Dipping a toe into Bitcoin

So there seems to be a bunch of primates going bananas about these emerging cryptographic, Peer-to-Peer digital currencies[5]. The most widely used one is Bitcoin. I’m not going to go into an “introduction to bitcoin” or “mining for BTC” type post as there are plenty of those out there. Go Google and find out about it. These are just some thoughts I’ve had. I’m not an expert in currency trading, economics or anything financial – my expertise is in technology.

Trading (and buying Bitcoin)

The price of bitcoin has been rising steadily, but also fluctuating wildly, due in part by speculation, but also by panic selling and some DDOS attacks by market manipulators trying to look for short term profit. The main exchange for bitcoin is MtGox which is based in Japan, but there are also others worldwide that deal with a variety of currencies. Being stuck in Australia did limit the options somewhat. MtGox does now accept funding from Australian banks and also withdrawing to them, but it took over two weeks for them to verify my identification so I could start to trade[4].  Since that time the value of BTC essentially doubled, but I took another, more expensive route.

I used a local company, Bit Innovate, to buy coins by going into a bank and depositing into their account. Within an hour, there was my order in BTC in my wallet. I got it at a great rate comparable to MtGox, but there was a 7.9% commission, whereas, from what I can tell, MtGox would be about 4.55% (3.45% deposit fee for depositing from Australian bank, plus 0.6% for the BTC trade). MtGox would also take a day or two to transfer the funds. For the premium, Bit Innovate was a good option, especially if you consider I would have been paying double if I had waited forMtGox to verify me.

I’m uncertain how much Bitcoin is really worth, but as an emerging technology that is creating some buzz, I thought that I should give it a try. I purchased a few coin around the $70AUD mark. Getting to know the exchange, I shortly sold some back to AUD, but also kept some BTC to try to buy some things, and today the price is about $150. Will it crash, or will it soar as more vendors get on board? There is plenty of uninformed discussion and speculation, but I am quietly optimistic. At the end of the day, BTC may not be the final digital currency that survives, but I am proud that I picked it to be an earlyish adopter[2].

For a history of Bitcoin trades and prices, look at MtGoxLive, and ClarkMoody

Length of the Blockchain and Confirming Transactions

One of it’s strengths is also one of it’s problems – the blockchain. If you have the Bitcoin wallet client on your computer it has downloaded the entire blockchain and downloads new transactions and blocks as they are made. Due in part to the popularity of a gambling app for bitcoin called Satoshi Dice (more on that below), and the huge numbers of blocks that have been solved, the blockchain is HUGE. It is currently about 2.3Gb on my PC. I’m on a measly satellite Internet connection here, so I wasted a good portion of my monthly download allowance jut downloading the blockchain, twice (since I installed it on 2 computers). I also have been online with my PC connected to my smartphone, downloading new blocks, which has eaten into my download allowance on that service as well. I was considering putting an Android wallet app on my phone but it would chew through bandwidth, so if I end up doing mobile transactions I will probably set up a web based wallet for that.

The blockchain contains all of the transactions in the history of Bitcoin, so it will continue to grow. This will cause problems storing wallets on smaller, limited devices, so people will start using online wallet services.

Wallet Security

  1. BACKUP YOUR WALLET.
  2. HAVE MORE THAN ONE WALLET.
  3. CLOSE THE BITCOIN CLIENT BEFORE MAKING A BACKUP.

All wallets have the possibility of being hacked. If your password to the online wallet it guessable, then it can be forced and you could lose that wallet (ie it will be emptied out). You get malware on your Windows PC that installs some remote access tools, you’re going to have a bad time. You store a wallet on a Linux box behind your firewall and are lax by not using SSH keys or a VPN to access it – the same will happen. Wallets can be encrypted. Wallets can also be corrupted. I suggest having a few wallets. Back them up to a USB stick. Have a long-term-cold storage wallet that is not stored on your Internet connected sources. Take a look at Armory that has the ability for offline wallets as well. If using an online service, use 2-factor authentication where possible.

What You Can Use BTC For

However, on a daily basis there are more and more uses of BTC, from sending funds to each other, to buying good from auction sites and online stores, to paying for services or even web hosting. I suggest looking at the Reddit subreddits /r/bitcoin for some ideas.

The first purchase I was excited about was buying the Reddit Gold service using Bitcoin. I needed a software license for an old version of software, I found it on the BitMit auction site, since it was a version from the USA so I don’t have to pay the Australia Digital Goods Tax[3]. While perusing the items on sale there, some obviously a joke (eg for sale: 1 Air Guitar) I picked up a few coins and other collectibles. Buying of Bitmit uses Escrow, so the funds are held by the Auction house until I tell them to release the good because I received them. There were a few Australian listings, but in my travels I have found almost no other places in Australia to spend my Bitcoin. If you know of any, please feel free to let me know. I saw geeks selling up their collection of Magic The Gathering card sets, but I wasn’t tempted.

