Just to be perfectly clear, I’m not recommending investment in Bitcoin or any other Bitcoin-like crypto-currency. Right now and for the foreseeable future, it’s very risky. But it might be useful to have a basic understanding of how Bitcoin works, since many companies and individuals are jumping on the band wagon.
Bitcoin is not a physical object, like a quarter or a silver dollar; there are no discrete “coins” in Bitcoin. Instead, Bitcoin is a public ledger, an online accounting book with a set amount of digital currency and a record of “who” owns how much of that currency at the present time. But as you might have heard, Bitcoin is somewhat anonymous. So “who” owns an amount of Bitcoin in the ledger is determined by whosoever holds the private key that can digitally sign a transfer of those funds to another private key holder. If someone obtains a copy of your private key, they can take your Bitcoins.
For example, a TV anchor for Bloomberg, Mat Miller, thought it would be cool to give his two co-anchors $20 each worth of bitcoin, on the air. When one of the cameras briefly caught a glimpse of the QR code that encodes the private key, a savvy young bitcoiner got the private key from a screen grab and moved the money into his own Bitcoin wallet. Here’s the full story. The full lesson is that bitcoin can be stolen.
The online ledger for Bitcoin is kept by a peer-to-peer network, similar to file-sharing networks. You can find a copy of the ledger online at Blockchain.info. The public ledger is called a “blockchain”. Each entry in the ledger is a “block”, and each subsequent entry is linked to the previous entries in a “chain”. The ledger is kept by numerous computers, connected to one another over the internet, and each has a copy of the entire blockchain — currently approaching 20 GB in size.
So here’s one reason why Bitcoin might not last: As more persons use Bitcoin, and more transactions are recorded in the public ledger, the size of the blockchain is going to balloon to a size too big to download. There are some technological solutions to that problem. But it is by no means an easy or quick fix. Any solution might be very disruptive to the Bitcoin ecosystem.
If you have a month’s worth of food stored up, that prep has inherent value. No matter what happens to food prices or the economy, you can eat that food. It is worth something. Precious metals like gold and silver also have value; gold and silver are useful metals.
But Bitcoin is only useful as long as a large number of persons agree that it is useful. There is no physical object that you could sell or use if Bitcoin collapses. Many preppers are of the opinion that the U.S. economy or the world economy will eventually collapse or partially collapse. But the Bitcoin “economy” is many orders of magnitude more fragile.
To obtain some Bitcoin, you could sell something in exchange for Bitcoin, or buy Bitcoin from an online company, or get an account at a stock-market-like Bitcoin exchange. Bitcoin exchanges follow Know Your Customer (KYC) and Anti-Money Laundering (AML) rules from the U.S. government. So, typically, you have to identify yourself with two forms of picture ID, a scan of a recent utility bill, and perhaps some banking or credit card information. Not so anonymous.
You also need a digital wallet to store the private key for your transactions. There is software that you can download (like Bitcoin Armory), to keep the wallet on your computer. But it is complicated to use, and you have to download the entire blockchain (about 20 GB and rising fast). A simpler option is to get an online wallet. However, an online wallet and an online Bitcoin exchange can be hacked. Over 10% of all Bitcoins have been stolen, hacked, or lost in some way. See This list of “Bitcoin Heists”.
The most famous Bitcoin heist, which I’m sure will eventually be made into a movie starring Jonah Hill, is the Mt.Gox collapse. Originally, the site was for trading nerd fantasy card game stuff from “Magic the Gathering”. It was then turned into a Bitcoin exchange, became the number one exchange in the world, and did billions of dollars in trading volume per year. Then Mt.Gox began to delay money transfers out of the exchange. You could buy and sell Bitcoin, but you couldn’t withdraw money, at least not easily. It might take a month or two to transfer funds out. Then they halted all funds withdrawals. Then they halted all Bitcoin digital withdrawals. Finally, they admitted that they had lost most of their Bitcoins by some type of elaborate digital heist. Oh, and they also lost most of the “fiat currency” (cash) in their bank account. We still don’t know what the hell happened.
On the alleged anonymity of Bitcoin: It is and it isn’t anonymous. The public ledger doesn’t have your name or any personal identifying information. But anyone can see every transaction, where the bitcoin came from and where it went. When eventually that bitcoin is turned into cash, it is traceable, if you have the resources of a large U.S. federal agency. And your use of the internet to do anything with Bitcoin is just as traceable as any of your other activity online. So, its anonymous enough for everyday (legal) use. But it’s not anonymous enough for serious crimes.
On that note, consider what happened to the Silk Road, an online black market — now defunct — for buying drugs, illegal firearms, and allegedly murder for hire. This notorious marketplace used Bitcoin to buy and sell illicit goods and services. But as I said, Bitcoin is not entirely anonymous. The FBI (with help from the NSA?) was able to break the anonymity of the marketplace, arrest its owner/operator, and shut down the marketplace. Once they had access to the computer of the owner, they likely could find the various persons buying and selling on the site.
Some boy-genius then thought it would be a good idea to set up a “Silk Road 2.0″, using Bitcoin as its currency. He catered to a clientele that included drug lords, illegal arms dealers, and other professional felons. Then someone hacked the site and stole a vast amount of Bitcoin from him and his clients. Here’s the story from Forbes magazine. The victim of this hack and owner/former-owner of Silk Road 2.0 was quite upset:
“I am sweating as I write this… I must utter words all too familiar to this scarred community: We have been hacked,”
Yes, you’d break out in a cold sweat too, if someone stole a large amount of money from your clients, who include murders, drug dealers, and heavily-armed arms traffickers. They might blame you for their loss. They might not be in a forgiving mood.
There’s a lot of talk in the media about Bitcoin being a perfect vehicle for money laundering and criminals, and not much else. I disagree. There are plenty of lawful and moral uses for a digital currency. And it does not have the degree of anonymity needed to hide serious crimes.
So your Bitcoins are not so secure in an exchange or an online wallet, due to the possibility of hacking. And an exchange could collapse financially and go into bankruptcy. It would be fine to get a little bitcoin and play around with it. But don’t bet the farm on Bitcoin. It could all go away tomorrow.