Lets Talk Bitcoin Episode 61 LTB for New Users! Participants: Adam B.

. Levine (ABL) Host Stephanie Murphy (SM) Co-Host DISCLAIMER: The following program is for informational purposes only. It is not a recommendation to buy or sell bitcoin or any particular investment or product, nor a recommendation to pursue any particular purchase or investment strategy. The brands, opinions, advertisements and recommendations expressed by this program are the opinions and recommendations of the individuals creating the show, and not the LTB network. ABL: Welcome to Lets Talk Bitcoin, a twice-weekly show about the ideas, people and projects building the digital economy and the future of money. My name is Adam B Levine and I am the editor in chief of Lets Talk Bitcoin and LTB network. With Bitcoin in the news recently and not many new users understanding even the basics of it, Dr Stephanie Murphy, one of the other hosts at Lets Talk Bitcoin and I decided to break it down for you here today. So, Stephanie, where do you think we should start? SM: Lets start out with maybe the most basic question of all, what is a Bitcoin and why does it matter? ABL: Its kind of like cash that lives on the internet, right? If youre standing next to a person in real life, then you can hand them a couple of dollars or however much you want in cash. They receive it directly, it doesnt go through a bank when I hand cash from me to you, and if I later want to put a hold on that or if it was a fraudulent transaction there are no protections that I can really call on. I cant call my bank and say Hey, can you put a hold on that ten dollar bill that I gave to Stephanie a while ago. If you can get past thinking about money as credit cards and get towards thinking about money as cash then you take that and you combine the concept with e-mail then its like if you took cash and combined it with e-mail, thats the core visualisation I think for people who have no context, is its doing for money what e-mail did for mail. SM: Yeah, I really like the e-mail analogy because that goes into the next thing about Bitcoins, well how do you move Bitcoins around? Well, theyre not associated with Adam or Stephanie, theyre associated with a Bitcoin address, and a Bitcoin address is like an e-mail address. ABL: Harder to remember. SM: Harder to remember, yeah, its a string of kind of gibberish characters and you can send Bitcoins to an address, if you know what the address is. So anybody can send Bitcoins to an address, if they know they address, but the only person who can move Bitcoins from the address and send them somewhere else is the person who can prove their ownership over the address by having control of something called the private keys. Its basically like you can receive mail at an e-mail address but you can only send mail if you have your password and you type it in. ABL: Right, the physical analogy for this again, using the mail, this is like a one-way drop box, like a mailbox, like one of the ones where mail is collected for larger delivery and you can put mail into the top but only someone with the key at the bottom can actually extract what has been put in. Its very similar here and so that means that one the one hand you have to protect the key, because if someone else gets the key then they can open the box and take things out too, but on the other hand it means that if we make a cash transaction and Im asleep at the time, well then we cant make a cash

transaction. But we can make a Bitcoin transaction because I dont need to be there, I can just go later with my key, access my account, and if the Bitcoin is there then Im able to spend it. I want to take a step back here and get a little bit more in-depth at how Bitcoin works. At its core, Bitcoin, like cash, is an ownership based system, so whoever owns the asset, whoever holds the asset actually owns the asset. When it comes to Bitcoin, even though you might think you have them in your phone or on your computer, you actually dont. What you have is that key, your mailbox key, or your password, your e-mail account or whatever, its that that actually gives you the ownership. When I send Bitcoin to you Stephanie Im not actually sending Bitcoin to you, what Im doing is Im actually taking my key, Im unlocking these coins that I control, and then Im transferring the ownership to you, but the coins themselves never actually move because the coins themselves live on that block chain that weve talked about before. When were talking about a change of ownership imagine that instead of having keys these were like stamps and every address had the ability to have its own stamp, and so essentially when I send you Bitcoin Im taking my stamp and Im covering it over with yours. And so as long as my stop is the one on top only I can effect it, only I can choose what stamp goes over mine or if no stamp goes over mine, so long as mine is on top I own it. But if I sell it to you then essentially what Im doing is you give me a copy of your stamp, which is your public address, and I copy it over onto that and now only you can access it. So even though this thing never moved, all we did was change who owns it, still technically the ownership changed and it moved hands, and because of that its able to do so very fast and very efficiently because frankly nothing actually moves, its just a change of who owns it. So this public record called the block chain really is the core of what Bitcoin is, its the continuous record and the continuous leger from the very first Bitcoins that were ever created back in 2009. Essentially you can look at the block chain and track transactions all the way back to that. Now, you might think that this is hugely bad for privacy, and in some circumstances it could be, but because most people, and anybody can, theres no cost to doing it, use essentially a different receiving address every time, so this is like if you had a different mailbox address every time and before you received a payment you had the ability to give someone your new address instantly, immediately and there was no additional cost for doing that, it would be very, very difficult to track and correspond because you cant tell which person controls which addresses. The same thing is true here in Bitcoin and someone like myself who does a lot of transactions because Lets Talk Bitcoin runs primarily on Bitcoin, I have thousands of addresses. SM: Literally, you can at no cost generate a new Bitcoin address every single time you do a transaction, and actually thats a great practice if you want to maintain security and privacy with respect to using your Bitcoins. And theres no cost to do it so it really makes it easy to just separate each transaction to a separate address. ABL: Of course, the downside to being able to create so many addresses is actually that this is why the addresses are so long and impossible to remember. its because in order to have that many address in order to allow people to have as many as they want at no cost, they