Making Bitcoin work

This morning I learned a lot of bad news about Bitcoin just by checking my Twitter account. As if the Mt. Gox fiasco wasn’t enough, some online wallet service I might have once seen advertised on BitVisitor had all its hot wallet coins stolen and closed its doors as a result while an exchange platform had up to 12.5 percent of its holdings stolen in a clever exploitation of a coding weakness.

This led to this statement by Nicholas Weaver which probably sums up a lot of Bitcoin outsider (and possibly even insider) sentiment: “BTC is just too easy to steal to be usable.”

20140304 ncweaver tweet

Is that so? Whenever I read statements like that, or much of the Fear, Doubt, and Uncertainty (FUD) which has been spewed around the Internet even while Bitcoin is in a major rally, I get this very weird, surreal feeling. It seriously feels like living in an alternate universe.

The reason is that my actual experience with Bitcoin has led me to believe otherwise. It’s not that I’m some sort of Bitcoin fanatic or believer; it’s simply that it’s working for me, as in my life is better today than it was a year ago because of Bitcoin.

I do not have access to any sort of secret information; I do not know any little known tricks; I am not trying to sell you some get rich in a box method for the low, low price of only $39.99 (though its actual retail value is more like $1,999.99 when you break it down into the value of each benefit). But I do believe that some important things I know and understand about Bitcoin are being missed by the spewers of FUD, some of whom are looked up to as being smart about money and economics, and possibly the jaded insiders as well.

So what is it about Bitcoin that so many people are missing?

It’s really not a political issue It’s true that many people are making it out to be a political movement. The former owner of the original Silk Road black market website used to post long essays about freedom on his Facebook wall, and he seemed to believe that what he was doing with the Silk Road site was about taking a giant step towards freedom. Never mind that the major product category of items for sale on the site was addictive drugs, which in my opinion are enslaving to their users. But the Silk Road founder was certainly not alone in his sentiments that Bitcoin is this major movement for economic freedom, that it’s going to singlehandedly reform the current corrupt banking system (and therefore it’s the big elite bankers’ worst enemy), and finally usher in a utopian heaven on earth for all people everywhere.

I don’t care what anyone says, Bitcoin is none of these things. It is a virtual coin kept in a vast, energy intensive computer network. It’s a thing, and it so happens to be a thing of value because right now I can sell one for $658.48 and have the fiat money in my bank account tomorrow morning. Why does it have value? Many reasons, but the most important one is because someone is willing to pay that price for it. But regardless of its price, Bitcoin is a material object, a thing, a tool, and as such, it has some interesting uses, bugs, and features, as well as challenges, which need to be understood so as to get the most value out of it.

It’s not really money Yes, Bitcoin can be used as a medium of exchange, and with over 25,000 retailers including some big and well known ones like Overstock accepting it, it often gets used that way. But that doesn’t make it money in the way people typically understand money to be. It’s not universally accepted, its value fluctuates wildly, and apparently a lot of people are scared of it. It would be more accurate to say that Bitcoin is a barter item. It happens to be very easy to hold and move around, so it makes a very convenient barter item (it will be a long time before I can trade my chickens for something on Overstock), but it’s still different from money. I personally think it’s great that Bitcoins can be traded for tangible items that many people want or need, and one way to make sure that your Bitcoin ventures actually yield a return for you is to take those Bitcoins and trade them for something you want, but more on that later.

It’s not a good investment OK, I believe that the value of Bitcoin is likely to go back up to $1000 and beyond, and it very well may shatter records next year in terms of the return on investment someone who bought a Bitcoin for $658.48 today would be able to sell it for on March 4, 2015. But despite my belief that the price will go higher, I do not recommend anyone buy and hold Bitcoins in hopes of cashing out later. That is too risky because there are still way too many ways you can lose your Bitcoins. Just today, two online services had funds stolen from them; one of these services responded by simply closing its doors. Its customers are out whatever funds they kept there. We all know about Mt. Gox. Nicholas Weaver is right when he says it’s very easy to steal Bitcoin.

People who are computer savvy know how to secure their wallets on their own systems and even export their coins to a paper wallet, otherwise known as cold storage. But the reality is that the way most of us use our computers is anathema to securing much of anything. We all have experienced or know someone who has experienced a hard drive failure with no backup. That’s all it would take to lose all the Bitcoins in your wallet; forget hackers. But we all know about the ubiquitous malware out there which for a time defies the best anti-malware programs we use. In short, for all but the most savvy of computer nerds, our computers are not secure places to store lots of Bitcoins worth over $600 a pop. I personally prefer online services because I know my computer is not the best place, which brings me back to the fact that online services are vulnerable too.

Because of this, I am a firm believer in keeping my Bitcoins moving so that they move through my wallets rather than stay in them. I either sell them for fiat (which then gets spent) or I buy something I want with them. This brings me to my next point.

Bitcoins aren’t a good buy In a way I don’t want too many people to know this because of course if everyone suddenly believed this there goes one of my major income streams. I don’t mean to say that one should never buy Bitcoins with fiat. I simply mean that Bitcoins in and of themselves shouldn’t be the point of the purchase. If you’re going to buy Bitcoins, buy them with a purpose in mind, as in you intend to buy something with them.

