Bitcoin & Cryptocurrency – THE Definitive Guide To
- 30th January 2018
- Posted by: Loanable
- Category: Blog
Take your mind back…
Where to begin, but at the beginning, not the dawn of time, but how about the dawn of money.
Sorry, that may be too large a topic to just begin with, it is a thesis within itself. But let’s take a brief look at money, and its long and interesting history.
Why look at the history of money in discussing Bitcoin you ask?
All will be revealed, but the fact is that currency is what we will be looking at, discussing, and dissecting digital currency and its origins, and while digital, it still lies within the realm of currency or paper money, in its analogue, and antiquated form.
Money a Means to An End
If we look at the history of money, it really has come a long way.
Money has been with us for 3,000 years or in some form or another, from its humble beginnings as the barter system using sheep or cattle, to what we are looking to as the future of money, digital currency.
Money is a means to an end, a conveyance of sorts, a trade or exchange.
You have something I want or need, and you will accept something in return for the item I want. It may be something that obviously has value, like trading a sheep or cow for grain or some other item.
This trade can also happen by using something that on the surface does not appear to have value, such as money today, paper notes and coins.
Today we accept these paper notes as having value, but it was not always the case. Can you imagine going into a shop or store and paying for your purchase with an A4 piece of paper that you state is legal tender and worth £20.
In essence that is what you are doing with paper notes, but something gives them value, besides the fact everyone everywhere accepts and believes they have value and are worth £20 worth of goods or services. They are backed, today by a global economy and trade, but many years ago different countries used different “standards” to back their currencies.
There was the silver standard and also the gold standard.
Currency backed by gold or silver, or anything else that is precious or valuable, would mean you could trade that note or coin in for that denomination of gold or silver.
Going back before the creation of paper notes for money, currency was gold coins or silver coins, which had value and could be used to make purchases.
If you look at a quick time line of the history of money it in simple terms goes like this:
The beginning: Bartering was used, trading animals and grains and even furs.
600BC: “The first known currency” began being used, created by King Alyattes of Lydia, which s now part of Turkey.
1661AD: Coins evolve into bank notes.
1860: Wire transfer of money is developed.
1946: The first credit card is introduced.
1999: Mobile banking is started.
2008: Contactless payments via debit and credit cards is introduced.
Which brings us to today, where people can pay via mobile phones, wearable technology, even some banks are now offering facial recognition payments.
Which brings us to our timeline of today and Bitcoin, digital currency, but what is Bitcoin and how does it work?
What is a Bitcoin?
In the most simple of terms to describe and define Bitcoin is that it is a form of digital currency. Bitcoin is created electronically, and also held and transferred electronically.
Bitcoin is a form of cryptocurrency, there are other cryptocurrencies as we well see later on, something to keep you reading:)
However, Bitcoin seems to be the most popular, and one of the oldest forms of cryptocurrency.
As a form of currency you can think of it in the same terms as you do money that we use everyday, such as coins and paper notes, in addition to credit cards, and debit cards.
Bitcoin can be used as a “payment system” worldwide.
One unique aspect of Bitcoin is that it is the “first decentralized digital currency”. This means that Bitcoin works without a central depository or a central or single administrator.
If you compare Bitcoin to other currencies, such as our currency here in the UK, the Pound, the Pound is administered in a sense by the Bank of England. They can make changes and adjustments, such as with interest rates, that can affect the economy, and as the economy changes, such as with inflation, it can affect the value and buying power of the Pound.
Our currency can also have its value affected by world events, other countries economies, and world trade.
Bitcoin’s network is a peer-to-peer network, that has its transactions taken place between the users of the currency, through the use of cryptography.
There are no “intermediaries” or middle men involved.
All transactions and values of the currency are verified and recorded in a public distributed ledger called a blockchain. Again, more on blockchains later on.
A Brief History of Bitcoin
The history of Bitcoin is not as long as the history of paper money, but it is very interesting, and also momentous; Bitcoin is being seen as the currency of the future.
Also, the history of Bitcoin is somewhat mysterious, as no one knows who invented Bitcoin, was it one person, or a group of people?
The term “Bitcoin” was first mentioned in a white paper that was published in October 2008.
Bitcoin was created in 2009, by person(s) unknown, who used the name Satoshi Nakamoto, and was released as open-sourced software. This means it was public software, and anyone could access and use it.
So How Are Bitcoins Created?
Just as all money or currency has to take a form or be created, so does Bitcoin, however, Bitcoin is not limited to just one source to create it, many people can create Bitcoin.
Here in the UK and around the world, governments print money, they create the tactile money in the form or coins and paper notes. These coins and notes are made in denominations and are assigned a value in accord with the current rates and also exchange methods.
Bitcoins again are different, they are created by mining.
Mining is the process of checking payment transactions and using a software programme that follows a mathematical formula.
So while currency today, and the money in your purse or wallet, should you have any, is based on other values, such as gold or silver back in the day, Bitcoin is based on mathematics.
Again a digital currency that you cannot feel or touch, created by a digital process you can see, but cannot feel or touch.
Very futuristic and they way of the digital future.
Again, this software that is used to mine Bitcoins is free and open-source, so why isn’t everyone creating Bitcoins and getting rich?
The process of mining takes time, a lot of time, and also a lot of computer power, power that many of us just don’t have. It can take someone with a home computer working on mining a Bitcoin many years to mine just part of one coin.
How Many Bitcoins Are There?
