Conversational Bitcoin: The Ebook

CONVERSATIONAL
BITCOIN
The Bitcoin basics you need to know

Christopher Carfi
Download this book for free at http://coindale.com/bitcoinbook

Design by Michelle Senn

Conversational Bitcoin by Christopher Carfi is licensed under a Creative Commons Attribution-ShareAlike 4.0 International License.


Table of contents

 What is Bitcoin? 04

 Where can I spend bitcoins? 17

 Why should I care about Bitcoin? 07

 What else can Bitcoin be used for? 19

 How do bitcoins get exchanged? 09

 What does the government think about all this? 20

 Are bitcoins money? 10

 Where did Bitcoin come from? 21

 Why should a business accept bitcoins? 12

 What is Bitcoin mining? 23

 Why should I personally use bitcoins? 15

 What are the risks? Isn’t it a Ponzi scheme? 25

 Isn’t Bitcoin just for drugs and porn? 16

 Acknowledgements 27

What is Bitcoin?

Bitcoin is a form of digital currency that has existed since

insofar as the Bitcoin protocols are open standards that can

2009, and can be used to purchase goods and services at an

be implemented by anyone. No organization “owns” Bitcoin,

increasing number of locations worldwide (you can see some

although there is a Bitcoin Foundation that is chartered

of the merchants that accept bitcoins here). Bitcoins and

with standardizing, protecting and promoting Bitcoin.

the associated Bitcoin ecosystem have a number of different
facets, all of which are important.

The Bitcoin network performs a number of important
tasks: trading digital assets (“bitcoins”) amongst the net-

The Bitcoin ecosystem consists of a network of thousands of

work members, confirming the validity of transactions that

computers running the Bitcoin protocol that are connected

have occurred on the network and collectively and predic-

to the internet. The Bitcoin network is a true “peer-to-peer”

tably managing the supply of bitcoins that are available to

system, without a central set of servers; any computer run-

be traded. Like the internet itself, the power of the Bitcoin

ning Bitcoin software can connect (or disconnect) from

network comes from the collective processing power of

this network at will. This software is part of an open-source

the thousands of individual machines connected to it. This

project and anyone can inspect the code to understand its

interplay between bitcoins (the medium of exchange) and

inner workings. In some ways, it can be viewed in the same

the Bitcoin ecosystem (the network and related its open-

way one views the conventions that underpin internet email,

source protocols) collectively provides a number of benefits:

4

 Bitcoins themselves can be used as a currency – one can

 The Bitcoin network, at its core, contains a distributed

buy goods or services using bitcoins if a merchant

ledger of every Bitcoin transaction that has ever

accepts them as a payment method. In this facet, Bitcoin

taken place, and its protocols guard against “double

is an alternative to Visa, MasterCard, American Express,

spending” of bitcoins and other malicious activities. In this

Discover, PayPal and cash.

facet, the Bitcoin network itself can be used as a ledger
that can illustrate ownership (and transfer of ownership)

 One can perform instant, global transfers of bitcoins

of digital assets. (For example, with a little bit of

from one individual to another, with virtually no

ingenuity, the Bitcoin network can act as an irrefutable

transaction fees. In this facet, Bitcoin is an alternative

timestamping service for all types of digital documents.)

to international remittance services such as Western
Union and MoneyGram.

 Bitcoins themselves can, of course, also be used as
a speculative commodity. In this facet, bitcoins have been

 Since bitcoins are digital, fractions of a bitcoin can be

called “digital gold” (as well as digital apples) and

transferred in units as small as 0.00000001 bitcoin. In this

can be traded on a number of international exchanges just

facet, Bitcoin can act as a method for micropayments.

like precious metals, pork bellies and frozen concentrated
orange juice.

5

Why should I care about Bitcoin?

