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Bitcoin: Seven questions you were too embarrassed to ask

What's a bitcoin? How do I get some? What's it good for? Ars explains the basics.
TIMOTHY B. LEE - 12/2/2017, 3:50 AM
fdecomite

No, these aren't actually bitcoins.

Bitcoin's price hit a new record this week, soaring above $11,000 on Wednesday morning. The price has been a roller coaster since then, with the price
briefly dropping to $9,000 later on Wednesday before regaining much of its lost value in recent days.

The currency's astonishing gains—it was worth less than $1 in early 2011—has caused a lot of people to
FURTHER READING
wonder if they should be paying attention to the technology. Coinbase, a popular service for trading dollars How bitcoins became worth $10,000
and bitcoins, now says it has more than 13 million users. While almost everyone has heard of Bitcoin at this
point, many people are fuzzy on the details: what is a bitcoin, exactly? How do I buy some? What would I use it
for?

We're here to help. Read on for a beginner's guide to bitcoin. We'll explain what Bitcoin is, how it works, and what ordinary people should know about the
technology.

1) What's a Bitcoin?
 Chris Ratcliffe/Bloomberg via Getty Images

Enlarge

The term Bitcoin actually refers to two different things. Capital-B Bitcoin is a payment network—like MasterCard is a payment network. Lower-case bitcoin
refers to the currency of the Bitcoin network—much like MasterCard uses dollars in the United States.

What makes Bitcoin different from MasterCard, PayPal, and other payment networks that existed in 2008 (when Bitcoin was invented) is that Bitcoin was the
world's first payment network that's completely decentralized. The MasterCard network is operated by MasterCard Inc., but there's no Bitcoin Inc. in charge
of the Bitcoin network. Rather, it's a peer-to-peer network that maintains a shared transaction ledger called the blockchain.

Inventing a new currency was an unavoidable consequence of making the Bitcoin network fully decentralized. On a conventional payment network, the
network owner promises to redeem balances for conventional currencies like dollars or euros. But there's no Bitcoin company, so there's no one to
guarantee that Bitcoin balances will have any particular value. Instead, bitcoins float against conventional currencies, with their value determined by supply
and demand.

And no, those physical "bitcoins" you see in a lot of pictures aren't what a bitcoin "really" looks like. Bitcoins are just entries in the Bitcoin blockchain. If you
own some bitcoins, that means you have some cryptographic private keys stored on your computer, on an external drive, or printed out on a piece of paper
somewhere. These keys allow people to spend bitcoin balances in much the same way that the password to your bank's website allows you to spend the
balance in your bank account. But you can't withdraw bitcoins from the network the way you withdraw physical currency from your bank.

2) If Bitcoins aren't tied to a conventional currency, how did they get so valuable?
Bitcoincharts

Enlarge / Notice that this chart has a logarithmic Y axis.

Good question! When the Bitcoin network was first created in 2009, bitcoins were barely worth anything. Bitcoin lore holds that the very first real-world
Bitcoin transaction occurred in May 2010, when one early Bitcoin user paid another user 10,000 bitcoins for two pizzas. At the time, Bitcoins were trading for
less than a penny each.

But as the Bitcoin community grew, the currency's value steadily climbed. By the time I started paying attention to Bitcoin in April 2011, its value had climbed
to $1. This was at the start of the first great Bitcoin bubble. Media coverage of Bitcoin attracted new users, which caused the price to rise. The rising price, in
turn, attracted more media interest. The value rose to more than $30 by June, before it crashed and fell to $2 before the end of 2011.

This cycle repeated two more times in 2013. In May 2013, Bitcoin's price briefly rose above $250, before falling by about 80 percent. Then in late 2013,
Bitcoin's price rose above $1,000 before once again crashing by 80 percent. The current boom—which has taken the currency from a low of $200 in early
2015 to a high above $10,000 in recent days—is the fourth major Bitcoin boom.
Each of these booms—and, for that matter, most bubbles throughout history—has been driven by the same basic publicity-price feedback loop. As an
Internet writer, I've seen this process first hand. During times when the price is rising, there's a lot of traffic to be had writing about Bitcoin, so reporters like
me write articles (like this one!) about it. The articles cause more people to pay attention to the currency, and some of those people decide to buy. That
pushes the price up even more, triggering more media coverage and more public interest.

This bootstrapping process has achieved something that most people—including me—would have thought was impossible a decade ago: a valuable
currency that's neither backed by a commodity like gold or silver, nor by a powerful institution like a government or bank. On one level, Bitcoin's value is
rising simply because more and more people are betting that its value will continue to go up over time. The question, of course, is whether they're right
about that.

JUMP TO END PAGE 1 OF 3

3) Why would I want to use Bitcoin?

@99Piloto

Enlarge / A Bitcoin ATM in Albuquerque, New Mexico.

Honestly if you're an ordinary American consumer, you probably wouldn't. Despite years of effort, Bitcoin startups haven't had much luck building payment
applications that ordinary people find useful.