Another interesting aspect about Bitcoin is the number of them that can be created. This factor, the finite number that can be mined, and other economical factors, helps to determine the value of a Bitcoin in relation to other currencies.
There can only be 21 million Bitcoins ever mined, ever!
However, these coins can be divided into smaller parts. Think of a Bitcoin as a million dollar note, and this note can be broken down or has other notes to make it up.
We have notes for the Pound in denominations of £50, £20, £10 and £5.
Bitcoins can be broken down to smaller sums, the smallest being a one-hundred millionth of a Bitcoin. This small denomination of a Bitcoin is called a “Satoshi“, named after the person or group who created Bitcoin.
OK, I Get It. Bitcoin is a Cryptocurrency, What is Cryptocurrency?
Cryptocurrency by definition is, “a digital asset designed to work as a medium of exchange using cryptography to secure the transactions, to control the creation of additional units, and to verify the transfer of assets.”
Bitcoin is a cryptocurrency, and there are other cryptocurrencies as well. Some others are called “altcoins” as they are similar to Bitcoin.
Just as there can be only 21 million Bitcoins, all cryptocurrencies are designed to have production gradually decrease, this to mimic precious metals, such as gold, silver or gems like diamonds. It is like a self-controlling supply and demand.
In addition, it also aids in the exchange value of the digital currency, as it becomes more rare, values go up.
Here’s where we get into some fun stuff.
Without blockchains, Bitcoin would not exist, or be able to be mined. So as you can guess, they are very important.
Blockchains are a ledger, like in bookkeeping, but they are a “continuously growing” ledger or “list of records”.
Blockchains are very unique in that they are an open ledger for anyone to see, however, their design makes them resistant to change. This means no one can go back and make adjustments, or changes, or fraudulent entries.
As a new block, or list of records is added, it “points” back to the previous block, so these blocks become a chain. These blocks can record transactions between various parties, and are also witnessed, or seen, by others, as again it is an open ledger.
Some say impossible to crack or make alterations, as any change or alteration, then requires the alteration of all previous blocks. This would require a great deal of “collusion” from the entire network.
Think of it as a book that we all add our names to, each of us in turn writes our names in the book. If one of us wants to write a fake name, everyone in the network and who had written their name prior to ours would need to agree, as each new name, points or leads back to the previous and older names.
That kind of collusion, is unprecedented and unheard of, especially with millions of transactions across the globe happening.
Blockchains do not have to be used just for Bitcoin or cryptocurrencies. A blockchain is just a recordation of events and transactions.
It can be used for almost any form of record management. They can be used for medial records, “food traceability“, or the processing of almost any information.
Blockchains are a big deal in the word of cryptocurrency and Bitcoin. If mining is the number one thing, which is generating Bitcoins and/or parts of them, blockchains are the second most important thing. These allow transactions to be witnessed, verified, and remain unchanged. It adds to the secure nature of the currency, which also helps to increase its value as a currency.
Being decentralised means not just one person or entity can control blockchains or Bitcoin.
Some Bitcoin Terms to Know
Here are some terms we have discussed and mentioned, and are important to understanding Bitcoin:
Blockchain: A public record of all Bitcoin transactions. It is open sourced and for all to view. Each block builds on the previous block, and points back to it. They cannot be changed without changing all the blocks prior to the one you wish to change, making them very secure.
Mining: This is the process in which Bitcoins are created. Computers do mathematical calculations for the Bitcoin network which confirms transactions. These calculations are how miners collect fees for each block they verify. The calculations are very time consuming and also take a lot of computer processing power.
Cryptography: This is the coding and decoding of messages, or in this instance financial transactions which make up Bitcoin.
It allows messages, and data to be sent and stored only by those it was intended.
Cryptocurrencies: Digital assets, such as Bitcoin, that use cryptography to secure the transactions.
Decentralised: No central point, no one person or entity that can dictate or control something. Bitcoin is peer-to-per meaning all users within the network can communicate with each other.
Satoshi Nakamota: The name given to the person, or persons, who developed Bitcoin.
Satoshi: The smallest denomination of a Bitcoin, one (1) hundred millionth of a Bitcoin.
Wallet: Something we have not discussed yet, but we will. Just as you may have a wallet or purse to carry your money in, you need a digital wallet to carry your Bitcoins in.
A wallet allows you to store, send and receive Bitcoin, and there are various forms of wallets available.
OK, now we should have an overview of what Bitcoin is, how they are mined or created, and some idea of how they operate as a currency.
Now let’s get into some nitty gritty of it all shall we!
How to and Where to, Buy and Sell Bitcoin
OK, now you know everything there is to know about Bitcoin and cryptocurrency, and your interest has been peaked. You want to know more.
Such as where can I buy Bitcoin, and how much will it cost?
And if you are buying Bitcoin, you then may ask yourself, where can I sell Bitcoins?
But first, why do you want to buy Bitcoin, as an investment?
That’s a good question, because just a few years ago Bitcoin while it had value, was not worth quite what it is today. the value of Bitcoin has increased tremendously!
Bitcoin had humble beginnings, being worth a few hundred pounds each, then it surged upward around 2013, only to crash in value by half in 2015.
Currently, Bitcoin that may have started at a value of almost £750, is now worth almost £8,000. Does that seem like a good investment to you, it does to me.
There are those that feel this “good thing” investment is about to burst, the bubble of Bitcoin that is.
As quickly as an investment can rise, it can also fall. There is a lot of media coverage going about Bitcoin, and while this can be good, it also draws attention to the currency, and with a finite supply being mined, demand can drive prices up. And just like stocks and shares, and the stock market. There are factors that can drive the prices downward.