have to be, I think its 35 characters long and alphanumeric and so the number of possibilities is literally in the trillions upon trillions I dont even know if thats a big enough number. It has its positives in that you get as many as you want but has its negatives in that its very difficult to remember and so you basically just cant remember them. SM: But there are solutions to deal with that. So, for instance people will translate Bitcoin addresses into QR codes, theyre kind of like barcodes except its a square instead of a rectangle and youre scanning dots instead of lines, and somebodys phone or computer can read that and translate it back into a Bitcoin address or they can copy it to their clipboard or whatever and use their Bitcoin program to send you some Bitcoins. Theres also wallet software where you can manage several different addresses under the umbrella of one single wallet that belongs to you. So, there are ways to manage the problem of having lots of different Bitcoin addresses. ABL: And in the reasonably near future too, there are other projects that attempt to take this and really simplify it by using essentially a dynamic name system where like, if my name on the system is Adam and you want to send me either communication or Bitcoin or whatever, you just send

it to Adam and then my name automatically generates an address, sends it to your system, and so were able to do business as if theres no addresses at all, its all being done in the background in a very secure fashion. Thats not out yet, but I expect that in the next six months we will see that. SM: Really the key point is that youre not sending to a person, youre sending to a Bitcoin address, so thats what makes Bitcoin pseudo-anonymous, or pseudonymous, on the one hand theres this public ledger of all the transactions of Bitcoins that have ever been done, so in one way its very public, very trackable, very transparent, on the other hand unless somebody gives you that information you dont necessarily know who those addresses all belong to. So youve got this very interesting quality that most other money that were used to dealing with, or most other currency that were dealing with does not have, except maybe cash, cash is kind of anonymous unless you know whos holding the cash in their hand, it can be used more anonymously than for instance a bank account. VOOZA: I would say when I rank the bits it goes bit Bitdoor, Bitboard, Bitman and then right up there in that fourth place spot its back and forth between Bitcork, Bitcorn, Bitcoin and Bitcorn. ABL: So, there are some definitions that are kind of core to understanding Bitcoin and with any sort of technical subject theres always the jargon, so I really want to go through these terms and break down what they mean. The first one that youll hear when you deal with Bitcoin, really any of the new type of crypto currencies, is this idea of a decentralised protocol. At its core, this means that instead of there being a Bitcoin company that runs and operates Bitcoin, Bitcoin really is just a set of rules that live out on the internet. Its called a protocol because again, its like if you follow these rules then you can do this, so its an opt-in system for essentially money. In the case of Bitcoin, that decentralised protocol is followed by people all over the world, both users who want to spend Bitcoin and earn Bitcoin, they follow the rules by running the wallet software on their computer, or on the other side of it youve got people who mine, and theyre trying to follow a different set of rules, where essentially theyre playing a game, you can think of it like a lottery or like a global game of bingo, where every ten minutes somebody gets bingo and that bingo is a block. So there are different types of ways that people can participate but the important factor is that they all choose to participate because they view it as being in their best interest to do so. So they feel like they can make money, or do something that they couldnt do otherwise, or have more safety, whatever their particular motivation is they are choosing to participate as opposed to participating by default. And because of that, because there is no central entity, it means that its a very robust system because you could have large sections of the internet go out, if there was a Bitcoin company located somewhere, even in two or three places, then those are distinct points of failure where if something happened to the Bitcoin company then something might happen to Bitcoin. But because Bitcoin exists in this weird sort of decentralised, nobodys really in charge of it but everybody gets to participate in it fashion that these protocols develop in, it makes it so that there is very little risk to the protocol. There is risk to individual participants who use it, but to the protocol itself there just isnt much that can be done to it because, as is often said, you cant hold a gun to algebra. SM: Right, exactly. So it becomes this, almost like an organism, it becomes like an animal thats kind of been released into the wild and now theres no way it can be put back in Pandoras I guess Im mixing metaphors, but. ABL: Theres too many variables and whenever youre trying to identify something you really try to look for the points where it has the most pressure, the most tension, right, because those are the points oftentimes that will define it because they define the largest challenges that it faces. And with Bitcoin those challenges are all based around things that are not Bitcoin. Bitcoin at its core is actually very simple, its just a set of rules, people can choose to follow it, the thing of it is, is that some of those rules and the way that especially identity works, kind of conflict with the way some of the regulatory environment in the world exists. So, were not going to get into that here, thats what

we talk about on the show most of the time, it seems like, but the challenges that are ahead for Bitcoin are actually both helped and hurt by the fact that it cant react because its just a set of rules. ADVERTISMENT: EasyDNS is the Swiss Army knife for your domain names. Helping meet their customers individual needs since 1998. EasyDNS has been an outspoken critic of SOPA and CISPA. EasyDNS was an early supporter of Bitcoin and now they are proud to sponsor this show. Do business with a company that shares your values. Get a 13% discount when you pay with Bitcoin. Got to bitcoin.easyDNS.com and be sure to use discount code LTB. ANNOUNCEMENT: You are listening to Lets Talk Bitcoin, the premier audiocast providing news and insights that cover the rapidly evolving world of digital money. Our twice-weekly shows include analysis of late breaking news, updates on key technical, business and regulatory issues, and in depth interviews with the key people driving the new digital economy. Lets Talk Bitcoin offers sponsors an attractive way to reach a targeted and savvy audience. For more information, e-mail sponsors@letstalkbitcoin.com. SM: So youve probably heard the phrase Bitcoin mining or heard about Bitcoin mining before and what thats associated with in the popular media is, I guess, people running these specialised computers and getting Bitcoins out of thin air and getting money for nothing and as well see in a minute thats not quite exactly true but like Adam mentioned just a second ago, mining isnt really a great phrase for this activity, its more like bingo or a lottery that somebody wins about once every ten minutes and then gets a reward for doing that. The Bitcoin network is basically connections of computers to one another all around the world, its a peer-to-peer network just like file torrenting or file sharing, peer-to-peer, and peer-to-peer just means that your computers connected to some other computers and theyre connected to some other computers and pretty soon youve got a big network. ABL: On the one hand thats what it is but I mean think about it again, drawing it back to the analogy, P2P just means person to person so again its just that cash transaction thing, theres no middleman happening there. So, how do we create money, I mean this is the thing, its that one of the reasons why Bitcoin is such good money, and this is something that a lot of new people actually have a hard time understanding, its difficult to see the value in Bitcoin if you dont understand why the money that we have in the rest of the world isnt that good as money. If you cant understand why something is bad then its hard to appreciate why something else is good. I think thats kind of the core of this problem here, the reason why something like gold historically has made good money is because its universally accepted and strictly limited in terms of supply. The strictly limited in terms of supply is a really, really important part of this equation and Bitcoin goes out of its way to accomplish this in a very similar way to how gold does. Just as you mine for gold you also mine for Bitcoin and thats true in that you put work in in order to generate whatever it is youre trying to generate, in the case of gold mining its you put work or money into mining gold and then you generate gold. In this case, essentially what youre doing is you are devoting computational resources, so early on in the network this started off as peoples individual computers and then it became peoples computers that were good at playing video games and they would use their cards that powered the graphics of the video games in order to mine faster, and so over time its become actually a very highly specialised field. But at its core thats what it is, its a global bingo game where every ten minutes or so somebody wins one of these blocks and the important part about it is that it scales with the number of people who are playing the game. If there are two people playing the game then its supposed to, in a perfect world, this doesnt always work out, its supposed to scale so that they find one block every ten minutes, and if its got ten million people in it its supposed to scale so that they find one block every ten minutes and so what that means is that the more people who mine, the harder it is for everybody else to mine. And so this creates this self-balancing system where based on the price of Bitcoin, compared to the price of electricity, you wind up with a system that balances out

for how much currency should be issued and who should get it, because the people who get it are the people who are willing to put the most amount of resources into it, and then they get permission to essentially sell it and be the first to sell it on the market, or to hold it and speculate on its future value. But its the process of putting value into it thats important because if you can just, like Stephanie if I could just turn on my computer and be like hey, Id like to create a thousand Bitcoin today, then Bitcoins wouldnt be trading at high prices, Bitcoin would be easy to make and so who would care about having them because why would you buy them when you can just make them yourself? SM: Its a controlled rate of inflation or Bitcoin creation that doesnt need a central authority to enforce. So we dont need the Federal Reserve of Bitcoin to issue the inflation rates, what we have is a mathematical algorithm that automatically adjusts based on the number of people who are mining or attempting to do the proof of work to create bitcoins and the creation of Bitcoins is kind of decreasing at a controlled rate, there will only ever be twenty one million Bitcoins, its built into the Bitcoin program and were asymptotically approaching that amount of Bitcoins. Right now there are about almost twelve million Bitcoins, something like that, were about halfway up that curve, a little more than halfway, so the next ten million Bitcoins or however many are going to be gradually mined over the next several years, decade or something like that. ABL: Its actually about a hundred years, Bitcoins have a terminus mining date in the year 2140 which was a fascinating number for me, and again this is a really important point because Bitcoin isnt competing against systems that are perfect, right, Bitcoin is competing against systems that we have now and I dont think that anyone is going to make the claim that theyre perfect. When you compare Bitcoin and this long, slow predictable rollout of the currency over the course of a hundred and forty years where we now, in the year 2013, can say, okay, in eighty years I know about how many are going to be out in the economy. You compare that to any monetary system that we have today and that is so science fiction its just not even funny, I mean the Federal Reserve in the United States, we are literally adjusting and re-examining monetary policy every three months which means that at any point in time, three months in the future the monetary policy of the currency could change, and when it does change chances are pretty good it will be to the detriment of the people that are holding it. SM: Right, its very unpredictable, but the one thing that you can kind of predict about that is that the governments going to keep inflating your money gradually and you dont have much control over it, and its probably going to be to your detriment. ABL: But I mean, the problem there is that even if they stopped, Stephanie, even if they were like, oh, you know what, weve decided that its bad to inflate, even then youre going to have people who have made decisions on their past actions and are locked into them. And this is the core thing its that Bitcoin doesnt care who you are, it doesnt care what you do, it doesnt care. If you want to opt-in and you want to follow the rules, then you can use the system and it will probably benefit just about whatever youre doing because its a much more efficient way of conducting commerce or doing financial business than really any other system that we have available to us at this point. But, on the other hand, if you dont want to follow the rules then you cant break the rules, you just dont have to participate. SM: Bitcoin was the first digital crypto currency that follows this kind of pattern that has this kind of system. But there are others, right, with slightly different rules, so if you dont like Bitcoin but you maybe like Bitcoin with a couple of tweaks. ABL: Crypto currency is really interesting to me because its such a free market, theres almost no friction once you get in to crypto currency. Buying Bitcoin, were going to talk about this in a second, can be a little bit difficult because it just doesnt interface well with the existing financial system so if you have your money in a bank account then it can be a little bit difficult to get it into a Bitcoin. But, once you get past that, then theres no barrier, if you want to for example, to trade Bitcoin for the second most popular crypto currency out there, Lightcoin, then you can do that on any

