I’ve been watching Bitcoin for a longish while now without participating. So why am I getting in at this point, when we are almost certainly in some sort of bubble?

ObDisclaimer: Not only should this should not be construed as financial advice, let me assure you that I’m an idiot. I’m a more informed idiot than many other people, but I know enough to know how little I do know.

Why not

There are so many reasons not to be in Bitcoin.

Cryptocash has been tried many times before, and it’s failed every time. There are some depressing realities about how money works in the 21st century - some of which I am more aware of than others, due to my brief experience with financial products at Google.

Most of the people I know who are into Bitcoin seemed, to me, to be seduced by its cryptoanarchistic ideology rather than its utility.[1] Or they make elementary mistakes, like conflating Bitcoin’s rising price with its viability as a currency. If you believe in Bitcoin, and you use it to order a pizza, I suggest you haven’t understood it. (I had this very discussion with people at ToorCamp 2012, and the reaction was KILL THE UNBELIEVER.)

A final argument that I’ve heard not to use Bitcoin is that some early-adopter libertarian geeks, described by the complainer as “the most horrible people in the world”, will get richer if you do. I’m not sure I have a counterargument for that one.

Why yes

Paul Bohm wrote a great explanation of why Bitcoin is a theoretical and practical breakthrough. We can now achieve certain kinds of consensus over the internet. And in Bitcoin’s case, this means we can now transfer ownership of certain kinds of information, in a way that everyone can recognize, without a centralized service. This fact alone makes Bitcoin valuable.

But that just ensures that Bitcoin can be used to transfer value. At least at first glance, Bitcoin has some, but not all, of the functions of money:

1. medium of exchange ✔
2. unit of account ?
3. store of value ✘

Right now at least, Bitcoin is volatile. And since it’s designed to be deflationary, one worries the entire Bitcoin economy will lock up in deflationary spiral. Even ordinary inflation makes it sometimes hard to use national currency as a unit of account, and Bitcoin exacerbates the problem. Some say that people making long-term plans like lenders will just learn to adjust. If it were a predictable increase, they could, but at least so far, it’s so volatile no one can make plans.

Some Bitcoin supporters like Paul Bohm don’t care about this; I got into a long Twitter discussion with him the other day. I said that volatility and deflation were fatal problems. He dismissed this as irrelevant “macroeconomics” since, as he put it, the “microeconomics” of Bitcoin were solid. He believes Bitcoin just has the properties needed for success. And those who wish it was otherwise are like people who hope for a less viral and more private Facebook; they are criticizing the thing that gives it strength.

I still disagree with how he arrives at the conclusion, but in the end I did more research and decided Bitcoin was worth a shot.

Unlike most other currencies, it is already divisible into 1/100,000,000th parts. So in the event that a single Bitcoin is gets too valuable, you can still buy a stick of gum. If the currency goes into deflationary spiral, even if one person spent a fraction of a Bitcoin, you could still fit an entire national economy inside that expenditure. And efficiently distribute it around to millions of people by the end of the day. I am not sure if this solves all the problems of deflation automatically, but it does make solving them easier. Bitcoin appreciates like real estate, but you can sell it off one blade of grass at a time, without any diminishment of utility.

Bitcoin also functions, at least for now, as a complement to national currencies, and it’s easy to transfer between them. So any issue with one can be overcome with the other. Some suggest that maybe Bitcoin could be a medium of exchange only, to transfer between accounts held in traditional national currencies. Bitcoin’s current value would then be irrelevant.

So, here’s my bet. I think it’s likely the current bubble will pop, or indeed a crash will be engineered by hackers. But that will be difficult to time. And even if so, unless something changes the long-term picture for Bitcoin, it will probably start increasing in value again. There might be a stable price, and that price might be way above the current price.

I’m not all that worried about the government clamping down on Bitcoin. Much like the drug war the net effect might be to just make Bitcoin more valuable. The biggest risk might be someone coming up with a better cryptocash than Bitcoin.

How I did it

I’m wary of the current online exchanges. It’s the Wild West right now, and the biggest sites seem to be run by rank amateurs. The biggest exchange, Mt. Gox, requires you hand over scans of your passport or driver’s license, even though they have had security issues in the past.

A standout from the pack is Blockchain.info, with reasonable policies and an open source codebase. I might use them in the future.

But for my first foray, I wanted to try doing this the old-fashioned way. And by old-fashioned, I mean 2011.

I downloaded the Bitcoin-Qt client, and waited half a day for the blockchain to sync. Then found a local seller, met in person in a cafe in Hastings-Sunrise, and exchanged cash when the transaction was verified by the peer network. It took a lot of self-education, but it was surprisingly simple. We wouldn’t have had to even know each other’s names.[2]

If there’s anything the last twenty years should have taught us, “simple once you get over the geek usability issues” and “surprisingly valuable” are where you want to be.

Conclusion

Since I bought Bitcoin, just a few days ago, the value has gone up tremendously. I am not congratulating myself on my foresight (I would have if I had done this in 2011 or so) but it looks like it’s going to be an interesting ride.

It’s a fun experiment and I didn’t spend more than I can afford to lose.

Notes

1 I’ve had arguments with some of them where they insist, with perfect conviction, that ordinary people will take action to help strangers hide the sources of their income whether it be from fraud or murder. Not to say that privacy is unimportant nor cooperation to accomplish it (I do support Tor) but I think this shows a certain disconnect with how ordinary people are likely to act.

2 An online acquaintance warns that it is possible to be scammed if you’re not careful. He recounts the story of a friend who showed up without his own device, then used the seller’s device to log into his account, and then forgot to log out again. When he got home his Bitcoin wallet had been cleared out. If you ask me this person was trying pretty hard to be scammed, but, whatever.

My suggestions: do it in a public place like a cafe. Show up with your own device. Have the money in an envelope, count it out, but don’t hand it over. Exchange bitcoin addresses by email or whatever method seems good. Perform the transaction. Bitcoin is secured by other people in the peer network doing calculations related to your transaction, so wait until a few confirmations from the network come in before handing over the money.

Keeping your wallet secure is a bit difficult unless you’re already a geek. Once someone steals your wallet, they will be able to transfer your Bitcoins away in an irrevocable, and probably untraceable transaction. So using a wallet service may be a better bet unless you’re confident you can do secure backups.