Even so, it’s far better to find some way to earn Bitcoins than outright buy them. By far the biggest reason Bitcoin has worked so well for me is because thanks to the Devtome I have found a way to trade my writing for Devcoins, many of which then get traded into Bitcoins which then get traded into fiat. If you write well and enjoy it, I would highly recommend you request a Devtome account. This opportunity is still open. But even if you don’t write, find a way to trade a skill you do have for Bitcoin or some other cryptocoin that is doing well. The Bitcoin community is chock full of budding entrepreneurs who need to delegate certain types of work to free them up to focus on their business plan. If you provide any kind of service that can help start-up companies and entrepreneurs, then the Bitcoin community is a literal bonanza. Good website developers, programmers, accountants, marketers, and people with many other skills can easily find work if they simply get the word out in a tactful way. All it’s taken for me to land some writing clients has been a quick introductory email or forum PM.

A Bitcoin earned is worth way more than a Bitcoin bought for the simple reason that as long as Bitcoin is worth something, you can always trade your time and skill for fiat money. My only caution in working for Bitcoin is that you don’t make it your exclusive source of income, but more as a way to make some extra money on the side doing something you enjoy enough to do for free. If I earned the Bitcoin tapping away on my keyboard (something I do for fun), then although I prefer it when it’s worth $1000, I’m still coming out ahead when it crashes all the way down to $500. But if I paid $600 for that Bitcoin, than selling it for $500 represents a loss.

The real value in earning Bitcoin is that as an early adopter in a community of business owners who’d really like to pay you in Bitcoin, you are competing with a much smaller crowd. This is a boon for someone just starting up as a writer or a programmer, or web developer, or whatever it is you’ve always wanted to do but were daunted by the sheer marketing burden in the fiat world.

Always take profits Once you have a way to earn Bitcoins or alt coins, it’s time to spend them. Do not hoard everything you’ve amassed in the hopes of its value doubling or tripling down the road. When you notice the price go up, go ahead and sell some and take profits. Even if the price isn’t all that great, take some profits. Either buy something tangible you really want to have directly with your cryptocoins, or trade them into fiat and buy something in the fiat world, or better yet, pay off some bills or pay down some debt.

In other words, use your Bitcoin position to better your life now, and every step forward along the way. Once you’ve taken some profits and used them to improve your life, then even if the entire Bitcoin phenomenon crashes and burns (as predicted by the worst of the FUD), then it can’t negate what you have gained. To use a personal example, I cashed out a couple thousand dollars back in January to make a down payment on a van so as to minimize the monthly payments. If Bitcoin were to go poof tomorrow, I would still have the van. Ditto for the numerous overdue bills I was also able to catch up on. No hacker or Bitcoin thief can take that away from me, even if they stole all the Bitcoins and Devcoins I currently hold.

Invest Bitcoin in things that make more Bitcoin This is a more risky step, so definitely take some profits first. But when you’ve amassed enough that you have some Bitcoin you can truly afford to lose, then go ahead and check out some investments which are meant to earn you Bitcoin in a more passive way. I recommend mining on the Bitcion Commodity Exchange. You can also check out the dividend paying securities on Havelock and Cryptostocks. You can even buy some alt coins that you think will climb in value, and some of the alt coins themselves have their own investments. Look around and see what’s out there and possible, and do your homework before investing anything. It’s still very risky, but when it works out, it’s really fun to collect those weekly or monthly dividends. Just be sure to take some profits when you do.

Choose Bitcoin sites which take security seriously This is a little tricky right now but this will get easier as more people become aware of just how important it is. Earlier today I had a little chat on Twitter with Jeff Garzik, a Bitcoin core developer, and Bitcoin Security about the possibility of those who know about computer and Internet security setting some standards for and awarding certification to online Bitcoin services which take the necessary precautions to protect their customers’ assets. Apparently Mt. Gox had layers upon layers of security-related sloppiness. It does not have to be inevitable that a Bitcoin website will be successfully hacked.

20140304 jgarzik tweet2

As much as you are able, vet sites you are considering entrusting your Bitcoins to for taking the necessary steps and precautions to keep your assets safe. If you are like me and don’t know much about these things, then ask a knowledgeable friend you trust to give you an assessment. You can also look up the site on the Bitcoin Forum and see what the coders in the community are saying (but take it all with a grain of salt). You can also wait and see if the site still exists a month from now–that step will seriously weed out a lot of the fly-by-nighters. Hopefully soon there will be some more universal standards for such sites, but until then do the best you can. Just understand that there will always be risks.

Expect to lose sometimes This last point is important, and it’s why it’s necessary to take profits along the way. No matter how careful you are, stuff happens and you too might wake up one morning to find all your coins gone. I hope you never do, but you might as well prepare mentally for that eventuality. If you are not able to accept this then you may need to consider that cryptos aren’t a good fit for you.

I realize now that the reason the FUD spewers annoy me so much is that I think they are assuming everyone is in that boat, where a loss of Bitcoin would be a blow so devastating as to be impossible to recover from. They say that since it’s so easy to lose Bitcoin then no one should use them (or even be allowed to use them). But they are correct in saying that it’s currently easy to lose Bitcoins, and I am totally with them on warning you about that. But once you have been informed, it is your decision as to how to proceed.

In conclusion I believe that Bitcoin is something that could be profitable for many, and as such it’s well worth considering getting involved with it. People just need to understand that it has some unique uses, bugs, features, and challenges. For some the bugs and challenges are a dealbreaker and that’s OK. For others, the uses and features make the risks worth it. Even after having been burned a couple times, I remain in the second group. I also follow my own advice :)

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One Response to Making Bitcoin work

  1. Pingback: Making Bitcoin work, part 2 | Creative Currencies

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