number of exchanges, its very easy, it takes seconds and theres no trouble whatsoever. The ecosystem of crypto currency I think is ultimately whats going to be so interesting because as Bitcoin gets to be more expensive, you know I used to think that Bitcoin was going to be the only crypto currency out there, but Im realising that there are niches for little currencies and little specific things that do specific jobs better than Bitcoin can because Bitcoin is doing so many things and they can just all use Bitcoin essentially as the highway and then each one of these little currencies is an off-ramp and you can stay there for as long as you want and then move back into Bitcoin. So, Bitcoin provides that kind of global structure that weve been talking about. SM: In so many ways its an innovation in money, and its something that was long overdue, theres a lot of problems with the existing financial system but we dont have to tell you that, you probably already know. One thing that we didnt mention that I think is really important is the future of Bitcoin transactions, theyre irreversible, which is also very different to what most are used to when they think about spending money, when you dispute a credit card charge you can reverse it, if you send somebody a cheque and theyre ripping you off you can call the bank and tell them to stop it and put a hold on it but with Bitcoin you cant do that so once you send, that Bitcoin is gone, unless the person maybe agrees to send it back to you, you cant get it back. Thats another element about Bitcoin thats really interesting and probably can offer some advantages because theres not really a lot of options currently in the legacy financial system that have that property of irreversibility. ABL: Well its a good thing and a bad thing, right, you want something to be reversible if youve screwed up and you want to get your money back, but you dont want it to be reversible if youre selling something or doing something like that because again, its not that refunds necessarily are a problem, its that forced refunds are a problem, where its the payment processor coming in, not really understanding what the situation is and just making a judgement because they dont really care, it doesnt really impact them, they just have to pick, and then whatever they pick thats the way its got to be. Bitcoin takes that option away and it makes it so the buyers and sellers have to actually negotiate with each other and say okay, well, this is not what I ordered, and then if theres a valid reason you process the refund but its not this de facto oh somebody complained about something so that means full refund instantly take it out of the merchants side. SONG: Holding by Zhou Tounged SM: Now that weve given sort of a basic overview of what Bitcoins are, people are probably wondering about some practical applications of this kind of technology. ABL: Well there are lots of ways to do things, Bitcoin because its an opt-in system, anybody can just choose to make something, so there are lots and lots of tools out there. Stephanie, you and I have both been kind of doing business, you do advertisements and you do voice work for the show, and I actually underpay you a little bit from your standard market rates because I pay you in Bitcoin and because we do business kind of frequently. I think probably that with the price increases youre doing pretty well on those spots that you did for me six months ago. Have you managed to hold on to any of those Bitcoins? SM: Right, you know the fact that Bitcoin is behaving as a deflationary currency, its worth more if you hang on to it, has really encouraged me to think about my spending and how I can save as much as possible, so yeah, a lot of my Bitcoins that I have earned through working I have held on to, I have not sold. Some of them I had to sell, for one reason or another, bills to pay or whatever, some of them I did sell, but a lot of them I hung on to and Im really happy that I did. So yeah, I was going to say Adam, I dont feel like youre underpaying me because I know if I just hang on to those coins for a little while then theyll probably be worth more, so its really a great incentive for saving which a lot of people culturally did not grow up with. I at least, you know for a lot of my life, Im twenty nine years old, so growing up in the US for a lot of my life where I was spending, where I was having to worry about paying my own bills and stuff, it didnt really make sense to save because you know we have some rate of inflation, your moneys not going to be more valuable over time by just sitting in a

bank account. And so the incentive is to save it or find some kind of investment to put it in, whereas with Bitcoin its very different, if you save it youre likely to have more purchasing power or more value after some time goes by, so theres this real strong incentive for saving, which I think is fascinating. ABL: Yeah, thats been my experience with it too. I try to get as many services as possible from Bitcoin and there are people who give me a larger discount than you do and I get notes from them like the last couple of weeks its been crazy. As the price has gone up theyre like, Youre the first person I dealt with in Bitcoin and I charged you less than I ever charged anybody else and this is the most profitable, like we had five business cards made for five Bitcoin at the time, at the time it was like $400 for 10,000 business cards for a couple of different people SM: Business cards. ABL: Exactly, but now thats worth $2500, thats almost $3000 at these current prices so the incentive is huge and so I totally agree with you Stephanie, the cultural drive to save growing up, I simply did not have it. It made way more sense to spend the money, why keep it? Its better to SM: It makes more sense to take out debt actually, because when you pay back the debt youre paying it with less valuable dollars. You actually have the opposite incentive, to borrow money. ABL: And, I dont know, do you have a student loan? I have a student loan, I took that with the idea