Bitcoin is everywhere at moment. Is it the future? Is it a fad? Is it legal tender? Does that even matter? Nobody seems to know for sure. To try and get a gauge of whether Bitcoin is worth the hype, I decided to dive in and try actually using it. So I set myself the following challenges:
- Get some Bitcoin
- Leave it for a period of time to see how it fluctuates in value
- Trade it in for a real world object or service
Stage 1 — Somewhere to put the Bitcoin
First thing I needed to do was get a "wallet". This is a chunk of data (called the blockchain) and related software for holding your Bitcoins and proving that you actually have them. Since the Bitcoin algorithm is inherently complex, the blockchain file is about 6Gb in size. This drove my decision to use an online wallet rather than keep it on own computer. Hosting the wallet on your own computer is the more secure choice — since 3rd party wallet providers are an obvious target for hackers. However, I don't plan on playing with huge amounts of money, so am comfortable taking the risk.
Some research shows that blockchain.info is by far the most popular service, so that’s what I chose to go with. Registration is quick and painless, though further verification is required before actually being able to make deposits and withdrawals. Five minutes later, and I've got my own Bitcoin wallet!
Stage 2 — Buying some Bitcoin
So, now I need to get some Bitcoin to put in the wallet. At the time of writing, an individual Bitcoin valued at just over £500. Fortunately you can deal in fractions of Bitcoin.
There are two ways to get a hold of Bitcoin, and I'm going to try both:
- Buying some with sterling
- Mining some
So let's go buy some! I find a few sites straight away that will let you buy Bitcoin easily with an electronic bank transfer. They require a minimum purchase of 0.1 of a Bitcoin though — about £50. More than I fancy investing initially.
So the next option is to find an individual to trade with. Again, there are multiple sites for this — I go with bitbargain.co.uk. A search form lets me quickly filter down sellers who match the amount I want to spend and payment method I want to use. The list is generous and they all have a near-perfect trust rating. The top two are highlighted as currently being online so I pick one of them.
At this point, things start feeling a little cloak and dagger. There's talk about text messages being sent, set timescales in which actions have to be taken, warnings not to proceed unless you're confident you meet all the requirements. In particular, the threat of being banned if you use the word "Bitcoin" in the reference field when making the bank transfer, caught in my mind.
Despite all this, things go smoothly. The seller accepts my request almost immediately and a chat session begins. Everything I need to do (which isn't much anyway) is clearly documented and the few questions I do have, the seller answers quickly and eloquently. The whole transaction is done in less than five minutes and all that is left is to wait for my bank transfer to go through.
The next day, I log into BitBargain to find the transaction has completed. For £5.00 I have successfully purchased myself 0.05 Bitcoin! Apparently if I leave this money on my BitBargain account for longer than four days, interest will start being deducted, so I transfer it to my BlockChain wallet straight away.
I feel a thrill of excitement at this minor achievement, though this quickly subsides — all I've really got to show for my efforts is three digits and a decimal point on a screen. It doesn't feel real enough, tangible. Time to try and get some more — this time without spending any money.
Stage 3 — Mining for Bitcoin
Unlike traditional currencies where a central bank prints new notes as they see fit, Bitcoin is completely decentralised. New Bitcoins can be "discovered" by anyone that can solve an incredibly complex mathematical formula, using various free pieces of "mining" software. The catch is that with each new Bitcoin discovered, the algorithm grows in complexity and the odds of an individual decoding a new Bitcoin are now at lottery-like levels. Fortunately, as with the value of a Bitcoin, the work of discovering one can be split into fractions as well. Pooling together with other miners is now the norm — the value of any discoveries being distributed based on how much each member contributed to the task.
So I sign up with one of the biggest pools — BTC Guild. Sign-up is as easy as it gets and I'm then provided with access details so I can start contributing. I need to download cgminer, which I'm told is the best piece of mining software to use, but Chrome flags the download as potential malware. I get scared, close the browser window, and go for the next biggest option, Bgminer.
All of these mining programs are command-line based, so will scare away those who can't cope without a mouse. After some fumbling through menus and a bit of Googling, I have things configured and kick the process off. Bgminer communicates with the BTC Guild server for a bit then starts working on decoding Bitcoin blocks. The fan on my processor is humming away greedily and text is occasionally scrolling on the screen, but it's otherwise difficult to gauge progress. If I'd built this program, I would have had an animation of a man swinging a pickaxe.
Just over an hour's mining earns me 0.00000148 of a Bitcoin, according to the BTC Guild site — that's worth about a tenth of a penny. At this rate I'd have to mine solidly for almost six weeks to get £1. Hmm. I'm sure the rate of success and payout must vary though, so decide to persist.
Over the next week or so, I let the mining program run for a total of 25 hours and netting me a grand total of 0.00000566 Bitcoin. At this point I'm still 3 decimal points away from even being applicable for a payout. I decide this stage of the experiment has run its course. There are plenty of ways to be more productive — using specialised hardware, leaving the process running 24/7 or pushing the processor with far more intensity – but, for me, it's feeling like far more effort than it’s worth. Time to move onto the next stage of the experiment.