One of the most often-discussed applications for the Bitcoin network is international money transfers. Conventional financial networks like Western Union
and Moneygram are expensive, and it can often take a long time for money to go through. In theory, a Bitcoin-based money transfer system could be
cheaper and faster.

In practice, however, Bitcoin has struggled to gain traction as a platform for remittances. One way to see this is by looking at the prices charged by Bitcoin
ATMs, which allow people to exchange cash for bitcoins and vice versa. The average transaction fee for a Bitcoin ATM—at least according to one website that
tracks these things—is currently around nine percent for buying bitcoins and six percent for selling them. So to send money to an overseas friend or family
member using Bitcoin ATMs, you could wind up paying transaction fees as high as 15 percent. That's on top of the transaction fee charged by the Bitcoin
network itself, which has averaged around $5 in recent weeks.

There are a number of companies working to improve the experience of making international payments using Bitcoin, especially in Asia. These companies
may eventually figure out ways to make payments fast, convenient, and affordable—but they haven't achieved critical mass yet.

Bitcoin has also shown enduring popularity with illicit transactions. A succession of underground websites have popped up on Tor to serve as a kind of eBay
for illegal drugs. These sites rely on Bitcoin because they would immediately get shut down if they tried to get accounts on conventional credit card
networks. But no one has the power to block anyone from using Bitcoin.

There is also anecdotal evidence that Bitcoin is popular in countries like Argentina and Venezuela with unstable currencies or dysfunctional financial
systems.

But if you're an ordinary person in the United States or another rich Western country and you don't want to buy drugs or speculate on Bitcoin's future value,
Bitcoin might not have much to offer you—at least not yet.

4) If Bitcoin has few practical applications, how can it be worth $150 billion?

Andrzej Barabasz

Enlarge

One possibility is that Bitcoin speculators are simply delusional and Bitcoin's price will inevitably plunge. There are other possibilities, however.

One is that the Bitcoin economy is still in its early years. It took the Internet about 25 years to go from being an experimental technology—ARPANET in 1969
—to becoming a mass market phenomenon—Netscape in 1994. Bitcoin is a comparatively young technology, having been around for less than eight years.
It's possible that Bitcoin will eventually become a key part of the global financial system—it will just take another five, 10, or 20 years to work out exactly how
to apply the technology in useful ways.

It's also possible that Bitcoin will have important applications that are not consumer-facing. For example, the Bitcoin network charges roughly the same
transaction fees whether you're sending $10 or $10 million, so Bitcoin could become a standard way to move large sums of money overseas for international
trade or investment. Big companies are conservative institutions, so it might take several years to build the infrastructure necessary to support these kinds
of transactions—and then several more years after that to convince companies to make a switch.

Another reason for optimism: Bitcoin is becoming the reserve currency of a broader cryptocurrency economy, much as the dollar is the default currency in
global trade. Bitcoin has deeper markets and more sophisticated currency exchange services than other cryptocurrencies. So people wanting to buy any one
of the dozens of lesser-known Bitcoin competitors often first trade their dollars in for bitcoins and then swap their bitcoins for dash or litecoins or whatever.
As the broader cryptocurrency economy grows, it pushes Bitcoin's value upward.

A final possibility is that Bitcoin could primarily become a store of value much like gold. Gold has practical uses in industrial applications and jewelry, but
most of the world's gold is kept in vaults and under floorboards as a long-term means of storing wealth. People like to hold gold because it is compact, easy
to conceal, and exists outside of conventional financial systems.

Bitcoins have similar advantages. You can store millions of dollars' worth of bitcoins on a thumb drive or even a piece of paper. As long as the encryption
keys are secure, bitcoins can't be seized by any government. Bitcoin also has a big advantage over gold because it can be transferred around the world
electronically.

5) OK, I'm sold. How do I get some?

 Thomas Trutschel / Getty Images News

Enlarge

Before we answer that question, we want to emphasize that investing in bitcoin is insanely risky. Bitcoin has been known to lose 80 percent of its value in a
matter of days. And while bitcoins recovered their value after previous crashes, the price is much higher today. There's no guarantee that Bitcoin will recover
after its next crash. So please don't invest money you can't afford to lose.

That said, acquiring some bitcoins is pretty easy. To do this you go to a site called a Bitcoin exchange and set up an account. You then send dollars (or
whatever currency they use in your country) to the account using an electronic bank transfer or similar mechanism. Once the money arrives in your
exchange account, you can trade dollars for bitcoins at the current market price.

Once you have your bitcoins, an important question is whether to leave the deposit with the Bitcoin exchange or withdraw them into your own custody.
There are several ways to store bitcoins yourself. You can store the encryption keys on your own hard drive. You can store them on a Web wallet app that
encrypts them client-side using a customer-supplied password. You can print out the encryption keys onto a piece of paper and store the paper (hopefully
multiple copies) in a safe place.

