There was an interview with me on a Slovak web about money and I decided to translate it to English (and do a few minor edits). Enjoy!
Is Bitcoin a pyramid scheme? Certainly not, is more like gold. Juraj Bednar talks about the most popular virtual currency in the world.
Mining and buying are two ways of getting Bitcoin. What is the difference?
Regarding Bitcoin mining, we can use an analogy to gold. Mining is a very difficult process and currently makes use of specialized hardware developed only for this purpose. As with gold, most people who want to get gold (and Bitcoin) buy it on the market instead of mining it. Mining gold from nature means people need specialized machines to mine gold. They also need a lot of knowledge – like the location of good mining spots.
Is it better to mine or to purchase Bitcoins?
Mining is required to secure the Bitcoin network, and you need to realize that there are only 25 Bitcoins mined every ten minutes in the whole network. Miners compete to get these 25 Bitcoins. I guess for all normal Bitcoin users, mining is irrelevant and too difficult.
Aren’t the “first miners” in advantage?
Again the analogy with gold: Those who have mined it first were in advantage, because it was much easier to find new gold then than it is now. With Bitcoin mining, there was always a risk – no one knew if Bitcoin would take off and have any value at all. First miners are rewarding for taking this risk and investing in mining infrastructure.
Isn’t it a bit of like a pyramid scheme? Who got in first has earned the highest profit…
Unlike pyramid schemes, there is one crucial difference – no one ever promised profit on Bitcoin. A pyramid scheme is based on the fact that those who join it first earn profit at the expense of those who came later, despite promises that they all earn profit. There is and never was such promise with Bitcoin – it is, and it was risky all the time. Bitcoin was invented as a new medium of exchange, not as a quick way to get rich.
Even so, a lot of people buy it hoping to get rich…
You should be aware that Bitcoin itself is not an investment. It does not create anything new; it is just a medium of exchange. One can make a profit if one is willing to take a chance and “bet” on the future value of Bitcoin. It is also possible that the value crashes and you end up with a loss.
It is important to note that speculations are very beneficial for the market because, in the long term, they stabilize prices. And it is not just earning, it is risk-taking with a possible downside. At the same time, people who started using it first took the risk, popularized it and built the necessary infrastructure around it. In my opinion, they deserve a reward.
Why has Bitcoin become the most popular virtual currency right now?
Because it was the first fully decentralized virtual currency. Technologically it is something new, the authors of this currency invented some really unique solutions to previously unsolvable problems. At the same time, during the financial crisis, people at least for a moment lost their illusions about the stability of the international financial system based on government fiat money and welcomed an alternative. Alternative currencies have existed in the past – for example e-gold based on gold, but all were centralized. This was also their main problem if they have not crashed before that because of inflation or poor acceptance (especially true for so-called local currencies).
Which of virtual currencies do you think are the most interesting right now?
Currently, I think that the most promising is still Bitcoin because it is the largest and most widely accepted. If anything is to become a universal medium of exchange, liquidity is the most important parameter, i.e. for what it can be exchanged. Bitcoin is still too small, especially compared to credit cards, but all other decentralized virtual currencies are only a small fraction of the Bitcoin economy.
There are more than 40 of such currencies on the market…
Other currencies are not so popular because they did not bring much new. Most of the differences are cosmetic and do not bring anything fundamentally new to the user. The best technological innovations currently are ZeroCoin, which brings anonymity on top of Bitcoin and proof-of-stake mining, which gives more power to holders of the currency (in addition to miners). For example, TerraCoin implements this. It is a little bit more ecological because the creating new blocks can be done also without power-hungry calculations. I want to state again that mining is not an end in itself, but it helps to maintain network security.
Bitcoin is relatively new – it is from 2009. Are there any predecessors?
Several attempts have been made to create virtual currency. The ideological predecessor of Bitcoin was probably Hashcash, which was not a currency in itself; it was a system designed to fight spam. It used similar calculations as Bitcoin to increase the price of sending an e-mail. If you wanted to send an e-mail, you had a computer perform calculations similar to mining – if a person wanted to send one e-mail, it took a few seconds. If a person wanted to send millions of e-mails, it would take too long, and it would cost a lot of computing power and electricity. Verification of the calculation (as with Bitcoin) is simple and takes very short time. The second system was the forerunner of Bitcoin called Bit Gold, authored by Nick Szabo. It has a lot of characteristics similar to Bitcoin and many people believe that the author of Bitcoin who hides behind the pseudonym Satoshi Nakamoto is Nick Szabo.
Bitcoin is currently worth about a thousand dollars. Is it also suitable for smaller payments?
High value of Bitcoin is certainly not a problem. What you know as Bitcoin is a hundred million pieces of units called Satoshi. When you send a Bitcoin, in fact, send a hundred million Satoshi. The authors of Bitcoin knew about the possibility that the price of Bitcoin would rise. I have changed my wallet to display balances in millibitcoins (one Bitcoin equals 1000 mBTC), and I know that 100mBTC is about $100 as of time of this writing. Bitcoin is also suitable for sending small transactions.
Is it possible to steal or fake Bitcoins?
It is currently not possible to create fake Bitcoins, but it is possible to steal them – your Bitcoins are stored on your computer in your wallet – an encrypted file with a “private key”. The easiest way of stealing it is infecting your computer with a virus that waits until you enter the decryption password for your wallet and at that moment, it transfers all Bitcoins to the thief’s address. When using Bitcoins, you need to follow all safety precautions as with any other electronic payments. There are several solutions to the security problem. You can use an offline wallet, when transactions are created on a computer that does not have the necessary private keys to sign it, and then sign it on another computer that is not connected to the Internet and is sufficiently secured against theft. I would also like to mention Bitcoin Trezor, which is a good solution for securing your Bitcoins.
What about legislation? Does it treat Bitcoin as private property?
I hope that every theft is illegal, and legislation sees Bitcoin as an asset, but it is a question for lawyers (and the answer would probably differ among countries). Even more interesting question is if the police can actually do something about the theft. Like ten years ago, the Internet was something completely unknown for police and justice systems in most countries. I do not believe that our police would be able to investigate the theft of Bitcoins or do something about it. By design, Bitcoin transactions are irreversible and relatively anonymous. The investigation and correction would be tough even for experienced security professionals. I recommend that you think deeply about security if you hold a significant amount of Bitcoins.