Bitcoin - a Layman's Guide

A physical bitcoin.

A recent computer virus infection at the Swansea, Massachusetts, police department brought the topic of bitcoin to local attention. This nasty virus encrypted several computer files, effectively holding them for ransom. If the cops wanted their files back, the perps demanded to be paid in bitcoin. Luckily, all ended well with no damage, injury, or loss of confidential data. But it did require the very real expenditure of $750 to buy two bitcoins.

What the heck is a bitcoin?

One thing is certain – bitcoin is extremely popular on the web. As of this writing, Google reports nearly 35 million hits on the term. Most of the descriptions are highly technical and loaded with computer jargon. Let’s try to demystify it.

Bitcoin is a virtual currency. This means that no physical bills or coins are required to represent value – bitcoins live in computers. While this may seem odd, consider that our own dollar has very nearly become a virtual currency. For many folks, it is common to have their wages (or government pension) automatically deposited into their bank account. Bills can then be paid using the bank’s online bill paying system. Groceries, restaurant meals, gasoline, and untold other goods may be purchased using a credit card. Nary a dollar bill is seen.

Another characteristic of bitcoin is that it can facilitate anonymous transactions. (That’s why the perps required the Swansea police to pay in bitcoins). But this is not an unfamiliar characteristic of our dollar. While credit card and banking transactions are easily tracked, a suitcase full of cash is fairly anonymous (unless the bills are marked).

Bitcoin differs from the dollar in one significant way: it is not a fiat currency. Fiat currencies are issued and backed by central authorities such as the Federal Reserve Bank (dollar), European Central Bank (euro), or Bank of England (pound). For citizens living in these stable countries, a fiat currency is a good thing. But not so for those living in economic paradises such as Venezuela and Argentina, where bitcoin is gaining popularity as an alternative to the uncertainties of high inflation rates, devaluation, and the risk of expropriation. Further to their credit, bitcoins cannot be counterfeited.

Where did bitcoin come from? The idea was first presented in a 2008 paper written by "Satoshi Nakamoto" (which may be a pseudonym for an individual or group). The currency is only possible because of developments in powerful yet affordable computers, high speed networks, and distributed processing. It is very much a child of the Internet Age. Bitcoins are “mined” by enthusiasts with powerful computers searching for the solution to a very difficult cryptographic problem. When a new bitcoin is discovered, its existence is added to a distributed, public ledger.

Each bitcoin is unique and the total number of bitcoins is limited (mathematically) to some 21 million. All of the easy bitcoins have been discovered and it is becoming progressively more difficult to find (solve) each new one. This insures that bitcoins will never be devalued by “printing money”, which governments are wont to do.

Bitcoins are stored in (and spent from) electronic wallets. Your wallet might be an iPhone app or a discrete (miniature computer) device. You can buy bitcoins from a broker and store them in your "wallet". From there, they can be spent to buy goods and services in much the same way as a debit card. Physical bitcoins are available from vendors such as Casascius. These physical coins each contain the unique identifiers of the virtual bitcoins they represent.

How is all this working out in practice? Pretty darned well. On October 30, Time Magazine reported that “Bitcoins took yet another step toward mainstream use on Tuesday, as the world’s first ATM converting the virtual currency to conventional cash, and vice versa, was introduced at a coffee shop in Vancouver, Canada.” In a recent Wall Street Journal article (11/14/13), the story of the Craigs was chronicled. Austin and Beccy, an adventurous couple, successfully paid all of their expenses using bitcoins during a 100 day, three continent odyssey (albeit with some difficulty at times).

Are bitcoins here to stay? The signs are good. At a Senate committee hearing on Monday 11/18/13, US authorities termed bitcoin a “legitimate financial service.” The concern of illicit activity was felt to be manageable under existing banking and currency laws. Federal Reserve Bank Chairman Ben Bernanke, in a letter to the committee, wrote that virtual currencies “may hold long-term promise, particularly if the innovations promote a faster, more secure, and more efficient payment system”. Bitcoin prices surged on the Tokyo Mt. Gox exchange in response.

At one time, ATMs were new and strange to many of us. But given time, this brave new world of virtual currency will become equally ordinary. This is how science fiction comes true – one iPhone app at a time.

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Update 11/21/13 - "Bitcoin now accepted as tuition payment at Cyprus university."

How your iPad will conquer student debt

Aristotle teaching Alexander.

College costs are out of control. Students and families are reeling under burgeoning debt. Politicians, state and federal, are rushing to feed the beast they have created. That might work.

The statistics are appalling when taken in whole. Here are a few…

• Since 1990, the cost of attending college has risen at over four time the rate of inflation
• In the last 25 years, full-time university administrators have increased 75% while student enrollment has grown only a bit over 25%
• Median pay for public-college presidents is now over $400,000 with several being paid over $1,000,000
• Since 2001, the cost to attend public college will have doubled by 2016
• In 1991, one in ten families carried tuition debt while today it is one in five, with many owing over $100,000

It’s undeniable that attending college has become as much a financial burden to the typical American family as home ownership. But, the recent housing bust included, home ownership on whole is still a long term investment that pays off. The same cannot always be said of the “investment” in a college education. Nearly half of all college grads now work in jobs that don’t require a college degree. Was that a double latte macchiato?
  

There appears to be a confluence of several trends at work here.

1. Public funding of tuition support has enabled colleges to exorbitantly increase fees and tuition
2. Colleges have greatly increased the number of dean or director-level positions dealing with equality, diversity, and related non-academic functions
3. We have encouraged all students to attend college, some who might be better served by excellent vocational schools

While we might continue down the path of publicly funding these fiefdoms, there is little hope that strategy will yield affordable results. Fortunately, there is a light on the horizon.
   

Teaching is the act of imparting knowledge. But over 2,000 years, we are using techniques that are fundamentally unchanged since Aristotle’s students sat at his feet. The internet has blown up that model by allowing a skilled professor to now instruct thousands of students at one time. Computerized courseware administers quizzes and recommends supplemental studies individually tailored to each student. Academic courses can be undertaken in the solitary environs of a student’s home, or in small study groups, or remote classrooms. The only requirement is an internet connection.
  

Simply use your favorite search engine to look for “university courses online.” You will find that many leading universities are offering internet courses, a good number for credit. Private, donation-based organizations such as the Khan Academy provide in-depth training in a wide range of topics from mathematics to history to physics to finance. For-profit companies are beginning to see the opportunity. Coursera, Inc., has partnered with 33 top universities to offer academically rigorous courses to students all over the world. 
  

Bloated colleges feeding at the public trough will soon take note. Some of them will see the opportunity and will embrace this new paradigm. The rest will see their enrollments dwindle. That’s life.