that, well it doesnt matter if Im spending this money now because Im going to earn so much later from these skills that Im developing, but sometimes the math stops working with that after a while. With Bitcoin the math is very obvious, if you dont spend them, they probably will be worth more later, because there are not that many of them being made and because the demand for them that is potential is quite huge. So, its very simple, and I like things that have simple incentives, they make it so that I know what to do, as opposed to wondering if Im making the right choice or not. VOOZA: Bitcoin is it is a currency. Its a currency that its not necessarily a monetary currency but its a kind of a bartering system that we have with the other companies in our building where you can swap sodas or snacks. Bitcoin, glad you asked. Bitcoin is a form of currency for drug dealers. It was invented by the Winklevoss twins, or as I call them, the Winklevi, who are of course the twin brothers who invented Facebook. SM: Theres one way to get Bitcoins that we didnt mention. Thats because I hesitate to mention it, because its not a good way for somebody whos new to get into Bitcoins, it requires a huge upfront investment, a bigger upfront investment than most people are probably willing to make if theyre new, and that is by mining. So as we mentioned before when people do the proof of work to process Bitcoin transactions to create the Bitcoin network, they are engaging in mining, and they are using their computing power to contribute to the Bitcoin network and as such, somebody who is participating in that activity gets a so-called block reward, which is some amount of Bitcoins, its 25 Bitcoins per block right now. A block is just an amount of transactions bundled together, its called the block chain and so forth. Anyway, the block reward is like winning the lottery or winning the bingo, it provides an incentive to mine. Nowadays its getting so difficult to mine, you used to be able to do it with your computer, like you mentioned Adam, just a regular old computer or maybe a graphics card that was made for gaming. Now you really need specialised equipment to mine, and these are machines that are built specifically for Bitcoin mining and no other purpose and furthermore, theyre getting rapidly obsoleted as the technology continues to improve at a rapid pace. In a couple of months these machines are obsolete because they cant keep [pace] with the now

increased difficulty as time goes on on the Bitcoin network. But, the point is, if you invest in specialised mining equipment, and if your mining equipment is able to keep up with the difficulty of the Bitcoin network, you can make Bitcoins by mining. However, is it profitable? Its not really designed to be profitable, its designed to create an incentive to participate in mining, but not so much of an incentive that its wildly profitable. Its kind of one of those things that, if its being done right, and the Bitcoin network adjusts automatically so its usually being done right, its not wildly profitable, its barely profitable and it may take a while to break even on the investment somebody makes on the hardware thats required to mine. So, mining is a way to acquire Bitcoins, yes, but its not a way that I would recommend for people that are new to Bitcoins. ABL: Yeah, its not a simple way. And its a function of Bitcoins popularity, really thats what it is, because if Bitcoin wasnt seeing so many people wanting to mine, then it wouldnt be hard to mine. But because everybody, I mean the first thing that people talk about when they get in there is, oh, you can create these with your computer and theyre worth how much? What you dont pay for in money you pay for in time, basically. So the people who are really seeing the crazy profits from the arbitrage, from mining, are people who mined fairly early. And fairly early is relative, fairly early is like a year ago, or like six months ago in some cases. SM: Or like 2009 ABL: I mean 2009 certainly, that is very early comparably. I mean, you said that mining is designed to be barely profitable and I agree with you in the short term. But I think that again this gets back to that fact that Bitcoin is deflationary, which means that over time the price will probably go up because theres more demand than there is supply. So if you look at it from that perspective, if you dont have to sell the coins that you mine immediately to pay for electricity and you can sit on them for six months then probably theyll be worth a lot more in six months than they are now so maybe it is highly profitable, just not immediately profitable. But to your point about people mining or not, yeah, its totally a highly specialised field, you absolutely should not get into it, if you do you should talk to a consultant. Are there mining consultants yet? There should be mining consultants. SM: Yeah, yeah. I believe there are mining consultants, Im sure. And you know, one other thing I wanted to mention about mining, there have been a lot of stories and I think this will continue to be true in the in the future even more so, but there have been a lot of stories about people who preorder mining equipment and they pay with Bitcoins and then the company doesnt ship the product for a while and meanwhile the price of Bitcoins goes up. So not only have they basically overpaid for their mining equipment but they also missed and opportunity cost because if they would have just taken that cash and put it into buying some Bitcoins at the time when they bought the mining equipment and then waited until the time when the mining equipment actually ships, then they would have a lot more money than if they had just bought the mining equipment and waited and then tried to figure out how to break even on it. In many cases it can be more profitable if youre thinking about making an investment in mining equipment, take that cash and put it into Bitcoin and see how that does. ABL: Yeah, thats very true, thats very true, so I actually have an experience surrounding this directly, back in July of 2012 I pre-ordered a Jalapeno from a company called Butterfly Labs. Now, a Jalapeno, it was supposed to be a little coffee-cup warmer that was powered by USB and would mine Bitcoin and also warm your cup of coffee, that would sit on top of it. And so at the time Bitcoins were worth about $4, I pre-ordered one of these very small units for I think it was something like 25 Bitcoin. They were supposed to ship in, I believe it was October, and that date slipped and slipped and in November I asked for my money back and they told me they wouldnt give me my money back. By the time we get to November the price of Bitcoin was up to about, I think it was $14 or $15 so the value of the money that I had spent in Bitcoin had tripled. And so what had been a like $250 purchase was in fact now more in the range of a $600 purchase. So I was unhappy about that and I tried to get my money back from them but they wouldnt give me my money back and so I waited another two months and the price of Bitcoin was up another 50%, or something like that, and so I