All of these options have risks. If you leave your money on deposit with the exchange, the risk is that the exchange itself will lose your bitcoins due to
hacking, mismanagement, or fraud. In 2014, the then-biggest Bitcoin exchange, called Mt. Gox, declared bankruptcy after millions of dollars in bitcoins were
stolen by hackers. Other early Bitcoin services simply disappeared from the web, taking customers' bitcoins with them The Bitcoin economy doesn't have
anything resembling FDIC insurance, so if your exchange loses your bitcoins or goes bankrupt, you might be out of luck.

On the other hand, exchanges have matured significantly since 2014, and holding bitcoins yourself is risky, too. If your hard drive crashes and you don't have
backups, your bitcoins could be lost forever. If you print out your bitcoins and then lose the paper, your bitcoins will be gone forever. If you put the bitcoins
in a Web wallet and forget the password, your bitcoins will be lost forever. If someone puts bitcoin-stealing malware on your computer, you could lose your
bitcoin regardless of how you store them.

In short, there's no completely safe way to hold on to bitcoins, and technical newbies are at particular risk. Investors in Bitcoin are at much greater risk of
losing their investments to accidents or thefts than investors in conventional assets like stocks and bonds.

JUMP TO END PAGE 2 OF 3

6) I just made a killing! How do I cash out?

 Getty Images | Jonathan Kitchen

Enlarge

If your cash is still deposited at a Bitcoin exchange, you just execute another trade to convert your bitcoins back to dollars at the new—hopefully higher—
price. Then you withdraw the funds to your bank account.

The bitcoin market is very liquid, so unless you have millions of dollars in bitcoins, cashing out won't be difficult. Major bitcoin exchanges do have daily dollar
withdrawal limits to minimize fraud, however. So, if you sell thousands of dollars' worth of bitcoins, it might take a few days or weeks to transfer the cash
into your conventional bank account.

We've seen some people argue that Bitcoin's $150 billion market capitalization isn't real because people can't cash out all of that value simultaneously. But
that's misguided. The same basic point applies to any asset: if Jeff Bezos tried to sell all of his Amazon shares at once, the stock would crash. But people still
say he has a net worth of nearly $100 billion. There's enough liquidity in Bitcoin markets that all but the very wealthiest Bitcoin holders can quickly and easily
convert their holdings to conventional currency. And even the wealthiest holders could cash out their holdings gradually over time if they wanted to.

7) Is it true that Bitcoin wastes a ton of energy?

George Frey/Getty Images

Enlarge / Emissions rise from smokestacks at Pacificorp’s 1,000MW coal-fired power plant on October
9, 2017 outside Huntington, Utah.

Yes. The Bitcoin network maintains its shared transaction ledger, called the blockchain, using a computationally intensive process called mining. Miners
compete with each other for the right to add blocks to the blockchain—each comes with a reward of 12.5 Bitcoins—or around $125,000.

Because electricity is the biggest cost for Bitcoin mining and this is a competitive market, we should expect miners to keep spending more and more money
on electricity until electricity spending is on par with the size of the block reward. One back-of-the-envelope calculation suggested that each Bitcoin
transaction uses 271kWh of electricity—enough to power a typical American home for nine days.

The fact that these figures are often quoted on a per-transaction basis has caused a fair amount of confusion. The Bitcoin network generates blocks at a rate
of about six per hour, and mining a block takes essentially the same amount of energy whether it contains one transaction or 2,000 (the current average).
And for a given bitcoin price, it would take roughly the same amount of energy if, someday, the Bitcoin network is processing tens of thousands or even
millions of transactions per block.

This means that we can't save energy by reducing the number of bitcoin transactions. And increasing the number of bitcoin transactions doesn't directly
increase energy consumption. What does cause Bitcoin's energy usage to rise however, is when Bitcoin's price goes up. A higher price means the 12.5 bitcoin
reward becomes more valuable, and so miners spend more resources to capture the larger prize.

Fortunately, this is a problem that will solve itself in the long run. The per-block reward halves, in Bitcoin terms, every four years. It has fallen twice—it
started out at 50 bitcoins in 2009—and is scheduled to fall to 6.25 bitcoins per block some time in 2020, then to 3.125 bitcoins per block around 2024. As the
per-block reward falls, the network's energy consumption will fall proportionately.

So it's true that the Bitcoin network is an environmental disaster, using vastly more energy per transaction than any other payment network. However, we
can expect the network to become less wasteful, at least on a per-transaction basis, in the coming years and decades.

Have further Bitcoin questions? Ask away in the comments for now, and stay tuned to Ars as we continue to follow the cryptocurrency.

TIMOTHY B. LEE
Timothy is a senior reporter covering tech policy, blockchain technologies and the future of transportation. He lives in Washington DC.