Ajit Tripathi, who is with PwC, an accountancy firm, states that Bitcoins rise is due to its growing popularity, and also the myth that surrounds how it was created.
Remember the unknown person or persons who developed Bitcoin, Satoshi Nkamoto.
Tripathi says, “Bubbles are driven by sentiment and stories, and bitcoin has a great story with a lot of mystery and spectacle to it.”
“Is bitcoin at $40,000 by the middle of next year unthinkable? It’s not – but is there a logical and rational explanation for why it should be, I don’t think so.”
However, as with all investments, as an investor you need to be in for the long haul.
If you look at the history of the stock markets and many investments, they experience ups and downs, but in general overall move upwards.
Bitcoin as an investment is the same. Look at how its value was halved in 2015, and now it is off the charts with its meteoric rise.
OK, OK, this all sounds fine, but where can I buy Bitcoin?
There are two ways to get Bitcoin, and one of them is mining for them, but this takes a long time, and can be costly, as we will see later on.
Buying Bitcoin is easier in the long run, but as we see with the values of Bitcoin, it is not a cheap venture.
First things first:
Set-up a Bitcoin Wallet: Just as you have a wallet to carry cash around to spend, you need a wallet to get and spend Bitcoin.
If you wanted to just download and have the entire Bitcoin programme, you can do this, but you’ll need 150gig of space.
Using your home computer, while an option, is not very secure. So you will open a wallet online, like a digital bank account.
You can visit Blockchain.info to download a wallet, and even a mobile application to access your new wallet.
You also need to make sure your wallet is secure, there are various security features for each wallet.
Get a Bitcoin Broker: Just by doing a quick Google search, you can find plenty of brokers out there to buy Bitcoin from.
Brokers have different increments of Bitcoin they sell, remember if a Bitcoin is selling for thousands of Pounds, unless you have that kind of money to invest, you may be looking at buying part of a Bitcoin.
Some Brokers will sell in £10 increments, which is 0.005 Bitcoin.
Buy: Buy as many or as much of a Bitcoin as you want to invest in. You can transfer money into your account to make the purchase(s) or even use a credit card.
Sell – Wait – Spend: Once you have completed your purchase of Bitcoin, you can sell it to other buyers through your broker, sit back and wait to see if the prices increase, just as you would hold onto stocks or shares, or spend your Bitcoin.
How to Spend Bitcoin
So you’ve bought your Bitcoin and created a nice Bitcoin portfolio, and your investment is paying off handsomely. However, those Bitcoins are burning a hole in your pocket and you want to spend some this new found wealth, how can you do that?
Years ago spending your Bitcoin fortune was difficult, as the newness of it all caught people, and shops and stores by surprise. But necessity being the mother of invention as she is, and consumerism prevailing, how to spend your Bitcoin soon became as easy as ……well….spending any currency.
As to where you can spend your Bitcoin, there ate many shops and places that accept them.
It would seem that retailer, food establishments, and even pubs are OK with accepting Bitcoin as a medium to pay your bill.
However, I know what you are thinking, if Bitcoin is the future of currency and spending, why not have a credit or debit card that is attached to my Bitcoin to use for purchases.
Wait for it…..as it is here.
The Dragoncard a new UK Visa is to allow investors to convert their Bitcoin into purchases and sterling, however, there will be some fees associated with doing this.
There is a £20 one-off charge, a fee to use ATM’s, and a 0.5% fee to use the card at tills, which is converting their cryptocurrency into Pounds.
The main concern previously about using and converting Bitcoin from one currency to another was that it was not the quickest of exchanges. This new card is to alleviate that delay.
We know there are two (2) ways to get Bitcoin, buying it and mining for it. Let’s take a look at mining for Bitcoin and what is actually involved in doing this, and if it is cheaper than buying the cryptocurrency.
Mining For Bitcoin
So far we have read about Bitcoin, the history of this cryptocurrency, its value as an investment, and how to buy and spend it.
We also know Bitcoin is not cheap, currently one (1) Bitcoin is valued at £8,290.89. Not the kind of cash you just have lying about to use to invest.
So if you don’t have over £8,000 to buy a Bitcoin, as we discussed, you can purchase part of a Bitcoin, with the smallest part you can buy being a Satoshi.
As to how much or part of a Bitcoin you can buy will depend on the brokerage firm selling the Bitcoins. Some will break this figure down not by a part of a Bitcoin, but by an numerical amount you wish to invest.
Say you wish to invest £250, then you will be sold what portion of a Bitcoin £250 will buy.
As you can see this can get expensive, and the only other way to get Bitcoin is to mine for them.
So put your miner’s caps on and let’s get digging.
How to Mine For Bitcoin
There are a few basic concepts we need to understand prior to mining for Bitcoin. One is that mining for Bitcoin is legal, and anyone can do it, well anyone who has access to a computer, and the software programme to do so. Which again, is free.
In a nutshell, mining for Bitcoin involves running “SHA256 double round hash verification processes” to validate Bitcoin transactions, and add them to the general ledger or blockchain.
Did you get all that.
The speed at which you verify these transactions and mine Bitcoins, is measured in “hashes per second”.
What you are doing is verifying these transactions, and by doing so you get rewarded by the network, or paid in Bitcoin.
Just like mining for gold or some other precious metal.
There is a reward effect, which means that the more computing power you contribute to the network, the “greater your share of the reward”.
