December 4, 2013

Thoughts on Bitcoin

Posted in Political, Recreational, Technical at 11:39 pm by Ian

I first heard about Bitcoin a few years ago. I was reading Hacker News, and there was a story about someone ordering a pizza with them. Over the next few months, there were many more stories, mostly about the rapidly rising value. I started to learn a little bit more about it, and found the entire concept fascinating.

Near the first price peak around $30/BTC, I remember reading an article written by a guy who had put his entire life savings into it. Wonder if he had the guts to hold all the way through.

When the price dropped down to a few dollars each, I decided to throw $20 at it.

At the time, there were a few ways to get bitcoins:

  • Mine them.

  • Find someone in person to give money to and have them transfer bitcoins to you.
  • Get some money onto an online exchange and buy them.

I didn’t want to deal with the (potential) technical complexity of setting up a mining rig for a short experiment, and even then, the days when a standard computer could generate any reasonable amount of them were waning.

In retrospect, finding someone in person would probably have been the simplest option, but at the time I didn’t really even know how to verify that things had worked and wanted to be able to comfortably nose around a website for a while without the social pressure of someone who probably just wanted to get my $20 and move on.

So I tried the online exchange method.

The process of buying them was complicated and required me to trust a variety of third parties that I had no real reason to trust.

At first, I tried going through an online virtual currency exchange that specialized in currencies from multiplayer video games. I Paypal’d some money over, then somehow managed to convert USD into Linden Dollars (the Second Life video game currency), but was unable to then convert to Bitcoin. I backed out and started over.

Then, I tried to use Mt Gox. I set up a Dwolla account, verified who I was, and waited. Then verified some more things. After a week or two, I was hitting the “buy” button. I downloaded a Bitcoin client on my computer generated a key and some addresses, and tried transferring some back and forth. The numbers decreased in one location and increased in another. Cool. I have successfully exchanged dollars for math.

At every step of the way I felt like I was on the verge of sending my money into a black hole. The addresses are meaningless strings of characters. The software was full of rough edges and The protocol is complicated and I had no real understanding of how the system worked or what I was doing.

And, for a time, they were forgotten.

Last week, the exchange rate broke $1000/BTC. And all of a sudden, they were remembered. All of a sudden, my $20 experiment was worth thousands of dollars.

I’m not sure how to feel about that. Clearly, I didn’t earn that money in any sense of the word.

If anyone tells you they can predict the future of Bitcoin, hold on to your wallet. It’s too different from anything that’s come before for existing economic models to have much predictive power. Is it currently in a bubble? Almost certainly. But that’s not the interesting question. The interesting question is what it means for the future of money. I won’t pretend to know. But I am fascinated by it. It’s an amazing and brilliant experiment at the intersection of technology and math and economics and I’m loving every wild moment of it.

I just reread Ender’s Game, and I was struck with the parallels between Satoshi Nakamoto, the pseudonymous creator of Bitcoin, and Locke and Demosthenes, the internet personalities created by the elder Wiggin children to influence public discourse on the internet. In the story, they leverage their fame and readership into political power. Nakamoto leveraged some clever math, a bit of code and some spare CPU cycles into a fortune of billions. This is what it looks like to have an idea so powerful that it changes the world.

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3 Comments »

  1. Patrick said,

    Interesting post. One question – if/when you make a withdrawal, do you report your capital gains on your tax receipt? And related, is the IRS in a position to acknowledge Bitcoin as a currency (or at least a marketplace for speculation and investors to make real returns)?

  2. Jared said,

    Are you going to sell?
    If it were me, I’d sell about half my current holding right now, to lock in an actual, honest-to-goodness profit.
    Or, at least spend some to hire a good assassin.

  3. Ian said,

    I did sell some. More than half, actually. I will report it as (I think) capital gains, but I’ll have to do more research to figure out how exactly to do so. I don’t think it matters whether the IRS counts it as a currency. If you buy something, hold on to it for a while, then sell it for a profit, that’s capital gains, right?

    The success rate on hiring assassins with bitcoin leaves something to be desired.


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