Above and beyond the hype in the news about the financial

vely that it only takes 10% of a population to hold an unsha-

impact and speculation around Bitcoin, the long-term rea-

keable belief for that belief to then accelerate and become

son to pay attention is that the Bitcoin network is, in some

the dominant idea. If Bitcoin gains a 10% foothold in a geo-

ways, a new layer of the internet. In the same way that the

graphy, demographic, industry or application, then it is quite

creation of the web browser in 1994 launched a new wave of

likely the network effects will accelerate and drive Bitcoin to

innovation that continues today, the development of the Bit-

become a notable component of the way things get done for

coin network creates a new set of possibilities for electronic

that group.

commerce and services. A few of these types of examples are
included in the “what else can Bitcoin be used for” section

The approach used for the Bitcoin network itself is an elegant

of this ebook.

solution to a class of difficult problems. As such, in addition to
bitcoins themselves being used as currency, the most interes-

More pragmatically, it is quite conceivable that Bitcoin will

ting reason to care about Bitcoin is that we are just beginning

be continue to grow until it hits a tipping point of adoption,

to explore the types of solutions that can be built using the

at which point it may accelerate to ubiquity in the same way

Bitcoin network. As more entrepreneurs and investors begin

the internet, smartphones and tablets have. A 2011 study by

to explore the space, it is certain that interesting solutions to

the Rensselaer Polytechnic Institute (RPI) showed conclusi-

previously intractable problems will be created.

7

How do bitcoins get exchanged?

To exchange bitcoins on the network, one needs to have a

Bitcoin wallets are integrated with QR code scanners. Just

bitcoin wallet. A Bitcoin wallet is a file that can live on your

like email addresses, you can have as many Bitcoin addresses

computer or smartphone, or it can be hosted on a trusted

as you want, and a Bitcoin wallet can contain any number of

service on the network. A wallet contains a record of credits

addresses. To send bitcoins to someone, you instruct your

and debits of bitcoins into and out of it. Sum up all those

wallet to send bitcoins from one or more of your Bitcoin

transactions and you can see how many bitcoins that wallet

addresses to someone else’s Bitcoin address. The number of

contains.

bitcoins in your wallet is reduced by the number of bitcoins

The credits and debits in a Bitcoin wallet are associated with

you’ve sent, the number of bitcoins in the recipient’s wallet is

one or more “addresses.” Bitcoin addresses can be thought of

increased by that same number, and the network verifies the

analogously to email addresses, and take the form of a long

transaction to ensure that the sender doesn’t try to “double

number such as 1Fm8XdPvGzKbfuHrBrsK8d7ZDLvCCM1WWc

spend” those bitcoins. The transfer process occurs nearly

(that’s the Bitcoin address of a Bitcoin wallet currently taking

instantaneously, and the verification of the transaction by the

donations for the Philippine Red Cross for typhoon relief,

network takes place within minutes.

and if you were to send bitcoins to that address, you’d be
making a donation). Sometimes people choose to translate

Perhaps most importantly, there is no middleman to the

their Bitcoin addresses into QR codes in order to make it easier

transaction. In this way, transferring bitcoins it like using cash,

to use smartphones to send bitcoins, as many mobile-based

in that it is a direct transaction between two parties.

9

Are bitcoins money?

Over the centuries, many things have been used as “money,”
including cowry shells, peppercorns, gold, silver and, of

 It needs to be a store of value, and can be saved
and stored for later use.

course, modern currencies such as dollars and euros. Since
bitcoins can be used to obtain goods or services in some
cases, are they also money?
According to the International Monetary Fund, for something
to act as “money,” it needs to have three traits:

 It needs to be a unit of account, and can be a base
for prices.
 It needs to be a medium of exchange, and can
be used to buy and sell goods and services between
parties.

10

That’s the textbook definition of “money.” For a further read

At the current time, there are businesses and individuals

on nine other ways bitcoins stack up against other currency

who will trade bitcoins for goods and services, and there

types, a great read is the article “The Nine Characteristics

are a number of exchanges where bitcoins can be traded for

That Make Bitcoin Money” from The Genesis Block.

dollars, euros and other traditional currencies.

