How Bitcoin has changed the market
At some point in time, either at a family dinner or talking hypothetically among friends, we’ve heard or said the phrase, “If I could go back in time, I’d invest in Apple/Google/Amazon.” In our heads, buying Apple stock back in 2002 seems like the perfect get rich quick scheme. Little did we know that just seven years ago, almost all of us missed an investment opportunity that would’ve made Apple look like peanuts.
When Apple had their Initial Public Offer in 2002, they traded at $23.30 a share. For $100 you could’ve safely bought four shares of Apple stock. Today, after all the splits and growth the company has undergone, your initial four shares would’ve turned into 56 and you could sell those for $6,664. Now, a $6,564 profit and over 6,000 per cent Return on Investment is hardly something to scoff at. However, after a decade-and-a-half of holding onto the stock, you’re hardly rolling in money. You’d have to have invested around $10,000 to be able to retire off of it.
In 2010, a new kind of currency hit the market. Known as Bitcoin, “It was the first cryptocurrency to use the blockchain. That is why it is the biggest,” said William Choi, a Bitcoin investor who is also currently designing a website for the currency. When Bitcoin started, it traded at $0.05 a coin. $100 of Bitcoin back then would’ve given you 2,000 coins. Though the market has been extremely volatile, Bitcoin currently trades at $834 a coin, meaning those 2,000 coins would now be worth $1.6 million, making that initial investment the deal of a lifetime.
“I’ve always known about the existence of Bitcoin but I never knew too much about it until recently,” began Choi, “I first got involved with Bitcoin after I got hired at Vanbex as a full-stack developer. I was in charge of creating websites where blockchain transactions happen and to know how to do that I would have to know a bit about the digital currency. I currently now own a few Bitcoin but only keep them as an investment rather than to use them to purchase goods or services.”
In the early days of Bitcoin, if anybody had heard of the currency it was likely connected with the Silk Road. The Silk Road was part of underbelly of the Internet known as the Deep Web. It was only accessible through .tor and .onion programs, but once you were there, access to the most horrible parts of humanity were just a click away.
“The reason the site was so popular was because it essentially doubled down on anonymity,” said Alexandre Thompson, a Bitcoin investor. The funds were essentially untraceable and .tor client masked your identity. The site was mainly known as a place to get high quality drugs delivered. However, the FBI also discovered much worse content such as snuff films, child pornography and assassination contracts.
In 2013, when the FBI arrested Silk Road creator Robert William Ulbricht, he was charged with money laundering, computer hacking, conspiracy to traffic narcotics and procuring murder. He was sentenced to life in prison with no chance of parole. Since the site shutdown, the FBI has seized over 150,000 Bitcoin from the site, worth over $130 million today.
Though Bitcoin may be the first modern cryptocurrency, the idea has been around for over two decades. It could be argued that prepaid Visas and E-Gold are both early iterations of cryptocurrency, as both allow the owner to remain anonymous and secure. Any form of currency that bypasses banks and keeps the user anonymous can be considered a cryptocurrency. What makes Bitcoin different is that not only does no bank or credit card company run it, nobody runs it at all.
Bitcoin is able to be completely decentralized because of a technology known as blockchain, a system that stores one piece of information in multiple places. It also serves as a public ledger, posting all Bitcoin transactions to their website, blockchain.info, as they happen.
“How money was exchanged on the Internet before, was that there had to be an intermediary,” began Choi. “This is because, when you send something over the Internet, it only sends a copy of it. When you send a PDF over to your friend Bob, he receives a copy of it, but you also keep a copy on your machine as well. This does not work for money because if you have $500 and you send it to Bob, you can’t keep $500 on your machine as well. This is why an intermediary comes into play to keep track of how much money everyone has. This could be a risk to people’s money because if Paypal or a bank gets hacked, everyone’s money gets screwed.”
Choi explained that when currency gets sent over the network, every node in the chain updates the sums. This means that in order for Bitcoin to get hacked, someone would have to break into every node in the chain simultaneously – something considered impossible. “So not only does Bitcoin make transactions anonymous because it is user to user, but also much safer.”
Blockchaining also solved the biggest problem digital currencies were facing – duplicating. “Just like any other currency, there is a maximum number of Bitcoin and there is an exchange rate with other currencies,” said Choi. Before Bitcoin, any other digital currency that tried to get popular suffered from the fact it could be easily duplicated, rapidly devaluating the currency and making it unsafe to invest in.