EMAIL timothy.lee@arstechnica.com // TWITTER @binarybits

READER COMMENTS 184 SHARE THIS STORY

CHRONOLOGICAL VIEW | BEST COMMENTS PAGE 1 2 3 4 5 NEXT

Kaboom22 / Smack-Fu Master, in training NEW POSTER POPULAR DEC 2, 2017 4:25 AM

For any newbies reading this article, it is *Very* risky leaving your bitcoins on an exchange as all the exchange's bitcoins makes a very tempting target
for hackers or unscrupulous employees. If you wish to store them safely and simply, i recommend purchasing a hardware wallet such as Trezor or
Ledger as this takes care of the offline storage while still giving you great ease of use. Paper wallets also work, but can be awkward to use when you
come to spend some.

And remember, if you do not own the private keys to your Bitcoins, you do not own the Bitcoins!

+56 (+57 / -1) 1 post | registered 11/13/2017

rezsbc / Seniorius Lurkius DEC 2, 2017 4:44 AM

Bitcoin was once a very good way of sending/receiving small or large sums.

The current network problems caused by the 1MB block limit have made fees and transaction times skyrocket.

I surprised the author didn't mention any of those issues or the scaling debate here at all. Instead he just says "yeah it's no good for that - fees are high".
No mention of Bitcoin Cash, segwit or even Lightning for that matter. Surely before anyone would invest they'd need to understand all that?

+21 (+32 / -11) 38 posts | registered 6/19/2011

Timothy B. Lee / Senior tech policy reporter POPULAR STORY AUTHOR DEC 2, 2017 4:50 AM

rezsbc wrote:
Bitcoin was once a very good way of sending/receiving small or large sums.

The current network problems caused by the 1MB block limit have made fees and transaction times skyrocket.

I surprised the author didn't mention any of those issues or the scaling debate here at all. Instead he just says "yeah it's no good for that - fees are
high". No mention of Bitcoin Cash, segwit or even Lightning for that matter. Surely before anyone would invest they'd need to understand all that?
The piece was already 2,700 words and was pitched as a beginner's guide. My advice to beginners is you probably shouldn't invest in bitcoin because it's
insanely risky. I've covered BCH, Segwit, and Lightning in detail in other articles (https://arstechnica.com/tech-policy/201 ... -in-doubt/), but it seemed a
little bit too much in the weeds for a piece trying to cover the basics.

+89 (+93 / -4) 587 posts | registered 1/6/2007

BrangdonJ / Ars Centurion DEC 2, 2017 4:50 AM

Quote:
Major bitcoin exchanges do have daily dollar withdrawal limits to minimize fraud, however. So, if you sell thousands of dollars' worth of bitcoins, it
might take a few days or weeks to transfer the cash into your conventional bank account.

Reputable exchanges conform to "Know your customer" laws about money laundering. This means your withdrawal limits will be quite low unless you
certify your identity. This may involve sending the exchange copies of your passport, driving licence, and other forms of ID. Sometimes they also want a
photo of your holding your ID and a piece of paper with the exchange name and your account ID on it. It's a lot of hassle, and when you've jumped
through these hoops it will likely take days to be verified.

So it's not as frictionless as point 5) suggests. Which is probably a good thing. If you are interested in Bitcoin for criminal and/or anonymity reasons, you
have more research to do.

+22 (+23 / -1) 251 posts | registered 10/14/2012

Timothy B. Lee / Senior tech policy reporter POPULAR STORY AUTHOR DEC 2, 2017 4:51 AM

HellIsSartre wrote:
"a valuable currency that's neither backed by a commodity like gold or silver, nor by a powerful institution like a government or bank"

Please describe your understanding of what it means to be "backed by a government."

The government controls the supply of physical and electronic money and has the Secret Service to fight counterfeiting. It also mandates that people
pay taxes in dollars, helping to boost demand for the currency. But I agree that people often overstate how important this "backing" is.

+51 (+57 / -6) 587 posts | registered 1/6/2007

BrangdonJ / Ars Centurion POPULAR DEC 2, 2017 4:54 AM

HellIsSartre wrote:
"a valuable currency that's neither backed by a commodity like gold or silver, nor by a powerful institution like a government or bank"

Please describe your understanding of what it means to be "backed by a government."

Generally it takes the form of laws about legal tender. For example, in the UK, if someone owes you money, you sue them for it in court, and you win and
the court orders that you be paid, and they pay you with pounds sterling, that's it. You have no choice but to accept the sterling in payment of a court-
ordered debt. The full might of the UK police and court system insists on it, almost literally holding a gun to your head. There's nothing like that forcing
you to accept bitcoin.

Edit to add: people talk about being able to pay their taxes in dollars, but I think that's less significant than the above. Taxes mean the government has
to accept it. Legal tender means everyone has to. This is why "bad money drives out good", when people have no choice but to accept the bad money.