More realistically, however, perhaps we should talk about

So, are bitcoins “money?” Practically speaking, as long as

“currency,” which is described as “a system of money in

there are individuals who are willing to trade with bitcoins,

general use” as a medium of exchange within a particular

the textbook definition is less relevant. If two individuals

group of individuals. On this point, the Financial Times

are willing to exchange bitcoins for other goods, services or

gives a much more pragmatic and accessible definition.

other currencies, it’s money to them.

According to the Financial Times, “a currency is anything
that two people agree is a currency.”

11

Why should a business
accept bitcoins?
While it’s true that there are thousands of businesses

“handing 2.5% to banks to move bits around the Internet is

around the world that accept Bitcoin today, the real question

the worst possible choice.” In a situation such as this, where

is does it make sense for all businesses? The answer is, of

transaction fees are high relative to the profit margin of the

course, “it depends.”

business, accepting Bitcoin may be an attractive option.

A primary benefit of accepting Bitcoin is that it eliminates

Another benefit from the merchant’s perspective is that once

network transaction fees. Since the distributed Bitcoin net-

a Bitcoin transaction is done, it’s done. With Bitcoin, there

work is handling the task of securely transferring bitcoins

is no concept of a “chargeback” (a word that strikes fear

between buyer and seller, there is not a central toll-taker

into the hearts of many a merchant). In a chargeback, also

sitting between the parties. In a prototypical example, if

sometimes called a reversal, a customer contacts a credit

the profit of a business in a competitive industry is only 5 %,

card company to initiate an investigation into a transaction.

eliminating the typical transaction fee that accompanies

If the bank finds in favor of the customer, the funds from the

credit card purchases can significantly improve the out-

transaction can be clawed back from the merchant. Bitcoin

look for that organization. In his post “Why I Am Interested

transactions are more like cash. When the deal is completed,

In Bitcoin,” investor Chris Dixon appropriately notes that

it is irreversible.1

1 Naturally, caveat emptor plays strongly in this situation. If a buyer is for some reason unsure of the trustworthiness of a merchant, a Bitcoin transaction should be thought of in the same way
as a cash transaction. A buyer would be ill-advised to send bitcoins to a merchant if there was an expectation that the merchant wouldn’t deliver on the promise of an agreement.

12

In the short term, another strong positive benefit to businesses in accepting bitcoins is that Bitcoin is a currently a
hot topic, and that a business can get a sizable amount of
marketing buzz in announcing its support for Bitcoin.
One of the primary areas areas of concern that businesses
mention with respect to accepting Bitcoin is that they are
worried about volatility risk, since bitcoins have fluctuated
wildly in value over the past year. Except in extreme cases,
this is less of a practical issue since infrastructure providers
such as Coinbase and BitPay provide instant exchange services to immediately convert Bitcoin purchases into dollars.

13

Why should I personally use Bitcoin?

As an individual, there may be a number of places where it

On the other hand, there are other types of transactions for

makes sense to use bitcoins. As a payment method for goods

which bitcoins are an extremely attractive mechanism. The

and services from established businesses (e.g. Overstock.com),

most talked about example of this type is using bitcoins for

the reasons to use bitcoins are likely more philosophical than

international money transfers. Currently, existing money

practical at the current time. If one is aligned with the ethos

transfer networks (e.g. Western Union, MoneyGram, etc.)

of Bitcoin, using bitcoins to pay for your next laptop or latte

charge fees that are often 8% –12% of the amount transferred.

is an action that shows your support for a decentralized

In contrast, person-to-person Bitcoin transfers have no sig-

monetary system. That said, it probably won’t cost less, or give

nificant transaction fees. In other words, the next time you

you a significantly different experience than paying with an

want to send someone money, you can just do it, fee-free and

existing bank card or cash. You’ll pay, and you’ll get your item in

without a middleman.

exchange for that payment. (Do note that once you make a payment with Bitcoin, that transaction is effectively irreversible.

Up-and-coming money transfer networks such as BitPesa are

Bitcoins do not have the same type of consumer protections

exploring using bitcoins as a remittance mechanism to take

that one typically gets with credit cards, for example.)

advantage of the benefits of the Bitcoin network. These services have the potential to greatly improve the remittance
process to Africa, Central America, South America and other
locales where remittances from overseas are a significant part
of the economy.