The concern is that as a miner, if you are doing this at home on your personal PC, you do not have much computing power, running multiple computers or super computers, you can accomplish this at a quicker rate.
However, there is the cost factor of electricity. It can cost more in power/electricity consumption, than you can earn mining for Bitcoin.
Having the right hardware is critical, and there are many different mining hardware machines for Bitcoin.
But again, we still have the cost of electricity.
Since for many of us mining for Bitcoin at home is not practical, or economically feasible, there is the option of Cloud Mining Services.
While this can simplify the entire process, and may be more cost effective, you do not have physical access to the servers and hardware doing the mining.
In essence you are pooling together processing power with other miners, and are also sharing the rewards.
This is good in many ways as you do not need high powered and loud computers draining the power grid all day costing you a fortune in electricity.
The downside is that your profits tend to be lower due to sharing, and there can be a risk of fraud or loss of your investment.
However, Cloud Mining is an option for someone who wants to get into mining Bitcoin, without the mess and hassle of setting things up at home. In addition to the expense of electricity.
There are three types of Cloud Bitcoin Mining:
Hosted Mining: This is where a provider or cloud service, leases a mining machine to you.
Virtual Hosted Mining: This is where you install your mining software on a virtual private server.
Leased hashing Power: This is the most popular cloud mining technique, and where you just lease an amount of hashing power. There is no physical or virtual computer involved.
So now armed with all this mining knowledge, and computer processing power, you can build your own Bitcoin Empire…but how safe is Bitcoin? How secure is it as a currency?
How Safe is Bitcoin?
In asking the above question, it must be put into context, such as:
Is Bitcoin a Safe Investment?
No investment is a “sure thing” guaranteed to make a return, and pay back money.
Bitcoin has looked pretty good lately, and its rise in value has prompted many investors to jump on board and put their money where their digital mouths are.
The Bubble: Throughout history there have been many “bubbles”, areas or things that grow rapidly, and then burst.
There was a MBS or mortgage backed security bubble years ago, where sub-prime loans got mixed in with good loans, causing what was a good investment, mortgage backed securities, to go into default and crash and burn.
There also was the Dot.com bubble, where many Internet companies sprang up overnight. They were printing and selling stock like mad; stock that was worthless. These companies produced nothing so in reality, they had no value.
Value is determined by what someone is will to pay for it. This can be based on scarcity of an item, such as the limited amount of gold or diamonds on the planet, or is can be a controlled item, released in short measures to control its value.
Bitcoin has both these aspects.
Only 21 million of them can ever be made, and due to the lengthy process of mining for them, it aids in controlling the number of them in “circulation” at any time.
These two factors lend themselves to stability.
However, the reality of Bitcoin being a cryptocurrency and digital, you cannot touch it, you cannot physically hold one and lock it away; except in a digital wallet or vault.
You can do this with gold, silver and diamonds.
So if the market were to swing away from digital currency and more towards tangible items, such as gold, Bitcoins could drop in value.
Keep in mind we use paper money now, which you cannot just go to a bank and demand (insert denomination here) in gold or silver, or anything.
One other aspect of Bitcoin that makes people wary as an investor is that they just don’t get it!
People/investors want to know and understand what they are putting their money into.
Even the average man on the street knows and understands gold, silver, and even the stock market. I can see and tough gold and silver, receive paper stock certificates if I wish, and see an address or building where a company may be operating out of and I own stock in that company.
Bitcoin is a bit more complex (pun intended:)
You need to think in a digital world and have a digital mindset. You are not going to be able to have your investment in your hand. Sure you can buy coins that say Bitcoin, but they do not hold any Bitcoin value.
Many of these physical coins are more of a collectable value, than a real value.
Many people do not understand the concept of mining for Bitcoins. This again, being a computer based, software drive, transaction verifying process, dose not compute with many investors.
So if investors are “old school”, they may steer away from digital investments and cryptocurrency, such as Bitcoin.
So to come full-circle, no investment is 100% guaranteed to give a return on your money. Bitcoin as an investment is the same.
Is Bitcoin Safe From Hacking and Fraud?
Since there has been an explosion in the value of Bitcoin, not only has it attracted those seeking to make money off of it and invest, but also those seeking to hack, fraud, or illegal gain someone’s investment or Bitcoin.
Security for your investment such as with your wallet and brokerage firms, may be good, but there is still the odd chance they could get hacked.
With Bitcoin using a blockchain, making changes to them is near impossible. To make a change on one Bitcoin means you need to change the block before it, and the block before that block, and so forth. It would take a reverse domino effect to make one single change.
As people mine for Bitcoin they are verifying transactions, that is how Bitcoins are mined.
So could someone hack into the blockchain and alter records, conceivably yes, nothing is impossible, but it would require a huge amount of computing power, and also need to manipulate all previous blocks. Which is unlikely.
So, in general terms, from a hacking standpoint, Bitcoin is safe.
Money Laundering and Digital Currency
The Internet and digital world is a whole new realm of mischief my friends, believe me. And anything to do with money, digital or otherwise, is a target.
So why should Bitcoin be any different, right.
However, the security of Bitcoin itself is pretty secure, so while a hack can never be guaranteed it won’t happen, it is unlikely to occur. But there are other kinds of mischief Bitcoin can be used for….
Hackers Wanting to be Paid in Bitcoin
If you have a computer, and you go on the Internet, then you should be aware things like malware, trojans, viruses, and ransomware. All the little things that infect your computer, slow it down, or cause it to shut down completely!