Last edited by BrangdonJ on Sat Dec 02, 2017 7:57 am

+25 (+27 / -2) 251 posts | registered 10/14/2012

arcite / Ars Legatus Legionis SPLIT OPINION DEC 2, 2017 5:02 AM

HellIsSartre wrote:
"a valuable currency that's neither backed by a commodity like gold or silver, nor by a powerful institution like a government or bank"

Please describe your understanding of what it means to be "backed by a government."

The USD is backed the might of the US military --- but more importantly, the existence of the petrodollar system- which has ensured US economic
hegemony for nearly 40 years.

-5 (+21 / -26) 15091 posts | registered 3/13/2004

Timothy B. Lee / Senior tech policy reporter POPULAR STORY AUTHOR DEC 2, 2017 5:02 AM

arcite wrote:
"Major bitcoin exchanges do have daily dollar withdrawal limits to minimize fraud, however. So, if you sell thousands of dollars' worth of bitcoins, it
might take a few days or weeks to transfer the cash into your conventional bank account."

There you have it, Bitcoin is a scam. Performing international money transfers bank-bank is nearly instant these days, with no cash limits.

It's a shame Ars is pushing this.

Try withdrawing $10,000 from an ATM and see what happens.

As for Ars "pushing this," what part of "investing in bitcoin is insanely risky" did you not understand?

+124 (+133 / -9) 587 posts | registered 1/6/2007

polarbeareu / Smack-Fu Master, in training NEW POSTER DEC 2, 2017 5:06 AM

The article mentions (seriously or not, not sure) one method of retaining the key of writing it on a piece of paper. Any rough number of how "long" the
key is? eg, ten characters? five-hundred characters? That might affect a decision along that line...

+22 (+22 / 0) 2 posts | registered 12/2/2017

Excors / Smack-Fu Master, in training POPULAR DEC 2, 2017 5:17 AM

Quote:
The per-block reward halves, in Bitcoin terms, every four years. It has fallen twice—it started out at 50 bitcoins in 2009—and is scheduled to fall to
6.25 bitcoins per block some time in 2020, then to 3.125 bitcoins per block around 2024. As the per-block reward falls, the network's energy
consumption will fall proportionately.

So all those miners who are currently spending, say, $120K on electricity to mine a block worth $125K - what are they going to do when the reward for
those blocks suddenly drops to $62.5K overnight? Are half of them going to go bankrupt and throw their mining hardware in the bin?

I suppose they could increase the transaction fee by about $30 to make up the difference, but that doesn't really seem ideal if you want people to
actually make transactions, and it's still not going to decrease the total energy consumption.

Besides, the security of Bitcoin seems to fundamentally depend on honest miners controlling >50% of the network's computational power, which means
they have to be spending more on electricity than any adversary could possibly spend. If your adversaries are countries who want to shut down or take
over Bitcoin for whatever reason, that means the honest miners need to be spending an enormous amount of money on electricity just in case the
system ever gets attacked.

+31 (+33 / -2) 69 posts | registered 7/31/2013

Timothy B. Lee / Senior tech policy reporter POPULAR STORY AUTHOR DEC 2, 2017 5:18 AM

polarbeareu wrote:
The article mentions (seriously or not, not sure) one method of retaining the key of writing it on a piece of paper. Any rough number of how "long"
the key is? eg, ten characters? five-hundred characters? That might affect a decision along that line...

Here's an example private key in the common Base58 encoding:

5Kb8kLf9zgWQnogidDA76MzPL6TsZZY36hWXMssSzNydYXYB9KF

You can use a site like https://www.bitaddress.org/ to generate your own private keys and then print them out. If you use this for real bitcoins, you
probably want to take some extra precautions, like generating the keys while your computer is offline, printing them, and then shutting down your
browser before reconnecting to the internet.

And I was completely serious about this as a viable option. When I owned some bitcoins, years ago, this is the method I used because it seemed like the
best way to minimize the risk of malware accessing my private keys. I even made sure to print the keys out with an old inkjet printer because I know
some laser printers have internal computers that keep cached copies of stuff they print.

Last edited by Tim Lee on Sat Dec 02, 2017 8:20 am

+56 (+59 / -3) 587 posts | registered 1/6/2007

Lord Windy / Smack-Fu Master, in training NEW POSTER DEC 2, 2017 5:19 AM

Tim Lee wrote:

show nested quotes

Try withdrawing $10,000 from an ATM and see what happens.

As for Ars "pushing this," what part of "investing in bitcoin is insanely risky" did you not understand?

Sure, ATMs won't distribute that much cash. But if I call my bank in advance they would easily be able to transfer significant quantities of cash for me
within a day or so or have it available for me to collect. It certainly wouldn't take more than a few days rather than your worst case weeks. I am also
guaranteed my deposits up to 250,000 by the government and very likely more than that by the Reserve Bank of Australia propping up the bank.

I would agree that this article glamorizes bitcoins, but I would also say it wouldn't really matter if it does. It's an exciting new thing where people are
making fortunes. Similar to the gold rushes where everyone and their dog chasing get rich quick despite the easy profits already being gone. Some
people are going to go whole-hog no matter what to try and catch up to those insane early profits of whatever $1 to $10000+ is.