finally got them to give me my money back but they would only give me back 11 Bitcoins. So I paid them something like 25 and they would only give me back 11 and I wasnt going to get the product from them, so I took a loss of 15 Bitcoins. But then. SM: Aw, man. At least you got that 11 back, but still, thats painful. ABL: Yeah but in hindsight, yeah it was painful at the time, but I was like, Im glad to be over with it, it was stressing me out, I was like, man I cant believe I did this because my Bitcoins are tied up and Im never going to get them back. So I get my money back and at this point theyre still saying, oh well well release in you know, in four weeks or two weeks and it just kept getting pushed out. And so, I got my money back and I watched over the next six months as the price went up to over $200. And I was like, wow. If I had kept my money in there, this would have been, like a $20000 it was crazy, the amount of money that would be spent on this particular unit just because I didnt understand the future value of the money that I was spending at the time that I spent it. Absolutely floored me. So, if theres one thing you can learn from my experience, and I was very happy that I had gotten the refund because I wound up earning exponentially more than what the Bitcoins were worth than at the time that I sold them so it actually wound up being a positive transaction for me. But a lot of people didnt have that same sort of luck in getting a refund and so a lot of people were stuck through that and thats a terrible thing. So when youre dealing with Bitcoin or any sort of deflationary currency because I think these are going to be getting more common in the years to come, really make sure that you dont treat them like normal money, because when you treat them like normal money then you want to spend it. And with these things, you want to spend them when you can get a really good deal that captures future value. Like if someones going to give you 30% off for something in Bitcoin relative to something else, then thats probably a deal that I would take. But if someones going to give me 5% off for Bitcoin, probably not, Id rather spend dollars if I have them available to spend. SM: I think youre absolutely right about that, youve really got to incentivise someone to part with their precious Bitcoins. ABL: Yeah, I mean its just different, and you dont feel good when you make a bad decision like that. If youre buying a product and you get it then thats something, thats something that you paid for and you got it and theres an immediacy that makes the price okay. But if youre talking about pre-orders especially, I will never pre-order anything again in Bitcoin. Any pre-order I make is now in dollars, especially for things like mining equipment. I mean again, with Bitcoin the key is will the value of the Bitcoin be better than what potentially spending the Bitcoin now will give you. Because if that answer goes in favour of Bitcoin then you probably shouldnt spend it. SM: Thats a great thing to talk about because theres so much buyer beware in the world of Bitcoin that people might not be prepared for if theyre completely new to it and unfamiliar. A lot of people compare it to a Wild West or something like that and I wouldnt say its a Wild West but you do have to watch out for yourself you know, and you do have to take these things into account, the potentially deflationary nature of Bitcoin, the irreversible nature of transactions, and also security and protecting your Bitcoins and protecting your passwords and so forth. MUSCIAL INTERLUDE ABL: This is really the final point and its one of the key points. Right now this is as hard as its going to be, there are so many people who are working on solutions towards making it easier to really be able to safely feel secure about the value that youre storing in Bitcoin because right now its kind of terrifying. If you just have your Bitcoins on your computer, especially as the values going up, its like wow, am I safe, what can I do to better protect myself? Stephanie, what are you doing with your Bitcoin these days?

SM: Well, actually, as the price has gone up Ive become more and more paranoid about Bitcoin storage. There are a lot of ways that your security could potentially be compromised when using Bitcoins. Dont let that scare you away from using Bitcoins, just take some reasonable precautions. Those precautions would be any time your private keys or your passwords are on a computer thats connected to the internet theres maybe some risk of malware that could log your passwords or log your keystrokes or whatever. If your Bitcoins are stored on a web wallet so-called which is an online wallet like blockchain.info or the infamous former service that doesnt exist anymore, instawallet or wasnt there another one like mybitcoin.com or something like that? ABL: The core take away from me about the web wallets. Okay, so there are three descriptors, they are secure web wallet. You can have two of these, but not three and at its core thats the problem, its that Bitcoin is, because its such good money, when you store it online youve got a bunch of people all storing Bitcoin in the same place, its like a giant piata. As the price of Bitcoin goes up the more popular the service gets, the bigger the prize is for breaking it open and getting inside. So thats what we see happening, its that as we see these services get large, especially as the price goes up, the incentive for hacking into them and stealing the Bitcoin that are inside just go through the roof. Its very, very difficult to run these services in a way where theyre invulnerable, weve even seen services that were specifically saying they were specialising in security and doing everything right, they still get compromised. So, just in general, save yourself the headache and dont store your coins in online wallet. Store your coins somewhere that you have control over and ownership of. SM: I would add a little change to that which would be that there can be usefulness to online wallets or web wallets, but really not for more than so-called pocket change amounts of Bitcoins. Like, dont store all your Bitcoins in a blockchain.info wallet, please, unless you have 0.01 Bitcoins or something like that and youre not that worried about it if you lose it. But there can be a real convenience to web wallets, thats the thing, like if you have a blockchain.info account you can get an e-mail whenever you receive Bitcoins to that address or something like that. Same thing with coinbase they have kind of a web wallet service. So these things can be really convenient and you can take some steps to secure them, like two factor authentication. ABL: But theyre a target. Its just that theyre a target. SM: They really are. ABL: Theyre a target, and so there are lots of software solutions that allow you to run