.

https://www.stlouisfed.org/education/ec ... s-of-money

By that definition community currencies and LETS currencies count as money then. There is value, a ledger and a way to credit and debit them.

Although typically you cannot use them outside the community, nor trade them into sterling.

Western currencies have performed abysmally as 'a store of value'. The pound worse than most. If you look at the views expressed by economists and BoE members, the objective of being a store of value hardly rates at all. All they are interested in is greasing the wheels of the economy. Indeed they deliberately want a little inflation as they think it is good for growth. But having a 'little' bit of inflation is very hard. It has a mind of its own.

So I would be totally in favour of a currency that could not be corrupted by a government and was a reliable store of value. But I don't like bitcoin for many reasons. One being its electricity demands, another being its inefficiency as a medium of exchange and lastly as most of it is owned by its billionaire promoters such as the Winklevoss twins. Nasty!

[Mike4]

Until a way is found for customers of people like me to pay me in BitCoin reliably and on the spot for mundane stuff like getting the boiler fixed, I don't see its value stabilising or it ever meeting the definition of a 'currency'.

[stooz]

Until a way is found for customers of people like me to pay me in BitCoin reliably and on the spot for mundane stuff like getting the boiler fixed, I don't see its value stabilising or it ever meeting the definition of a 'currency'.

That's certainly coming and doable with a bit of faff now.

It's awash with illegal usage, but also that of choosing to defy government control.

Major firms accept it and encourage it like Tesla. And countries around the world are trying to catch up with recognition of it in order to make a revenue stream from income taxation.

[Mike4]

Until a way is found for customers of people like me to pay me in BitCoin reliably and on the spot for mundane stuff like getting the boiler fixed, I don't see its value stabilising or it ever meeting the definition of a 'currency'.

That's certainly coming and doable with a bit of faff now.

Like I said, it can't be done currently.

1) My customers rarely have any BC to pay me with
2) As you say, it is a right faff
3) Paying in Sterling by card completes in cleared funds in about 30 seconds from me saying "That'll be £1,856 please", so why would I put up with hanging around to get paid in BC?

[csearle]

By that definition community currencies and LETS currencies count as money then.

Thanks, I'd never heard of these before. Just found my/a local one. Thought I might offer my services. Only three or four other offers there (and as I don't own a dog, etc.) the "money" is a tad illiquid for my liking. But I digress. C.

[Urbandreamer]

Until a way is found for customers of people like me to pay me in BitCoin reliably and on the spot for mundane stuff like getting the boiler fixed, I don't see its value stabilising or it ever meeting the definition of a 'currency'.

That's certainly coming and doable with a bit of faff now.

Like I said, it can't be done currently.

1) My customers rarely have any BC to pay me with
2) As you say, it is a right faff
3) Paying in Sterling by card completes in cleared funds in about 30 seconds from me saying "That'll be £1,856 please", so why would I put up with hanging around to get paid in BC?

Well, it depends. Paying using $ notes in the UK would be difficult in most places and a bit of a faff. Paying using Visa, Mastercard, Apple pay or Google easy, even if your currency is the $.

OH wait, you can get Visa cards that work if your currency is Bitcoin. So it would still only take your 30 seconds.

Come to think of it lightning wallets make paying in bitcoin as quick as Apple pay or Google, where accepted.

Here is a 36 second video of buying coffee with bitcoin.
https://www.youtube.com/watch?v=fa9xB69jZk0

Here is a lady paying for groceries, drugs (legal ones), a haircut, stuff for a birthday party, receiving bitcoin as a birthday gift, paying for a holiday and appliance repair. Of course she does live in a place where bitcoin is legal tender.
https://www.youtube.com/watch?v=PSKdpbB5BAc

Look nobody has to chose to make bitcoin their currency, but to claim payments "can't be done" if you chose to make bitcoin your currency is simply not true. It's not even true in the UK. Hence my correction.

Before it is pointed out, I should remark that "free" banking does not really exist with crypto. How you pay differs, but there will be a cost. It's one of many things that might put people off, but that's a different matter.

This is DAK and we should be answering questions and not providing opinions. The Crypto board is the place for opinions about crypto.

Moderator Message:
Was moved from DAK quite a while ago. - Chris

[Mike4]

Until a way is found for customers of people like me to pay me in BitCoin reliably and on the spot for mundane stuff like getting the boiler fixed, I don't see its value stabilising or it ever meeting the definition of a 'currency'.

That's certainly coming and doable with a bit of faff now.

Like I said, it can't be done currently.

1) My customers rarely have any BC to pay me with
2) As you say, it is a right faff
3) Paying in Sterling by card completes in cleared funds in about 30 seconds from me saying "That'll be £1,856 please", so why would I put up with hanging around to get paid in BC?

Well, it depends. Paying using $ notes in the UK would be difficult in most places and a bit of a faff. Paying using Visa, Mastercard, Apple pay or Google easy, even if your currency is the $.

OH wait, you can get Visa cards that work if your currency is Bitcoin. So it would still only take your 30 seconds.

