Fun With Bitcoin For Beginners: Part Three

Bitcoin ("BTC") had one of its periodic crashes over the past few days, although very recently has recovered to some $900 (from a low of about $550, off the high of a bit over $1200).  BTC is extremely volatile, but the whole idea is worth a roll of the dice for me.  Education, even certain kinds of high-risk education, is worthwhile for me.

There are other developments in Bitcoinistan that I would like to share with you.  Arguably the most important is my purchase of a 0.25 oz Gold Eagle.  I have paid for it, received a couple of emails confirming the order and their receipt of my payment, and am hoping for arrival in the next several days (they said yes, it was in stock).  I do understand that there are various other ways of paying for precious metals online, the ONLY other time I have bought PMs online was platinum some years ago from MONEX, that order went without a hitch.

I paid BTC 0.4301 (shipping included), working out to a price of $365 or so when BTC was at $850 or so this morning when I placed the order.  The "transaction cost" (somewhat comparable to a wire transfer fee using a bank) was about $0.10 (ten cents)...!

At this point, it is not easy to keep even a BTC of gold purchase "secret" against a determined and knowledgeable opponent (say the NSA, IRS or the Banksters...).  There ARE various techniques that I am learning about which will indeed make it harder for those to sniff around and get my BTC wallet information, transactions, etc.  Right now, all I really care about is whether this whole BTC thing works for me.

***

While waiting on my hoped-to-arrive soon gold coin, I will mention that I got by BTC by cash payment.  My cost basis is almost EXACTLY $800 / BTC.  So, the first important part of my BTC experience (receiving BTC for cash) has been a success.

I do not have much BTC, certainly not enough to make me lose sleep at night, but enough for me to pound any crooked SOBs who try to cheat me, here, at Zero Hedge and on the walls of the Men's Room at my office... 

Or praise them for doing as promised...  Once I have my little gold coin, I will write up "Fun With Bitcoin For Beginners: Part Four".   :)

I am open about all of this to you, dear readers, because Bitcoin may develop into something real.  What if our bearing suppliers in China agree to accept BTC?  A game changer...  China is BIG in BTC (See more below), so that could happen...

***

I have another gold supplier in mind for my next purchase with BTC.  And then I will likely buy my wife a CVS gift card from gyft.com, whose ads I have seen at Zero Hedge.

***

Many of you know that I use to review the weekend issues of Barron's, the financial magazine/newspaper.  I stopped doing that because it was too burdensome, even for me with more time than most.

But, last weekend, Randall W. Forsyth wrote an highly visible column mostly about Bitcoin!  Forsyth has the tough job of writing after Alan Abelson, their "pet bear", wrote such splendid columns for years (Up & Down Wall Street")...  Forsyth has brought BTC to the Wall Street masses (although I am sure that many had long-noticed this phenomenon).

In my opinion, Forsyth wrote a balanced article on BTC, pointing out opportunities and risks, he even quote David Woo (B of A) who calculated BTC's "fair value" at $1300, and just got roundly trashed at Zero Hedge for this, well, bad prediction (or bad timing perhaps).  Woo did note that fewer transactions were done near BTC's highest prices (but my transaction has apparently gone through fine at $850, which is MUCH HIGHER than the BTC prices of about two weeks ago (when Zero Hedge kicked off the minor-mania for us newbies).

Forsyth quotes Walter J. Zimmerman Jr., a senior technical analyst that the soaring value of the virtual currency constitutes "a powerful indictment of Federal Reserve policy," (in their aim of 2% inflation).   Indeed.  Forsyth finishes his remarks saying that "Bitcoin may be pointing the way."

For BTC to get this kind of attention, something is up, and someone is worried...

***

I asked my "homies" at Zero Hedge (the place is becoming almost like a playground for financially aware adults now, so much fun, so much great communication) if they would answer some mildly technical questions for me.  I received a lot of good responses from (and I have gotten a few from others, I regret not remembering everyone) "Mudduck", "Matt", "mick_richfield", and "Lamarth" among others.  Thank you!