You will wade through a lists of sites accepting Bitcoin, paginating through pages of online poker and casino sites. One of the most popular is SatoshiDice. It has a high return rate, and you get the instant dopamine hit of a quick win by sending funds to an Bitcoin address depending on what odds you want. There is so much Bitcoin traffic to SatoshiDice that it is making the blockchain grow and grow and groooowwww. I tried this a bunch of times and was lucky when I just did a bunch of random bets. I was reading that people are writing their own bots to auto-bet on Satoshi dice with their own system, or the Martingale system (hence causing a huge number of transactions). Since you can have an unencrypted wallet on a Linux box running the bitcoind daemon, which responds to RPC requests via JSON calls, it’s trivial to write a bot. So I gave it a go, but I rarely gamble, and my system was crap. Actually I put a < where a > should have been in an if statement, and my bot ran away losing the half a bitcoin I put in there to test. I retired, hurt, and confirmed that the house always wins, but I walked away happy because what I put in was the winnings from a previous SatoshiDice bet so I hadn’t really lost anything, but in fact had learned how to write Bitcoin enabled apps.

There is a growing list of pron sites now accepting Bitcoin as payment for access.

Of course, some of the press has been about using it for slightly less legitimate purposes due to it’s nature of being unregulated by any bank or government. Silk Road, on the Tor network, springs to mind, but I haven’t had time to peruse that specific auction site during this busy month.

I’d like to see more computer stores offering Bitcoin for purchases, especially for digital delivery items such as software licenses.

Mining

The lowdown is that it’s barely worth mining anymore with today’s high electricity prices, and the soon to be delivered[1] flood of cheap ASIC miners will make GPU mining as useless as GPU mining made CPU mining.

You Got This Far…

I suggest doing some more reading or trying out the Bitcoin waters for yourself. The currency shows great promise. I’ll probably write some more articles on Bitcoin and other digital currencies soon. Thanks for reading my brain dump.

Footnotes

[1] Apparently ButterflyLabs have been collecting money from speculative miners for these super duper ASIC miners since 2012 and kept pushing back the delivery date.  Their GH/s rates are very high for the price, and they may have over-sold the performance of the product and are having problems bringing it up to speed. This has caused a bit of a stir on IRC and Reddit discussions, with some proclaiming it vapourware. I’ve put in an order for a small miner, but have months to wait in the queue since I’m late to the party. Some people have occasionally gotten their orders, and the company does give refunds willingly (since the order list is quite long), but something definitely weird is happening in ASIC land.

[2] I mined  few bit-cents a couple of years back when the currency was still in it’s infancy but GPU mining was coming into the norm. I stopped because there was a breakthrough with ATI based GPUs that made them 10 times faster than Nvidia GPU’s due to a couple of instructions they had that were useful for crypto work. I had an nVidia card so found it was not worth my time continuing and went on to other things. I’ve come back to the party late in the GPU game but still early in the life of digital currencies, mainly because it is now starting to be a useful currency.

[3] I’m not talking about Australia’s GST (goods and services tax). It was only for a couple of dollars worth of software, a great use of BTC for a microtransaction. What I am talking about is if I looked for the same software from a local site, it would be at a cost markup of over 200%. Software companies have been taken to task by the Australian government for ripping off Australian consumers for years when there is ABSOLUTELY NO EXCUSE. Their explanations in front of parliamentary committee’s  have been found want wanting. I refuse to pay twice what someone in the USA pays for EXACTLY THE SAME SOFTWARE AND SUPPORT. Since I mostly use Linux, I don’t have to pay much at all really.

[4]You can trade in BTC , but in order to add funds in Australia without paying the high cost of an international wire transfer, instead by paying to an Australian bank BSB and account number, I needed to be verified. This had the side benefit of also increasing my trading limits.

[5] Recent reports that the Winklevoss twins, those Olympic rowers and nemises of Mr Zuckerberg for stealing their idea for a Facebook, have a huge holding of BTC, in the tune of $11m worth. They saw that social networking was a good idea and they are putting their money into bitcoin too.  Not sure how much was invested and how much was mined.

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One Response to Dipping a toe into Bitcoin

  1. Sam Lee says:

    Good read, thanks for the business ;). Always great to meet another bitcoiner, my bitcointalk handle is “aspiring” if you’re ever on there.

    Cheers,
    Sam

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