Bitcoin on your computer. You can get physical Bitcoins if you dont even want to deal with running the software although they do come at a premium. SM: Yeah, thats a very expensive way to get into Bitcoin. You can actually accomplish the same thing, a physical Bitcoin or a physical representation of Bitcoin is basically a Bitcoin wallet and a private key that exist on paper or on a little token thats called a Casacius Coin, or some other way in the physical world thats not digital, its physical. And through this you can actually import the private key into a computer based wallet and you can move the Bitcoins from there. Or you could just give someone a physical Bitcoin, right, like you can transfer them that way you just cant break them up. ABL: Right, physical Bitcoins, theyre not really like tokens because really what it is is that they need to be redeemed. Theyre like redeemable Bitcoins. What I mean when I say redeemable, if I were to hand you a physical Bitcoin right now we wouldnt actually be making a transaction on the Bitcoin network, instead what we would be doing is I would be giving you a wallet that is known to contain say one Bitcoin. You could then trade that to someone else for one Bitcoin worth of something, but at some point in that chain if someone wants to use the Bitcoins online, then that physical Bitcoin does need to be redeemed which involves peeling off the sticker and recovering the private key which then lets you have control of the wallet. But as long as its not redeemed, whoever

holds the coin controls the wallet, even though they cant access it yet. If they choose to redeem it they can access it, and at that point the coin stops being valuable because you cant prove that the money is there and you havent already spent it or dont have the ability to spend it. SM: So getting back to storing your Bitcoins, there are different levels of security. The least secure would be an online or web wallet, also probably one of the most convenient. Another slightly more secure way would be to store the Bitcoins on a desktop client on your computer, so theres a couple of those, theres the original Bitclient called Bitcoin-Qt or sometimes called the Satoshi client. This used to be the only program that you could download to your desktop for storing Bitcoins. The problem is that is also download a copy of the entire block chain to your computer, which is now something like 12GB or more, it takes up a lot of space on your computer and it takes a long time to synchronize and download that whole block chain. So people for that reason tend to shy away from that client a little bit more, although some people do still use it. You can come up with a pass phrase and encrypt your wallet on that. So long as your pass phrase isnt maybe stored on your computer or written down where people could gain physical access to it, then thats pretty secure I would say. ABL: Lets talk about encrypting your password real quick because this is a commonality among all the wallets that youre going to do. Most of them will start not encrypted and so what that means is that if I have on my computer an unencrypted Bitcoin wallet and I launch that program then I can send Bitcoin and receive Bitcoin without having to type in a password. Which also means that if somebody else either sits down at my computer and opens that software, or accesses it remotely by hacking into my computer which apparently is something that still happens, I saw somebody else had it happen to them a couple of days ago, then they essentially all they have to do is access my computer and then they have just as much ability to send any of my Bitcoins as I do. But if you encrypt it, essentially what youre doing is youre taking your private key which is that thing that lets you behind the scenes send your Bitcoin by assigning them to someone else, and it encrypts them with this password basically. So in order for you to decrypt and then spend your Bitcoin you need to enter this password first. So instead if someone sits down at your computer or hacks into your computer then they need to enter that password too. Because of this its very, very important that you encrypt your walled because it means that there is that additional barrier to entry where, unless youve let out your password somewhere else or your computer is really infected with something thats logging your keystrokes, which is pretty bad as far as infections are concerned, then youre probably safe. Even if someone has access to your computer they still cant necessarily spend your Bitcoin unless they crack your password. SM: So, some examples of that would be the Bitcoin-Qt client a.k.a. the Satoshi client. Theres also a couple of other programs that I think are worth mentioning and those are MultiBit, Electrum and Armory. So, Electrum and MultiBit as I understand are desktop based clients, you can do the encryption and everything, you can encrypt your private keys on your computer and your password never goes to any server or anything like that, as I understand it with those programs. So its not as though your password is being uploaded somewhere where somebody could potentially hack it and get your password and steal your Bitcoins. But what they do do is access a copy of the block chain that is stored on a public server. Its kind of the best of both worlds, youve got the encryption going on on your computer but you are accessing the block chain somewhere else so that you dont have to host the entire block chain on your machine. So its faster, its faster set up, if you download one of these all you do is connect to a server and you can start sending and receiving Bitcoins right away. They also have some other cool features where you can store a bunch of different addresses within the same wallet, all of these desktop clients allow you to do that, and usually with a web wallet its one address, sometimes they have a couple of addresses in there but some web wallets are only one address or its a pain to figure out how to get multiple addresses in them. So, weve got Electrum, MultiBit and Armory, is one that I know you use, Adam personally I use a couple of different clients, I do have a blockchain.info account that I barely use for anything. I also have Electrum, Armory and the Bitcoin-Qt client, havent really used MultiBit. What else, I also use an Android wallet called Mycelium, thats one for your phone. Theres also blockchain.info apps for Android and iPhone and also theres some other ones that may not be available yet, but theyre coming soon for iOS devices. I