+9 (+17 / -8) 3 posts | registered 10/19/2016

Timothy B. Lee / Senior tech policy reporter POPULAR STORY AUTHOR DEC 2, 2017 5:28 AM

Excors wrote:
show nested quotes

So all those miners who are currently spending, say, $120K on electricity to mine a block worth $125K - what are they going to do when the reward
for those blocks suddenly drops to $62.5K overnight? Are half of them going to go bankrupt and throw their mining hardware in the bin?

I suppose they could increase the transaction fee by about $30 to make up the difference, but that doesn't really seem ideal if you want people to
actually make transactions, and it's still not going to decrease the total energy consumption.

Besides, the security of Bitcoin seems to fundamentally depend on honest miners controlling >50% of the network's computational power, which
means they have to be spending more on electricity than any adversary could possibly spend. If your adversaries are countries who want to shut
down or take over Bitcoin for whatever reason, that means the honest miners need to be spending an enormous amount of money on electricity just
in case the system ever gets attacked.

The Bitcoin network automatically (every two weeks) adjusts the network's difficulty level to maintain a steady rate of one block every 10 minutes. So at
a high level what happens is that some mining hardware gets switched off, the rate of mining temporarily slows, and that causes the difficulty to drop
until you reach a new equilibrium where bitcoins are being mined at the same rate with half the mining power.

In practice, miners know this is coming so they are going to take appropriate precautions. They'll slow investments in new hardware in the months
leading up to the difficulty adjustment. Then right after the reward halves, they'll switch off their least energy-efficient hardware earlier than they would
have otherwise.

The network's overall hashing power is constantly rising due to better and better ASICs. So in practice it's not that the network's mining power falls by
half, so much as that it stops growing for a while until it's fallen 50 percent behind the previous trend.

+36 (+40 / -4) 587 posts | registered 1/6/2007

The Colorado Kid / Smack-Fu Master, in training NEW POSTER DEC 2, 2017 5:32 AM

Excellent article Tim! Have you written about bitcoin mining as well? I'd like to learn more about that and your straightforward, uncomplicated writing
style is very helpful.

+13 (+15 / -2) 1 post | registered 12/2/2017

RedFoxx / Smack-Fu Master, in training POPULAR DEC 2, 2017 5:34 AM

My experiment with BC went bad. The stand alone wallet crashed irreparably and I lost everything, which truthfully wasn't much. I found setting up an
account and buying BC very tedious and highly intrusive. Transaction costs are outrageous. It's not the least bit anonymous at all.

If you want to buy something fairly anonymously, go to the party store and get a money order for 75 cents. Done and done. Then send it US Mail. That
works.

I thought this was an extremely well done, thorough, yet concise article.
 +34 (+34 / 0) 65 posts | registered 8/2/2017

Timothy B. Lee / Senior tech policy reporter POPULAR STORY AUTHOR DEC 2, 2017 5:41 AM

Lord Windy wrote:

show nested quotes

Sure, ATMs won't distribute that much cash. But if I call my bank in advance they would easily be able to transfer significant quantities of cash for me
within a day or so or have it available for me to collect. It certainly wouldn't take more than a few days rather than your worst case weeks. I am also
guaranteed my deposits up to 250,000 by the government and very likely more than that by the Reserve Bank of Australia propping up the bank.

I haven't looked into this personally, but I believe there are bitcoin businesses that cater to high-net worth individuals. They vet their customers in
advance and then enable them to do much larger transactions. So this isn't a limitations of the bitcoin network itself. It's just that leading mass-market
bitcoin exchanges (like Coinbase) can't afford to do the kind of vetting that would allow them to support larger transactions.

And yes, this may be a real advantage of the conventional financial system. But it doesn't make Bitcoin a "scam."

+33 (+38 / -5) 587 posts | registered 1/6/2007

Jim Z / Ars Legatus Legionis POPULAR DEC 2, 2017 5:51 AM

Quote:
A final possibility is that Bitcoin could primarily become a store of value much like gold. Gold has practical uses in industrial applications and jewelry,
but most of the world's gold is kept in vaults and under floorboards as a long-term means of storing wealth.

despite the fascination of a handful of regressive goldbugs, gold just isn't that inherently valuable. They sneer at "fiat currency" because it's supposedly
only worth what someone says it is, w/o realizing gold is only worth what people say it is. it's too soft to be of any use as a structural metal. it's main
industrial use is in electronics where it's corrosion resistance is useful, but that only requires a tiny amount. As you say, the biggest actual use of gold is
in jewelry (but I'll debate you on how "practical" that is) because it's shiny.

and that's really the only reason gold has historically been valuable. Centuries ago, when iron inevitably turned red and flaky, silver eventually turned
black, copper/bronze/brass eventually turned green, gold was the only known naturally-found metal which stayed bright and shiny forever. So it must be
somehow special, no? But for a while, when aluminum was first discovered and refined, it was held as even more valuable than gold and silver.