Ransomware seems to be the latest and greatest craze lately. As a hacker, why just hack into a computer or database and steal information to sell, just cause the computer or database to be frozen, or in accessible, and hold the data hostage, for a ransom.
This works well for large hacks into businesses and companies, as well as single users. We all need our data and files, and being denied access to them on our own machines, is frustrating in addition to being digitally violated.
In the past these ransomware hackers would have you transfer money into a bank account or send it via some form of wire transfer, today they can use Bitcoin, which is more difficult to trace.
The Professor of Cybersecurity at Ulster University, Dr. Kevin Curran said, “The odd hacker here or there could deliver a message to send money via Western Union or to a bank account, but that transfer was always traceable once the authorities were involved.”
With bitcoins being decentralised, it makes it more difficult to track and trace the money, and provides more anonymity.
A study done by Cambridge University estimated that six (6) million people across the globe have virtual or digital wallets. So hackers distributing ransomware stand a chance that some of those they infect already have a means to send Bitcoin to them.
So it is easy to send, provides anonymity, what other reasons would hackers need to demand Bitcoin as a ransom.
Oh yeah, let’s add in the fact that it is not rocket science in putting together the tools required to send out ransomware.
According to David Prince, who is a cyber security specialist at Baringa Partners, “If you have the skills to get an iTunes account you can probably download a ransomware toolkit, an automated bit of software, and start distributing it.”
It is beginning to sound like the perfect storm for ransomware.
He adds, “You can then go on the darknet and ‘wash’ your bitcoins and convert them back into cash.”
It almost sounds too good, why wouldn’t someone make a career decision and become a ransomware hacker.
And the hackers are clever in many ways, and one way is to not overprice your market. In many instances the hackers ask for a ransom of $300, which has increased to an average now of $1,000.
Inflation, expenses, you know, things go up.
In asking for a few hundred pounds or dollars, the victim is more likely to pay the ransom. If the ransom were some extortionate price they could not afford, the victim may not be able to afford it, or may just feel their locked files are worth the price.
Naturally if a hacker holds a large company and important files from the victim, they are more likely to pay more. This also increases the number of people involved in cybersecurity. The more hackers there are out there, the more security we require.
But you ask, OK, Bitcoin is good for hackers to use as a ransom medium, but what about the blockchain that records every transaction and is verified, can’t that be traced to the hacker?
The answer is no.
The blockchain records the transaction, and even the private key used for the wallet in which the Bitcoin was transferred, but no “personal identifying information” is associated with this.
So you cannot trace the actual person who may receive the ransom.
So now we can see why hackers using ransomware demand payment in Bitcoin.
Money Laundering and Bitcoin
We know that hackers using ransomware and being paid in Bitcoin is one realm of mischief Bitcoin is involved in, but what about money laundering?
Money laundering is by definition, “the process of transforming the profits of crime and corruption into ostensibly “legitimate” assets. In a number of legal and regulatory systems.”
It is taking money that was earned through criminal activities, which if you spend it your illegal activities may be found out, or you may be questioned as to where you received such a large sum of money, and making that money clean to spend.
Watch Breaking Bad if you want a lesson in money laundering.
Governments found out a long time ago that one way to catch criminals and stop crime was to trace the money trail.
Criminals commit crimes for money, and if they gain large sums of money, they want to spend it, buy a new car, a house, watches, etc. So they splash the cash.
If you drop too much cash all in one go, like buy a new car for £15,000 and pay cash, it must be reported, and then the government or authorities want to know where did you get that money. Same as if you deposit £10,000 in a bank account, the bank may very will question the source of that money.
So criminals take their ill-gotten booty, put into something that is legitimate, such as a car wash for Walter White, or some other cash type of business, florists, sunbed shops, etc, and the profits are clean.
Watch Ozark on Netflix for a more detailed lesson in money laundering.
Yes, the criminals pay taxes, and maybe even a fee to who helps them launder the money, but this is all part of their cost of doing business.
So how does Bitcoin fit into all this?
Once again Bitcoin is decentralised, so how can authorities determine where the criminal is, and who would have authority over the matter.
There also is the anonymity aspect of Bitcoin. You can sink money into them and then go exchange, or just spend them anywhere that accepts Bitcoin across the world.
Bitcoin is not regulated in the same manner as banks or other financial institutions, in part due to the decentralisation.
Once again, we may be looking at a perfect storm as to why criminals would use Bitcoin to hide money.
Using Cryptocurrency ATM’s
The latest and greatest way criminals are laundering money using Bitcoin is to deposit their dirty money into Cryptocurrency ATM’s.
There are 93 of these type of ATM’s just across London alone.
The criminal simply takes the illegal and dirty money to the ATM, makes a deposit, and has the money exchanged for Bitcoin. The Bitcoins can then be transferred, or withdrawn by anyone in the world, and or spent anywhere in the world that accepts them.
And once again, the funds while on the blockchain, cannot be identified as to anyone individual.
By using an ATM, no bank teller or human interaction is required.
So as we can see, money laundering and Bitcoin can go hand-in-hand. As to if there will be changes made to be able to track these exchanges down to an individual, or if there will be a surge in this form of money laundering, for now no one knows.
Bitcoin is Not Alone, Other Cryptocurrencies
Just as with most things, once something gets popular, or is new, copycats come along.
You didn’t think Bitcoin was the only cryptocurrency out there did you?
Currently there are 1,234 cryptocurrencies available on the Internet, and Bitcoin is just one of them, although by blockchain terms, Bitcoin is the largest of all the cryptocurrencies.