Stage 3 — Observing currency fluctuation
The plan at this stage was to sit back and watch my money grow (or fall slightly), not expecting there to be any huge variation. However, it turned out that I had chosen a particularly interesting time to perform this experiment. Mt. Gox – one of the biggest Bitcoin exchanges — went kaput, and very publically. It started with the site putting a temporary hold on Bitcoin withdrawals, which quickly became non-temporary. Users were furious, with some even flying out to the company’s offices in Tokyo to protest. Public faith in the Bitcoin currency dropped away as other major Bitcoin exchanges put withdrawal freezes into effect as well. If you hadn’t heard of Bitcoin before this point, you certainly would have now – every major news source was running a story about this being the potential death of Bitcoin. The value of the currency plummeted by over 40%, to its lowest point since taking off in late 2013.
Fortunately, things start to settle though. Most Bitcoin exchanges did resume trading, as did the Bitcoin community. The value slowly started to pick up once more, though to nowhere near the previous rate of growth. Mt. Gox remained locked down and gave little indications as to what was going on behind their doors. The truth of the situation was finally revealed that over 740,000 Bitcoins had been stolen by hackers, without Mt. Gox having noticed – around 7% of all Bitcoin in circulation at the time. With that money essentially lost forever, Mt. Gox was declared insolvent.
This all took place over the period of one month, so I decided to wait and observe for slightly longer. Over the following month, the value of the Bitcoin continued to grow, peaked and then starting dropping again, even further than it had during the Mt. Gox fiasco. I had now lost 50% of initial investment — £2.50 worth of Bitcoin.
Stage 4 – Spending Bitcoin
At the final stage of the experiment, I find myself in a fairly weak position, with only half the amount of Bitcoin available that I went in with. Some Googling turns up various online sites that claim to accept Bitcoin – everything from Reddit Gifts to Virgin Galactic. The range of products is expectedly nerd-orientated, and the majority are based in the US. There are a couple of sites that allow you to purchase virtual gift vouchers for sites like Amazon and iTunes. Even the UK-based www.takeaway.com apparently accepts Bitcoin, so I could have ordered pizza! Sadly, I struggle to find anything I can purchase with my handful of bits – not even enough to cover P&P or minimum spend.
I could go back to BitBargain, where I originally purchased my Bitcoin and re-trade for Sterling, but it barely seems worth it for the effort and amount I would lose in transaction fees. So instead, I settle on leaving my investment where it is. Who knows, maybe in a couple of years the market will explode again and I’ll find myself an accidental millionaire!
So what have I learned during my (mis)adventure with Bitcoin?
Well, it’s pretty easy to get up and running with. Buying Bitcoin isn’t difficult. Earning it from scratch however, is.
There is an abundance of people who will happily exchange Bitcoin for other currencies, but it feels like the current set of retailers are just doing it for the novelty factor. By which I mean “legal” retailers, and that brings us to the point at which I believe the most practical purpose of Bitcoin reveals itself.
Underground sites like The Silk Road (a dark-net version of eBay for trading drugs and other commodities) are by far the biggest source of Bitcoin transactions for physical goods. If you want to make anonymous, untraceable financial transactions then Bitcoin is the currency for you. In fact, I would go so far as to speculate that, without sites like The Silk Road, Bitcoin would probably have sizzled out long ago. I also wonder if Bitcoin makes money-laundering easier, or more complicated.
So beyond, its potential nefarious usages – is there a future for Bitcoin? My personal feeling is that the answer is “no”, or more accurately “not yet”. There are three major issues holding back Bitcoin as taking off a “real” currency:
1) It’s really a small handful of geeks using it, largely for the novelty factor. That’s not enough for a functioning economy.
2) Bitcoin isn’t the only virtual currency. There is a range of competitors out there, such as Litecoin, Namecoin and Dogecoin (which started as a parody but is now so successful it’s sponsoring a NASCAR driver). Bitcoin rose to early eminence, so is the one most people have heard of, but right now the number of competing currencies are blocking each other from really growing any further.
3) There is no single body responsible for Bitcoin. This is of course, also the main attraction of these virtual currencies, but is a double-edged sword. If the pound starts to bottom out (or over-inflate), then the Bank of England will take steps to remedy the situation. There’s nobody to do that with Bitcoin, as the epic Mt. Gox failure demonstrated. If you get all of your Bitcoin hacked, or the value falls to near-zero, there is no one to hold accountable. That fact alone will hold back big investors from getting involved.
Once those issues are remedied — for example, just two virtual currencies take the lead and become widely adopted, resulting the creation of an independent governing body (like W3C) — then I can genuinely see virtual currency becoming a real competitor to traditional money. Imagine PayPal tying into your Bitcoin wallet as well as your bank account. Or a small nation abandoning its failing economy and starting afresh with Litecoin. Investors might bank-roll Dogecoin mining operations, allowing entrepreneurs to buy small server farms and carry out intensive mining. These aren’t realistic scenarios today – but tomorrow? Tomorrow’s looking pretty exciting.