In late July, a man named Michell Abner Espinoza was released of three felony accounts of money laundering based on the fact that he was laundering bitcoin, not a traditional currency. And according to Florida judge Teresa Pooler, bitcoin “isn’t real money.”
So then what is it? Clearly, it has the financial and judicial world in a tizzy. Herein is an attempt from a non-techie to explain the world of digital money and how it pertains to the world we live in.
Bitcoin: Explained
Bitcoin is best described as a digital currency. It is basically “smart” money; it can be programmed to represent the value of a variety of things. One unit of bitcoin, for example, could represent a euro cent, a share in a company, a kilowatt hour of energy, or a digital certificate of ownership (examples taken from this very helpful video.)
No one expected this type of currency to rise in popularity. Yet in the past few years, it has done just that– and with it, the value of bitcoin rose as well. Bitcoin is now accepted as a valid form of currency by companies like Target, Microsoft and Amazon.com. Everyday users can buy Bitcoin through digital apps like Coinbase and Circle, and use it to buy products at stores that accept bitcoin, or sell it to banks in exchange for money to deposit into your bank account.
Dan Schott is a Grand Forks local and a long-time bitcoin enthusiast; he brought the first bitcoin ATMs to Grand Forks, and has been working on bitcoin initiatives for years. “It’s the future,” he says.
He described a few leverages bitcoin has over traditional currency; for example, it’s accepted in different countries and can be used as a global payment system, and it can be used to give non-profits a financial gift without any middle-man fees. In fact, major non-profits such as United Way have already adopted the new technology by setting up entire bitcoin donation pages.
“It can be seen as a safe haven,” Schott said. “It’s a free and frictionless way to move money around.”
A major downside to bitcoin is the extreme volatility of value. For instance, when we spoke with Dan last week, the worth of one bitcoin was hovering around $656.76. At the time of this article, the worth is at $556.53. It dropped $98.70 from last week.
But all of this is merely the surface level of the true technological revolution of the financial system. In order to fully understand bitcoin, we must dig deeper, to its roots: the blockchain.
Blockchain: Explained
Blockchain can be defined as an open, decentralized database of any transaction involving value; money, goods, property, work or even votes. It is the technology that enables bitcoin to work in a mathematical and trustworthy way; “a public ledger of all Bitcoin transactions that have ever been executed,” according to investopedia.
Blockchain can be thought of as the platform on which bitcoin operates. Daniel Gasteiger, who gave a talk called “Blockchain Demystified” at TEDxLausanne, describes the relationship between bitcoin and blockchain as similar to e-mail and the internet; in the same way an e-mail application uses the internet to send an e-mail around, bitcoin is an application that uses blockchain technology to send money around.
Gasteiger traces the creation of blockchain to a paper that described an online peer-to-peer payment system. It was published just after the economy crashed in 2008.
“Was this just a coincidence or very well-timed, that somebody released such an idea at a time when trust in the centralized system was lost?” he asks.
We will probably never know, he continues, because the author of the paper remains anonymous, under the alias of Satashi Nakomato — a clever move, some say, based on the disruptive nature of these ideas. In fact, blockchain is hailed by many as “the biggest technological invention since the internet,” Gasteiger said.
What does this actually look like? Blockchain + Bitcoin in real life
I decided to try out bitcoin for myself. Here is my real account of how I used bitcoin here in Fargo.
I used Coinbase as my digital wallet, an iOS app recommended by Schott. Coinbase has a great relationship with banks, Schott said. Another option is an app called Circle.
Let me tell you, this platform is not messing around. And rightly so. There are many steps of identification and verification, and a lengthy terms and conditions contract. I actually read through the terms and conditions of this process, being that I don’t really know what the heck I’m doing and the unknown is scary.
The warning is clear, right from the beginning: “The risk of loss in trading or holding Digital Currency can be substantial. You should therefore carefully consider whether trading or holding Digital Currency is suitable for you in light of your financial condition.”
That being said, once I had my account set up, I went for a small purchase of $5.00 worth of bitcoin. Bing, just like that, I had 0.0089166 bitcoin (or BTC) in my digital wallet.
Within seconds I had lost money, albeit a few cents; my purchase of $5.00 worth of bitcoin was now worth $4.97. This was to be expected. Perhaps if I wait a few weeks it would go up to be more than $5.00. In this case, I didn’t have time to wait. I attempted to buy a coffee at Red Raven, which used to accept bitcoin, but apparently they haven’t had it set up for a while. People used to come and use it, the barista said – “but we haven’t heard people talk about it for a few months.”
Looks like United Way is getting a $5.00 donation.
The future.
In Grand Forks, Dan Schott has used bitcoin to pay for upgrades on his son’s Xbox and regularly donates to non-profits using the digital currency. In the future, however, he envisions much greater things for bitcoin.
“I hope I could pay my son’s tuition in bitcoin,” he said. “Or if my daughter is in Norway and is short on cash, I could quickly transfer her money to use” — without going through the hassle of currency exchange.
Of course, bitcoin and blockchain have their critics. Namely, privacy; the idea of a public ledger that keeps track of money transactions via the Internet sounds to many as vulnerable and scary. Perhaps most of all, the world of bitcoin and blockchain is hard to understand, and when it comes to money, any sane person wants things to be clear as can be.
Even an avid bitcoin enthusiast like Schott can understand this. “At this point, it’s a leap of faith,” he said.
But, he adds, whether you take that leap or not, bitcoin and blockchain are here. And they don’t seem to be going away any time soon.
“It would be a mistake to write off digital currency as technology that will disappear,” he said.