also have physical Casacious coins and a paper wallet, so I use everything. And I honestly think security through distributing Bitcoins into different wallets and different methods of storage is a good idea as well. ABL: You cant have 100% convenience and 100% security, at least yet. There is always a downside. Armory is great because its really all about making sure that youre not going to lose your Bitcoins. And so they have great backup features and Alan Reiner the lead developer on it has been pioneering some really innovative and very new to Bitcoin features into the client as well. The good part about it is that its really focused on security, its easy to use once you get the hang of how things work and its pretty self-explanatory, theyve done a good job with the interface. SM: You can somehow store Bitcoin in offline wallets, what is that? ABL: So, when you create a wallet you get the option of how you want to back it up and what they encourage you to do is essentially to print a paper back-up where, at any point in the future, if you take this paper back-up and you type in, I think its a 32-digit long code split into groups of four, then you can recover your wallet without knowing the password, without doing any of that stuff. So its like a failsafe, so if I die and my wife doesnt know my password but weve got one of these in the safety deposit box, she can go and get that out and recover it, even if for whatever reason she doesnt know my password or any information about it. Armory lets you do that, and theyre also working on features because the concern there of course is that what if somebody I dont want to gets a hold of this paper, then they have access to my Bitcoin and theyre not protected by encryption or anything like that. So what Armorys done to address this is theyre done multi-parts, or fragmented backups, where instead of printing one piece of paper you print three pieces of paper, or five pieces of paper, and each piece of paper is different and in order to get the combination in order to recover the wallet, you need to have say 2/3 or 3/5, something like that. So you can have a little more security. Again, you can tell that even in that case its less convenient but its probably more secure. So Armory, as far as this security versus convenience side if definitely on the security side, but its getting much easier to use. SM: All these issue, developers have a great incentive to help solve these problems for people, to help make Bitcoin easier to use and more user friendly, and its just going to get easier from here on out like you said. ABL: I dont even know Im using Bitcoin a lot of times Im using Bitcoin, its just something thats kind of running in the background and powering my transactions. Eventually its going to happen. I hope I can always spend Bitcoin because I really like the feeling of these direct person to person payments in an internet connected system. But at the same time it sure would be nice if I didnt have to think about it quite so much sometimes. SM: You know one thing maybe we ought to mention with Bitcoin storage is the concept of creating paper wallets. ABL: All a paper wallet is you can take a piece of paper, just a plain piece of printer paper or whatever, and just write down your private code on it and now itll functionally be a paper wallet because thats all you really need to do. The reason why paper wallets are desirable are because if you have this number on paper then you can, if you want to, remove than number from your computer. And if that number isnt on your computer then its not an issue of whether or not youve encrypted your wallet or not because if someone does compromise your computer the numbers simply arent there for them to take because youve taken them offline. SM: If someone compromises your house, or somebody compromises your physical wallet then they might gain access to it, so its just a different set of problems. But, thats probably I would say, would you say its the gold standard now? For Bitcoin secure storage to generate key pairs with an address and a private key offline with a computer thats never touched the internet thats known to

not be compromised, then print them off and dig a hole and bury them, something like that and somehow physically secure them so that malicious people cannot gain access to them. I think thats the most paranoid you can get but then paranoias only paranoia if youre wrong, right? People have had their Bitcoins stolen from their computers, so. ABL: This is very true, absolutely, but the thing to keep in mind is that Bitcoin, you get to figure out what your risk tolerance is, you get to figure out how much convenience you want versus not and just treat it based on what your particular needs are and really thats the key, its that Bitcoin lets you do whatever the heck is that you want. If you want to use it, I mean whatever you want to use it for, however you want to use it, even if youre breaking the rules, I mean this is why it has trouble with the conventional system, its because there are limits to how much money youre supposed to be able to send and there are people who youre not allowed to send money to. But Bitcoin really doesnt care about that because again its just these rules that live in the sky and if criminals decide to follow the rules then criminals get to use the system too, just like cash. VOOZA: Bitcoin? What isnt Bitcoin? Next! And so people just, you know, you hit your keyboard and its sort of an easter egg type thing, where once in a while therell just be coins that pop out of your keyboard, and then you can use those to buy drugs. SM: I think weve covered the basics, but if you have any questions, like if you want to know something about how Bitcoin works that you dont think weve addressed here, let us know. You can send mail at mail@letstalkbitcoin.com or you can send a web inquiry through our website which is letstalkbitcoin.com and let us know if you have specific questions. On some of our older episodes we used to do a segment called newbie questions or something like that, or just Bitcoin questions and I wouldnt be opposed to bringing that back if people have questions that they want to send us. ABL: Yeah, absolutely, I think that were going to be moving towards a more interactive show again, Lets Talk Bitcoin is kind of floating around in terms of the format weve followed. Were segment based, thats like the one thing I can comprehensively say, we are segment based and that will probably stay the case. But yeah, I mean Bitcoin is a very much evolving situation and Lets Talk Bitcoin is probably going to grow along with it so Stephanie I look forwards to doing the next one of these when theres a whole slew of innovations that we have to talk about because theyre so new that nobodys heard of them yet. SM: Right. Absolutely, we look forwards to hearing from you. Thanks for listening to Episode 61 of Lets Talk Bitcoin. The New User Show was produced by Adam B Levine and edited by Matthew Zipkin. It featured Stephanie Murphy and Adam B Levine. What is Bitcoin was performed and provided by Vooza and while very funny, is quite wrong. Music was provided by Jared Rubens and Zhou Tounged. What did you think of Zhou Tongued? Ive got several other Bitcoin related parodies that I think are quite good but Im not sure if theyre appropriate for the show. Questions or comments? Email adam@letstalkbitcoin.com Have a good one.