There are several ways to get Bitcoin. “You can purchase Bitcoin through a currency exchange site. As Bitcoin is becoming more popular, there has been more unique ways of getting Bitcoin as well. For example, some cities have ATM machines where you can exchange your cash for Bitcoin straight into your Bitcoin wallet,” said Choi. Some nearby schools such as SFU and BCIT have added these Bitcoin ATMs to their campus. A Bitcoin wallet is software that manages your incoming and outgoing transactions. The downfall is that the software can be tricky to understand and maintain in the beginning. Ironically, there are now third party services that offer to maintain your wallet.
Before Bitcoin became so accessible to the public, one of the ways people obtained the currency was through mining blockchains. “Mining isn’t that efficient as there are places in China doing it in bulk,” said Thompson, “You primarily need GPUs to calculate prime numbers. You would run a mining protocol and then it would work on creating these calculations. There were lots of Bitcoin from this at the start, not as many now.”
The genius behind it is that every time a mine is successful, a new block in the chain is created and used. “Once a block is mined, every new transaction happens on the most recently mined block,” said Choi. Computers must solve a complex mathematical equation and the miners are often highly educated in network systems and invest a lot of money into their venture. “It takes one average computer over 10 years to mine a block, but with dedicated blockchain mining servers, a new block is mined roughly every 10 minutes. The computer who mined the block gets rewarded with a few Bitcoin. It is also how Bitcoin currency is made,” said Choi. Currently there are over 15 million Bitcoin. To prevent the currency from inflating, there is a hard cap of 21 million that cannot be exceeded.
In the beginning, Bitcoin was unknown and not overly useful. There was almost nowhere to spend it and few people saw the potential it had to increase in value. Today, many major stores accept payment in Bitcoin. People can buy a new computer, or plane tickets with it. There’s even a site that lets you shop on Amazon using Bitcoin.
Choi, however, maintains that the real value is as an investment. “It has the biggest blockchain and it’s hard for other cryptocurrencies to overtake the number of people who already use Bitcoin. It’s all about supply and demand. A lot of people want to use the new cryptocurrency and see the potential in it. That is why the price is going up. Currently, Bitcoin is only in its start-up phase. Once bigger organizations start to use it, the value of Bitcoin will only continue to rise.”
Thompson shares Choi’s sentiment. “I currently use Bitcoin as an investment, as the value of Bitcoin is predicted to rise soon. The general use of Bitcoin is simply as a new form of Internet currency. It is safe and anonymous and that is why there is such a high demand for it,” said Thompson.
Though Thompson is only a part-time investor, Choi works directly with Bitcoin. “I am currently working on websites that need to access the blockchain to make Bitcoin transactions,” he explained. Every single transaction that happens is stored on the blockchain. “Let’s say you have five Bitcoin. There isn’t actually five Bitcoin under your name, but a history of the transactions you have made with Bitcoin.”
As an example, Choi said that if you were to buy ten Bitcoins and use five of them, your wallet balance would read simply as five bitcoin. It would look at the blockchain and then calculate the equation +10 – 5 = 5 to show your balance. In order for a website to be able to accept Bitcoin transactions, it has to be connected to the blockchain so it can perform the proper arithmetic. Choi makes that connection.
Currently, there are debates about whether or not someone should have to pay taxes on Bitcoin. In November 2016, the IRS requested the records of 3 million Bitcoin users in order to track down people who avoided paying taxes last year. They’re doing it by going after Coinbase, a company that buys and sells Bitcoin. Coinbase and other companies like it are required by regulators to record and track the identities of people who use their service.
In 2014, the IRS declared that Bitcoin was to be treated like property instead of currency, in order to tax it. “The agency’s guidance said that people should treat their virtual currency as property, rather than currency, for tax purposes. If a person buys a Bitcoin for $200, for example, then sells it later when its value has risen to $400, the $200 in gains are supposed to be recorded to the tax authorities,” read a New York Times article. However, because of the high amount of anonymity Bitcoin provides, most people who are serious about evading taxes and keeping their money private will be hard to find.
To this day, nobody knows who came up with Bitcoin. In November of 2008, someone under the alias Satoshi Nakamoto, published a paper online titled, Bitcoin: A Peer to Peer Electronic Cash System. Two months later, the Bitcoin network came into existence with the launch of the first Bitcoin client and first transfer of coins with Nakamoto mining the first block, now known as the Genesis Block, for a reward of 50 coins.
Many news outlets, including the New Yorker have tried to find out who Nakamoto really is. Nobody has been successful, and the odds of ever finding out are getting increasingly slim as their involvement with Bitcoin appears to have ended in the middle of 2010. In 2011, Nakamoto told a bitcoin user that they had moved on to other things.
Despite the success of Bitcoin, Nakamoto appears to have no inclination to step forward and reveal their identity. Instead, they choose to revel in their anonymity, much like their currency has afforded others to do.
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