The next larger ones are:
This list is not always in order of who is second and so forth, the list is fluid as it can change at anytime due to a number of factors. One being the mining and sales of the currencies, and also the values or exchange rates associated with the currencies.
Just like Bitcoin, and paper money around the world, cryptocurrencies values fluctuate.
Let’s look a little closer at a few of these digital currencies and see what makes them tick, and also popular.
So isn’t Ethereum the same as Bitcoin, you may ask?
Yes, and no.
Ethereum is decentralised, meaning it can operated from anywhere, and it also does use a blockchain to track and verify transactions,
Bitcoins are mined by those processing mathematical transactions and adding to the blockchain, this is for electronic cash transactions.
With Ethereum, miners mine for Ether. Ether is a “crypto token that fuels the network”.
The big difference between Bitcoin and Ethereum is that Bitcoin has a limited function capability, where as Ethereum opens up more functions and also self-executes those functions, in addition to handling “enforcement, management, performance, and payment.”
Obviously these applications and crypto-technology is way too deep to cover in full here. However, Ethereum is on a lager scale in some ways than Bitcoin, and can be used for different applications. All with the same security and decentralisation as Bitcoin.
Ripple was released in 2013, and designed for peer-to-peer debt transfer, and is not based on Bitcoin.
It has some similarities, such as a shared database and ledger, but allows transfers of “financial transactions” of any size, to be sent anywhere globally, with no chargeback.
Ripple is used and has been used by many banks, such as Santander, and also UniCredit and UBS.
Payments are transferred and made using Ripple technology, which is based on an open public ledger, and since it uses cryptographics, it is very secure.
That is why banks, investment firms, and other financial institutions use Ripple.
Litecoin was released in 2013 by founder Charles Lee.
In its simplest terms, Litecoin is an open sourced peer-to-peer Internet currency, or cryptocurrency. It is decentralised just as is Bitcoin and all other cryptocurrencies, which makes it useful to move money globally.
Litecoin is very similar as Bitcoin, but has a few minor differences, these being of a technical nature.
Bitcoin aims to process a block every 10 minutes, Litecoin’s aim is to process a block every 2.5 minutes.
There are also differences in Litecoin’s “proof-of-work” algorithm.
As you can see, while there are other cryptocurrencies out there in the digital world, some with similarities to Bitcoin, and some being different, there is a common theme, the use of a blockchain, decentralisation, and the fact transfers can occur quickly and safely.
ICO’s or Initial Coin Offerings
So we now have this vast pool of knowledge on Bitcoin and cryptocurrencies.
We know how they are mined, their values, how they can be used for investing, and for the dark side of the force, crime and money laundering.
Just think, if you had known all this years ago, you may have bought into Bitcoin when it was low or cheap, and now be rich.
It can happen.
Just as companies have an IPO or initial public offering of share and stock, digital currency has ICO’s or initial coin offering.
If you really want to define IPO/initial public offering, and put it into perspective for someone, just say Facebook.
When Facebook had its IPO it raised over $100 billion!
The Internet based company with no real product, and service other than allowing people to connect to each other, went from value 0, to over $100 billion in a single shot.
Well it seemed like a single shot, but IPO’s are not that easy once you get beneath the surface.
There is a process and a set of specific events that must occur, prior to having an IPO.
An IPO is in essence saying to the public, come and buy shares in this company. We will sell you shares for (insert amount here) per share.
How do you know the company is worth this?
Remember the bubbles we discussed earlier, and one of those was the Dot.com bubble. These companies sold shares for companies that turned out in the end to be worthless.
It could happen again.
However, the process to initiate an IPO can be rigorous, and this is to get a valuation of the company, and set some sort of value per shares being sold.
The company has its financials reviewed, and in the United States files a prospectus with the SEC/Security and Exchange Commission.
The prospectus defines what the company plans to achieve, and the benefit to its investors.
The SEC in America is the regulatory body who oversee the selling of stocks and shares, and license those who sell them.
Once a value has been determined and the number of shares to be sold, the value per share can be set.
This is subject to change as demand and other factors can change. Just as with Facebook, the determination increased and so did the amount raised.
However, it was a roller coaster ride to get to a profitable stage, even with Facebook. Once again showing that investments, even initial offerings, need time to grow.
ICO’s work in a similar way with a few differences.
Just as with IPO’s, many investors want to get in on the ground floor, they want to start at the beginning. And many feel from here they can not just watch their investment grow, but they can get a deal, a bargain.
Just as when a company wants to raise money through an IPO, cryptocurrency firms want to raise money through an ICO, or initial coin offering. You can be the first to invest in the latest and greatest cryptocurrency.
One major difference between an IPO and a ICO is that ICO’s are unregulated. Remember, they fall outside of the usual regulatory bodies and are decentralised.
Being decentralised has its advantages, but from a safety and regulatory issue, this may be questionable.
ICO’s are in essence crowdfunding.
You ask a bunch of people for money and to invest in your project, this being a cryptocurrency, and in return they get some cryptocurrency, a percentage of the newly issued digital money.
As an investor, naturally the hope is the value goes up.
Like crowdfunding there is a threshold of money required or wanted to begin. If this amount of money is not pledged, or the goal achieved, the money is given back to the investors.
The ICO was not successful.
ICO’s and IPO’ are buying a stake in a company, and hoping that steak is medium rare, I mean goes up in value.
Ethereum also had a token sale in 2014, it raised 3,700 BTC or Bitcoins in just 12 hours. At that time these Bitcoins were worth a total of $2.3 million.
