Mississauga Life — Early Spring 2015
Change Language:
Buying Into Bitcoin
Kent Fenwick

Currency goes digital.

There’s a lot of buzz—and a lot of confusion—about Bitcoin these days: what it is, how it works, where it’s used, and so on. Is it just hype or is there something substantial to it? Let’s set the record straight.

What’s Bitcoin?
Bitcoin is a currency no different than any other currency, except that it’s digitalonly; it has no physical counterpart. If you download a Bitcoin software application from the Internet, you will receive a Bitcoin wallet and can exchange CAD (Canadian dollars) into BTC (Bitcoin’s currency) and store them in your wallet just as you would a five-dollar bill. It’s not like PayPal, if that’s what you’re thinking; PayPal is a digital wallet that holds real currencies.

Bitcoin vs. a Bank Account
Bitcoin is innovative—or disruptive, depending on your perspective—because there is no bank or intermediary between buyer and seller. If you want to send me 1 BTC, all you need is my wallet ID. The transaction gets sent to a distributed public ledger called the Block Chain. Software running on thousands of computers worldwide verify the transaction (and all others) in 10-minute intervals and add them to Block Chain for all to see. It’s all public and can be verified by anyone with a computer. This open and distributed model makes it nearly impossible to cheat the system and gives strength to the currency.

How Does it Work?
The math behind Bitcoin is very complex—that’s why it’s lasted so long (since 2009) and why it’s gaining so much momentum. The system was designed to: ensure that groups or individuals can’t manipulate it; release Bitcoins at regular intervals, controlling the supply the way a government would; and allow anyone to validate transactions. But to really learn how it all works, you need to brush up on your cryptography and read the original paper. Or visit weusecoins.com/en for a video.

Spending Bitcoin Online
Many online stores are starting to accept Bitcoin: Dell, Expedia, Microsoft, Newegg, and Overstock, to name a few, and more are being added every week. That’s great, but how does that work?

Say you have that five-dollar bill I mentioned earlier. If you want to buy something from Alice that costs $1, you would give Alice $5 and she would give you back $4, right? But in a way, that’s inefficient: it actually requires two transactions. Computers hate inefficiencies, and since there is no physical representation of the currency, you can divide it down as much as you want. So if you have 2 BTC worth $640 CAD and go to Overstock’s website and buy a $20 toaster, you will pay 0.0625 BTC or $20. One transaction. No change. Much more efficient.

Bitcoin Trading
The really interesting part of Bitcoin is that you can trade them the same way investors buy and sell “real” currency. Bitcoin, like Canadian or US dollars, is a market; the price fluctuates continuously.

I bought 2 BTC in the summer of 2012 and paid $110 CAD each. Today 1 BTC is worth $320 CAD. In February 2011, they were worth only $1.20 CAD. Imagine if I’d of bought 200 Bitcoin then, and still had them today: I would have made $64,000! Hundreds of early adopters made millions by investing in 2010–2012. Bitcoin went mainstream in mid-2014, with prices peaking at $1,242 USD.

The Bottom Line: Is Bitcoin Worth It?
I am not a financial advisor, so before you invest in anything, please talk to a professional. In my opinion, I would say yes, or at least invest a little. Big venture capitalists like Andreessen Horowitz and Peter Thiel believe that Bitcoin is here to stay and predicts prices will peak at $10,000 CAD. Needless to say, I am holding on to the two I have.

Kent Fenwick is a software developer and eternal optimist who lives in the future and returns now and then to write about it. If you want to learn more about BTC, find him on Twitter @kentf or email kent@tilt.com.