Their responses were technical in nature (to me anyway) and were from their own perspectives (example: using BTC "mining" rigs of different ages, costs and electricity usage), so it was hard for me to get an overall sense of how BTC prices would affect mining, other than mining will continue, even with old & slow machines, as those costs have been paid off, even if they generate few BTC...

So, once again I went to my main contact in the BTC world: "Bitcoin Insider", who knows his material.  I had three general questions for him..

My questions and his answers are edited here for brevity and confidentiality.

Me to B.I.:

WHAT is going on in China?  (I meant WHY is BTC so popular there, at least 50% more so than here in the USA, NOT about the minor crackdown recently)

B.I (he provided a link, but I accept his short version for now to save time):

"China" or "Chinese" as I find the best and most current insights
here. Short version: Chinese government doesn't want Bitcoins to
compete against their yuan as a currency, but they are fine with
them as a commodity like gold or silver. [...] They
are a potential threat to the US Reserve currency and will pose a
big problem in the USA.

His link: http://www.reddit.com/r/Bitcoin/comments/1sbefw/chinese_investment_banker_says_what_nobody_in_the/

Me:

(General questions on BIG computers like at the NSA or Fed who might monkey around with the blockchain (an important infrastructure element of Bitcoinistan) or other wise monkey around with their huge computers, in particular, the 51% issue I have seen mentioned at ZH)

B.I.:

NSA Computers. Even all the resources of the US government can not
come anywhere close to the fabled 51% attack. There are far too
many teenagers and other young guys with money that have invested
very heavily in Bitcoin mining equipment. The current network hash
rate is 5,063,825 Ghash / second. [...] has an 18 Ghash / second
of special AISC hardware for $1,000 plus his original 1 Ghash GPU
miners for >$3,000. Since the government can't have a large
quantity of AISC miners, they would require the equivalent of 5
million powerful gaming computers. The FBI does however own 5% of
all Bitcoins that they stole when they imprisoned Dread Pirate
Roberts and gathered up the accounts of the now defunct Silk Road.
They could very easily sell and buy on the currency exchanges to
cause very wild fluctuations and destroy people's confidence in the
pricing of Bitcoins. The only defense is to ignore their
interventions, just like we do with the gold and markets.

Note that I had simplified my questions so that I would have a prayer of understanding the answers...  B.I. elsewhere noted that the recent crash appeared to be a manipulated one, and that surprised him a bit.  There are now OPTIONS available on BTC that may open up other avenues to manipulate BTC prices.  B.I. also likes gold...

Me:

How does he spend his BTC?

B.I.:

Gift Cards. Bitcoins --> Gift Cards --> real stuff is generally how
I spend most of my Bitcoins and I've never had a problem. It always
worked great. There is a bit of a delay while the gift card issuer
waits for your transaction to confirm ~1 hour at most, but usually
around 15 minutes. I've asked my wife to buy some of the Alpaca
survival socks for Christmas directly with Bitcoins. If they don't
come, I'll buy them myself. I'm considering donating Bitcoins to a
documentary production: Sovereign Living the Reality Show Episode [...]

***

So, there you go, the latest in my continuing education to learn more about this interesting new technology.

I wonder if I should ask B.I. about vulnerabilities in the BTC ecosystem...  Some at Zero Hedge state that BTC is almost invulnerable, even in an EMP (don't ask if you do not know...), while others say the government could fairly easily shut down Bitcoin as they did with "e-gold" years ago, because of money-laundering charges...  I don't know if I should though, as I would like to see BTC succeed and not be destroyed by giving its enemies information on vulnerability...

In Part Four, I hope to demonstrate proof of receiving the gold I have purchased as well as have more questions answered.

If YOU have questions, drop off a comment below, smile,,,,