It is interesting that one cryptocurrency, raised money via an ICO with Bitcoin. Some may see this as a house of cards, one falls and they all do.
Why is it that anything that may be good and prosperous, gets turned evil or to the dark side. A rhetorical question.
However, ICO’s are no different, they can be used in scams. One reason why is that Bitcoin and cryptocurrencies are so “hot” right now as an investment.
Everyone wants to get rich quick, and these new forms of currency seem the way to do just that.
They are ripe for a scammer to use.
One such scam is where an investor “talks-up” the value of an ICO, which creates interest, which creates demand, which drives up the price. This investor who already owns some of the coins, when they see the value increase, sells or “dumps” their coins. Knowing there is no increased value. They just created a false sense of value by talking.
There are other ways to set-up scams using ICO’s and cryptocurrency. Just as with any investment, you need to be cautious, and remember, there are no guarantees of high rates of returns.
If it sounds too good to be true, then it probably is.
Q: What is a Bitcoin?
A: A Bitcoin is a cryptocurrency, or digital money. It does not have a shape or form, and you cannot touch it.
It is also a worldwide payment system, that allow users to transfer payments and make purchases around the world.
Unlike traditional banks and banking that have central points, such as the Bank of England, Bitcoin is decentralised, so there is no one place it is located at.
Bitcoins are created by mining for them using open sourced software.
Bitcoin was released in 2009 after being founded by a person or persons using the name Satoshi Nakamoto.
Q: How many Bitcoins are there?
A: Currently as of this writing, there are over 16.5 million Bitcoins in circulation. There is a cap of 21 million Bitcoins.
Q: What happens when there are 21 million Bitcoins?
A: The world as we know it will cease to exist.
When Bitcoin reaches 21 million the programme is set to cease mining, so no new or more Bitcoins can be created.
As to what will occur, we can speculate, but no one is certain. Just as with gold or diamonds being finite in circulation, it could cause the price or value of Bitcoin to go up.
Miners will lose out on as they can no longer make money mining for Bitcoin. They may however begin charging transaction fees, which could generate revenue.
Q: How much is a Bitcoin worth?
A: The value of Bitcoins fluctuate just as does any investment, like stock or shares, and like precious metals like gold or silver.
Currently, Bitcoin has seen a massive rise in value, with one (1) Bitcoin now worth almost £9,000!
Q: What is a blockchain?
A: A blockchain is the public ledger that records all transactions made using Bitcoin. It is done using open sourced software available to anyone.
While the ledger shows all transactions, it does not show personal details, so Bitcoin is anonymous in the sense no one knows the name of the person buying, selling, or making a Bitcoin transaction.
This makes Bitcoin attractive to criminals.
The blockchain is secure as well. No one can change a transaction as each transaction is based on the transaction before it. In order to change one transaction, you would need to go back and change them all.
Q: What is mining?
A: Mining is how Bitcoins are created. Miners are people who do mathematical processes and transactions on the blockchain, and are rewarded by earning parts of or whole Bitcoins, depending on the volume of transactions they complete.
Q: It sounds too easy, why isn’t everyone doing it, mining for Bitcoin?
A: Sounding easy and being easy are two different things.
Mining for Bitcoin is time consuming, like looking for a needle in a haystack, and also uses a lot of processing power and electricity for those processors to process.
For many people, unless you have a free, or very cheap source of electricity, and very powerful computers, it is not cost effective to mine for Bitcoin.
Q: How can I get Bitcoins?
A: You can get Bitcoins by either mining for them as mentioned, or buying them from a broker.
Q: Bitcoins are so expensive, can I just buy part of one?
A: Yes, some brokers sell Bitcoin in increments, usually dictated by how much you are willing to spend. Some may accept £25 or so as an investment.
Q: What is a Satoshi
A: A Satoshi is the smallest denomination of a Bitcoin. It is one hundred millionth of a Bitcoin, or 0.00000001 BTC.
Q: What is BTC?
A: BTC is the abbreviation for Bitcoin.
Q: Why do computer hackers want to always be paid in Bitcoin?
A: Mostly due to the anonymity of Bitcoin. The ledger/blockchain records all transactions and make them public, but no personal details are provided.
In addition, Bitcoin can be transferred and spent anywhere in the world. So it is easy to use.
Q: Do criminals use Bitcoin?
A: Yes, and more are learning of the technology and how to exploit it to their own advantage, such as in money laundering.
Criminals are taking money gained through illegal means, buying Bitcoins, and in essence laundering the dirty money.
Q: What advantages are there to Bitcoin?
A: Bitcoin due to the nature of the blockchain is secure, and also transparent. The transactions are irreversible, so merchants are more willing to accept them.
Also since Bitcoins are decentralised, there are no borders, you can transfer them anywhere in the world. There are no bank holidays or days the bank is closed.
Q: Are there any disadvantages to Bitcoin?
A: Yes, there can be some volatility in the value of a Bitcoin. Values can rise and fall.
There also is the future, how will Bitcoin be accepted in the future as a currency, will more business accept it.
Q: Where can I spend my Bitcoins?
A: There are literally thousands of places around the globe that accept Bitcoin as payment.
There are even charities that accept Bitcoins for donations.
Q: Are Bitcoins a good investment?
A: At the moment they would appear to be a good investment, but who knows what the future holds.
As with all investments, there are risks, and Bitcoin as an investment is the same.
Q: Can a Bitcoin ever get lost, like losing money?
A: Yes, they can. If a user loses their wallet, the digital way to hold Bitcoin, then the Bitcoins inside can be lost.