I just find it strange that in 2017 we hang on to these archaic notions of gold's value. I guess one part of human nature which never changes is our
fascination with shiny objects.

+64 (+72 / -8) 38965 posts | registered 11/5/1999

thegrommit / Ars Tribunus Angusticlavius / et Subscriptor DEC 2, 2017 5:56 AM

Tim Lee wrote:

show nested quotes

Try withdrawing $10,000 from an ATM and see what happens.

As for Ars "pushing this," what part of "investing in bitcoin is insanely risky" did you not understand?

I understand ars' motivation for publishing this piece, but the following quote seem amusingly relevant:

ars wrote:
Each of these booms—and, for that matter, most bubbles throughout history—has been driven by the same basic publicity-price feedback loop. As
an Internet writer, I've seen this process first hand. During times when the price is rising, there's a lot of traffic to be had writing about Bitcoin, so
reporters like me write articles (like this one!) about it. The articles cause more people to pay attention to the currency, and some of those people
decide to buy.

euzeka wrote:
Given the tone of the article, I think a disclaimer as to whether the author owns any bitcoins is in order.

That's a reasonable question to ask.

+2 (+17 / -15) 9719 posts | registered 9/22/2000

Technophobia / Wise, Aged Ars Veteran POPULAR DEC 2, 2017 6:00 AM

Jim Z wrote:
show nested quotes

despite the fascination of a handful of regressive goldbugs, gold just isn't that inherently valuable. They sneer at "fiat currency" because it's supposedly
only worth what someone says it is, w/o realizing gold is only worth what people say it is. it's too soft to be of any use as a structural metal. it's main
industrial use is in electronics where it's corrosion resistance is useful, but that only requires a tiny amount. As you say, the biggest actual use of gold
is in jewelry (but I'll debate you on how "practical" that is) because it's shiny.

and that's really the only reason gold has historically been valuable. Centuries ago, when iron inevitably turned red and flaky, silver eventually turned
black, copper/bronze/brass eventually turned green, gold was the only known naturally-found metal which stayed bright and shiny forever. So it must
be somehow special, no? But for a while, when aluminum was first discovered and refined, it was held as even more valuable than gold and silver.

I just find it strange that in 2017 we hang on to these archaic notions of gold's value. I guess one part of human nature which never changes is our
fascination with shiny objects.

Yeah, this is the thing that always makes me laugh about the preppers I work with and them buying gold because they believe "the system" is going to
collapse, and somehow people are going to be interested in trading gold again instead of important things like food and medicine.

+29 (+33 / -4) 137 posts | registered 7/27/2008

Timothy B. Lee / Senior tech policy reporter POPULAR STORY AUTHOR DEC 2, 2017 6:03 AM

euzeka wrote:
Given the tone of the article, I think a disclaimer as to whether the author owns any bitcoins is in order.

I don't own any bitcoins and would have disclosed that fact if I did.

+83 (+85 / -2) 587 posts | registered 1/6/2007

Tom the Melaniephile / Moderator / et Subscriptor POPULAR DEC 2, 2017 6:09 AM

I know a fellow who has roughly 30 Bitcoin in a digital wallet with an extremely strong password, dating back from when Bitcoin was around $100.

Unfortunately, he's forgotten the password.

+47 (+48 / -1) 20417 posts | registered 7/2/1999

euzeka / Ars Praefectus POPULAR DEC 2, 2017 6:10 AM

Technophobia wrote:
Yeah, this is the thing that always makes me laugh about the preppers I work with and them buying gold because they believe "the system" is going
to collapse, and somehow people are going to be interested in trading gold again instead of important things like food and medicine.

Indeed, gold might only be of any use long after any collapse, when a new system pops up.

If my memory serves me right, when Katrina hit the U.S., toilet paper was the real emergency currency.

+28 (+29 / -1) 4389 posts | registered 7/31/2000

MachGoGoGO / Smack-Fu Master, in training POPULAR DEC 2, 2017 6:23 AM

HellIsSartre wrote:
"a valuable currency that's neither backed by a commodity like gold or silver, nor by a powerful institution like a government or bank"

Please describe your understanding of what it means to be "backed by a government."

You know:

"United States coins and currency (including Federal reserve notes and circulating notes of Federal reserve banks and national banks) are legal tender
for all debts, public charges, taxes, and dues."
 +26 (+26 / 0) 29 posts | registered 6/13/2015

BuckyJoe / Smack-Fu Master, in training DEC 2, 2017 6:26 AM

"In 2014, the then-biggest Bitcoin exchange, called Mt. Gox, declared bankruptcy after millions of dollars in bitcoins were stolen by hackers."

except, apparently, 200,000 bitcoins from which Mark Karpelès the former CEO of Mt. Gox could reap a nice tidy profit (https://arstechnica.com/tech-
policy/201 ... e-profits/)

The best "financial" scams happen when someone else holds your money, especially when they can blame it on something else when it does vanish, and
that someone else can still profit.