Come to think of it lightning wallets make paying in bitcoin as quick as Apple pay or Google, where accepted.

Here is a 36 second video of buying coffee with bitcoin.
https://www.youtube.com/watch?v=fa9xB69jZk0

Here is a lady paying for groceries, drugs (legal ones), a haircut, stuff for a birthday party, receiving bitcoin as a birthday gift, paying for a holiday and appliance repair. Of course she does live in a place where bitcoin is legal tender.
https://www.youtube.com/watch?v=PSKdpbB5BAc

Look nobody has to chose to make bitcoin their currency, but to claim payments "can't be done" if you chose to make bitcoin your currency is simply not true. It's not even true in the UK. Hence my correction.

Before it is pointed out, I should remark that "free" banking does not really exist with crypto. How you pay differs, but there will be a cost. It's one of many things that might put people off, but that's a different matter.

This is DAK and we should be answering questions and not providing opinions. The Crypto board is the place for opinions about crypto.

Excellent videos, thanks! Certainly makes it look a whole lot easier than I was imagining and totally has changed my mind on that.

The first video where the payment transfers phone to phone looks the most appropriate for me. (I guess it's fair game to discuss it here now the thread has been moved from DAK.) Can you suggest any good links that explain what is needed to take payment on one's phone please, or shall I just resort to Googling?

Another thing that concerns me is the 'currency' risk. None I guess if I can find stuff to spend my BC income on, but if I need to use it to pay a non BC retailer then I'll need a currency exchange facility, and as a total guess, I suspect my bank might tell me to 'do one' (to use vernacular I picked up from another forum).

Also, I can imagine there being some income tax issues cropping up....

[Lanark]

The tragedy in El Salvador shows that Bitcoin's a disaster for buying and selling things, and that the dollar's a matchless currency. For a while, a flamboyant promoter marketed his fantasy to other zealots who want to believe. The test was selling it to his own people. They weren't buying.

- El Salvador’s plan to create the first Bitcoin-powered nation is tanking the economy—and is a mess by every measure

Here is a lady paying for groceries, drugs (legal ones), a haircut, stuff for a birthday party

and in that video you can clearly see the price is in dollars, so the bitcoin card is paying the merchant in dollars and at some later point (probably hours later) converting a Bitcoin balance into dollars to pay for it and charging 5% or so for the transaction (on top of the merchants normal Visa costs).

[Urbandreamer]

The first video where the payment transfers phone to phone looks the most appropriate for me. (I guess it's fair game to discuss it here now the thread has been moved from DAK.) Can you suggest any good links that explain what is needed to take payment on one's phone please, or shall I just resort to Googling?

Another thing that concerns me is the 'currency' risk. None I guess if I can find stuff to spend my BC income on, but if I need to use it to pay a non BC retailer then I'll need a currency exchange facility, and as a total guess, I suspect my bank might tell me to 'do one' (to use vernacular I picked up from another forum).

Also, I can imagine there being some income tax issues cropping up....

I'm just starting out so may not be the best to answer.

You make some good points though.

All crypto transaction require data exchange. A smart phone is simply the easiest way currently. What they are using as an "App" or application called a wallet (in this case a lightning* wallet which is why transactions can be quick). The nearest that I have is a Paypal app that would allow me to make payments over the internet. It's not really a crypto wallet, though you can hold crypto with Paypal.

They are mostly using the Civo wallet on the video's which is only available to El Salvarorians and has some serious questions about it. Others will have more experience of true crypto wallets. It's a big subject, but Civo is not the only lightning wallet.

If you used a crypto Visa card then the POS would demand a pin (or assume that the card is not stolen) then communicate with Visa. The vender's account would be credited, in the UK with pounds and your account debited. There would be a currency conversion fee.

The videos are from El Salvardo, where the transactions are in bitcoin, however note the "unit of account" or price is not. It's still in US $'s. This is one reason that I said that bitcoin was not working well as "money".

Currency risk. Well yes it's big, but works in both directions. Recently bitcoin has fallen so savings held in bitcoin are worth somewhat (some would say significantly) less than they were in December. In the past there have been falls of 80%, so it's quite a risk. Then again it's gone up just as much. Google will provide a graph.

Income tax issues currently are rare, as few are paid in crypto. However here in the UK we have to consider capital gains tax.
Let us assume that you go mad and buy £20k worth. We have rapid inflation and the £ falls to half it's value, but the BOE gets control again. You decide to sell your bitcoin, which will still only buy the same amount of stuff. On paper you have made a gain of £20k and have to pay tax because of incompetent management of the £.

*Lightning is another complexity. Bitcoin transactions are slow and expensive. The lightning network is a different system with different ideas that sits on top of bitcoin. This means it can be cheap and fast.
https://www.youtube.com/watch?v=yKdK-7AtAMQ

Ps, bitcoin was intended to be more like cash. Hence you carry bitcoin in a "Wallet". Like cash you can lose it. Of course you could also have someone look after it for you.