The Bitcoins are still on the blockchain, but without the key the wallet holder had for the coins, they cannot be unlocked or spent.
So the Bitcoins are not really lost, but dormant.
Q: How legal are Bitcoins?
A: Very legal. They are not banned or considered illegal in almost all countries. The only exception may be that some countries, such as Russia, have a ban or restriction on foreign currencies.
Q: Will Bitcoin ever be regulated by a government or agency?
A: That is highly doubtful due to the very nature of Bitcoin.
As Bitcoin is decentralised there are jurisdiction issues as to who would regulate it, and how. All users would need to be in agreement. Laws between different countries would need to be made equal and the same.
It may be possible for someone or a country that is very, very rich to mine Bitcoin and attempt to get a controlling interest, but this would require a huge amount of computing power, and they would need to sustain that power. In addition to being able to block or reverse transactions.
The investment alone would cost more than the return.
Q: Are there taxes on Bitcoin?
A: Yes, but this can vary across the world as to if you pay taxes and how much you pay, and when you pay taxes.
With many investments you are only taxed when you sell the investment, and if you have made a profit, which exceeds the capital gain allowance.
Bitcoin would be no different here in the UK and USA.
Here in the UK we pay VAT of 20% on many purchases, initially when Bitcoins were sold, VAT was added, which many felt was unfair and eats into any investment they may have. In other countries they do not have a VAT, so it was cheaper to buy Bitcoin in other countries.
This adding of VAT was overturned by a European Court of Justice ruling in 2015.
The government is looking more into the taxation issue due to the money laundering issues that surround Bitcoin.
A True and Odd Bitcoin Tale
In researching and reading about Bitcoin, one can see while on the surface the concept and idea of a digital or cryptocurrency is simple in nature, but gets complex the more you look into it.
On the surface money is money, currency is currency, we earn it and spend it.
However, currency such as Bitcoin causes us the need to rethink what we may believe is valuable, has value, and how it attains that value.
Our old fashioned thinking about money, needs an upgrade to Money 1.2.
And Bitcoin and other Altcoins and cryptocurrencies are that kick in the wallet.
An interesting story was in the news recently about a man in Wales who accidentally threw away an old computer, which in itself doesn’t sound too bad. What did he lose, some files, photos, what else could he have had on the computer.
It turns out he had thrown out a laptop computer which had 7,500 units of Bitcoin on the hard drive. He threw this computer out four (4) years ago, and at the time the Bitcoins were worth “a few hundred thousand pounds”.
So still a lot of money to lose.
However, in these four years, Bitcoin’s value has skyrocketed to where the coins are worth over £8,000 each, so an estimate is that around £74 million in Bitcoin is buried in the landfill under four years of rubbish!
The man in question is James Howells, who says he has offered the Newport City Council a 10% cut, or £7.4 million, just to give him permission to dig for the computer.
James thinks he has a good idea where the computer may be, even after 4 year and tonnes of rubbish on top of it.
However, the council, even with a promise of £7.4 million, say no permission.
James response is, “How can they leave $100m in the ground when making cuts to services?“
A valid point.
In addition, James has lined up investors to fund the dig.
James adds, “My investors have even offered to put a sum of money into a bank ‘bond’ just in case we mess it up, the council can access this money to fix it properly themselves.”
“I’ve also told them i would adhere to all safety standards when digging and also put the site back to its original condition when finished.”
“They are not interested in helping at all because the people in charge have never given me the chance to explain the details and the exact situation to them.”
It is a sort of stalemate in that without the permission no digging can begin. And to think that £74 million is buried there.
James states, “Here I am offering them a 10% cut for doing zero work at zero risk to them. It just doesn’t make sense.”
“I would love to know which hard drive data experts they consulted, because I’m pretty sure the council have nobody who is qualified in data recovery on their team.”
“They are under the impression I want to dig the whole landfill site when this isn’t the case.”
“I want to try and pinpoint the location and depth) of the drive based on the dates it was thrown out.”
“This would help narrow down the search area considerably and would not impact on-going operations in any way.”
“I have investors who are lined up willing to take all the risk even to the point of putting money in a ‘bond’ scheme so the council are covered financially if we mess it up.”
“It can be done, and it could be done safely, they just don’t want too.”
A spokesperson for Newport City Council said, “Newport City Council has been contacted in the past about the possibility of retrieving a piece of IT hardware said to contain Bitcoins.”
“However, the cost of digging up the landfill, storing and treating the waste could run into millions of pounds – without any guarantee of either finding the hardware or it still being in working order.”
“The council has told the individual concerned on several occasions that excavation is not possible under our licencing permit, added to the fact excavation itself would have a huge environmental impact on the surrounding area.”
“The landfill section of HWRC (Household Waste Recycling Centre) is not accessible to the public as it is a permitted facility with conditions that include security and prevention of illegal access to the facility regulated by NRW (National Resources Wales), therefore any potential treasure hunters could not access the site and would be committing a criminal offence.”
“The landfill contains around 350,000 tonnes of waste with an annual input of 50,000 tonnes.”
“It is likely that the hardware would have suffered significant Galvanic corrosion due to the presence of landfill leachates and gasses.”
There may be many morals to this story, but one surely must be to be careful tossing out any old computers, especially if you are using them to mine for Bitcoin.
I also would think that even tossing out Bitcoins worth a hundred thousand pounds, you would have tried to recover them immediately. Not 4 years later when they have increased in value to £74 million.
An amazingly true Bitcoin tale.