Last edited by BuckyJoe on Sat Dec 02, 2017 9:38 am

+24 (+24 / 0) 59 posts | registered 11/9/2017

BuckyJoe / Smack-Fu Master, in training POPULAR DEC 2, 2017 6:50 AM

Tom the Melaniephile wrote:

I know a fellow who has roughly 30 Bitcoin in a digital wallet with an extremely strong password, dating back from when Bitcoin was around $100.

Unfortunately, he's forgotten the password.

I'll bet he now describes his password with satisfying descriptive words other than "extremely strong"

+29 (+30 / -1) 59 posts | registered 11/9/2017

Jim Z / Ars Legatus Legionis POPULAR DEC 2, 2017 6:54 AM

zissop wrote:
Don't under stand why ars push people into this scam.

Do they? The author has already said he owns no bitcoins, and the article was pretty matter-of-fact in it's tone. How are they "pushing" it?

+36 (+38 / -2) 38965 posts | registered 11/5/1999

DirkofDirges / Wise, Aged Ars Veteran DEC 2, 2017 7:02 AM

Tom the Melaniephile wrote:

I know a fellow who has roughly 30 Bitcoin in a digital wallet with an extremely strong password, dating back from when Bitcoin was around $100.

Unfortunately, he's forgotten the password.

I can't even imagine how agonizing that must be.

Does the wallet have some kind of "lock out" feature that keeps him from trying to force it?

+15 (+15 / 0) 119 posts | registered 9/15/2016

BuckyJoe / Smack-Fu Master, in training DEC 2, 2017 7:04 AM

Jim Z wrote:
show nested quotes

Do they? The author has already said he owns no bitcoins, and the article was pretty matter-of-fact in it's tone. How are they "pushing" it?

He might be loosely referring to the thing that articles written cause some people to buy into it. Like in this article it says "The articles cause more people
to pay attention to the currency, and some of those people decide to buy. " Not exactly "pushing", but maybe "influencing" would be a better word in
that context.
 one does not need to "own" the very thing they are "pushing" for it to be a scam. All of the biggest and best financial scams have something in common,
when the scammers push it all of the pitches have a "pretty matter-of-fact" tone, take a look at the Bernie Madoff ($65 billion) and Robert Allen Stanford
($7.2 billion) scams.

Disclaimer: My reply here is not intended to imply or accuse this article author is trying to perpetrate or facilitate a scam.

Last edited by BuckyJoe on Sat Dec 02, 2017 2:24 pm

-2 (+7 / -9) 59 posts | registered 11/9/2017

malor / Ars Praefectus POPULAR DEC 2, 2017 7:13 AM

As a general financial tip: paying more for something than anyone else has ever paid for it is rarely considered a wise investment decision.

+25 (+29 / -4) 3267 posts | registered 8/8/2003

dnjake / Ars Tribunus Militum DEC 2, 2017 7:15 AM

Bitcoin is under no government control. Why do all of those who demand endless regulations over business and government activity trust those who
are running bitcoin? Bitcoin has no real value. Its only claim to value is the cost of producing it. How can it be worth far more than that cost? That can
only happen if its supply is being manipulated by the con artists who are making money off its creation.

-6 (+10 / -16) 2280 posts | registered 8/30/2006

issor / Ars Praefectus POPULAR DEC 2, 2017 7:16 AM

I had a small stash of bitcoin in Coinbase that wasn’t worth enough to withdraw about three years ago. I checked in on it recently and it is now worth
$70.

I came across something I wanted to buy the other day where Bitcoin was a payment option, so I decided to burn some of that found cash. I must say
that bitcoin seems to have been ruined. It cost me a $5 transaction fee just to send $5, and even with that fee it took three hours to go through. It used
to take much less time, would only take that long if you paid no fee.

I understand why; that there are limits to the transactions that fit in a block and popularity is causing a backup, but it just drove home to me the
technical problems being faced and why the community is fracturing.

+33 (+33 / 0) 4406 posts | registered 2/6/2005

BuckyJoe / Smack-Fu Master, in training DEC 2, 2017 7:17 AM

dnjake wrote:
Bitcoin is under no government control. Why do all of those who demand endless regulations over business and government activity trust those who
are running bitcoin? Bitcoin has no real value. Its only claim to value is the cost of producing it. How can it be worth far more than that cost? That can
only happen if its supply is being manipulated by the con artists who are making money off its creation.

did you just get a new can of worms and open it up? Apparently, from my reading around ARS past articles comments about bitcoin, here at ARS them's
fightin' words

Last edited by BuckyJoe on Sat Dec 02, 2017 10:22 am

-13 (+1 / -14) 59 posts | registered 11/9/2017

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