15

Isn’t Bitcoin just for drugs and porn?

A lot of the early stories in the media focused around Bitcoin

it is more akin to a Twitter handle pseudonym rather than a

being used for illicit purchases, most notably through an

completely anonymous moniker.

online marketplace called The Silk Road, upon which many
purchases of controlled substances allegedly took place.

Having moved past the rebellious adolescent stage, Bitcoin is

The Silk Road was taken down by the FBI in October 2013

now used for all sorts of transactions, including automobiles,

which, incidentally, was when the trading value of bitcoins

houses, electronics, content and services.

began its most recent climb. Perhaps shutting down The
Silk Road contributed to the legitimacy of Bitcoin.
There is a common misperception that purchases with bitcoins are completely anonymous, which may contribute to
the perception that Bitcoin is aligned with illicit activity.
However, Bitcoin is more appropriately a pseudonymous
system, rather than an anonymous one. While a Bitcoin
wallet address is a long string of numbers and characters,

16

Where can I spend bitcoins?

As of this writing, there are thousands of businesses listed

Additionally, companies such as Coinbase and BitPay enable

on coindale.com and other Bitcoin directories. A few notable

merchants to accept payment in bitcoins with the addition

brands that accept bitcoins are shown below.

of a simple payment button, similar in the way they can accept payment through other services such as PayPal.

17

What else can Bitcoin be used for?

While the speculative, transactional and funds-transfer

to itself as “Trusted Timestamping on the Bitcoin Blockchain,”

aspects of Bitcoin have received the most press to date, it is

uses the underlying shared ledger of the Bitcoin network to

the underlying foundation of the Bitcoin network that perhaps

unimpeachably store timestamps of when documents were

holds the most long-term promise. Lightspeed Venture

created. What are the types of industries that could be disrupted

Partners India states that “the underlying Bitcoin protocol

by an application like this? Any service or situation where ab-

makes itself applicable beyond the use cases of ‘store of

solute proof of a document is required is a potential candidate.

value’ and ‘payments.’ The Bitcoin Foundation took a huge

This means everything from notaries to documenting prior art in

step in allowing meta data to be included in the blockchain.

the patent process, and from transferring auto titles to real esta-

This will unlock a lot of innovation.” Venture capitalist Fred

te could potentially be affected. And this is just one example.

Wilson of Union Square Ventures, an early investor in Coinbase,
agrees and is looking forward to opportunities that address

Just as the first television shows were merely individuals on

“Bitcoin as infrastructure.” Similarly, Chris Dixon of Andreessen

stage reading scripts (since that what was done using the pre-

Horowitz, another significant investor in the space, sees

decessor technology, radio), the first applications of the Bit-

many aspects of Bitcoin being very interesting.

coin network will likely mirror existing processes. That said,
the most interesting aspects will likely take a few years to

So, what does a service on top of the Bitcoin infrastructure

come to light and will use this new infrastructure in ways we

look like? Once initial example is BTProof. BTProof, which refers

haven’t yet imagined.

19

What does the government
think about all this?
What does the government think about a financial infra-

The bottom line is that government regulation of Bitcoin is

structure that doesn’t have a sovereign nation backing it?

a rapidly evolving area. A site called BitLegal is tracking Bit-

The answer is...it depends on which government you are

coin’s status in many countries around the globe. As this

talking about. Certain countries, such as Thailand and Iceland,

is a fast-moving area, it is recommended that you do your

historically have been hostile toward Bitcoin. Others,

own investigation into any particular government’s positi-

including the United States, have taken a more tempered

on with respect to Bitcoin.

approach.
One of the biggest areas of concern and interest in the
United States has been in the area of how Bitcoin activities
will be taxed. At the current time, the IRS has not given any
formal guidance in this area, although individuals on sites
like Forbes and representatives from the HR Block Tax
Institute have offered their speculation.

20

Where did Bitcoin come from?

A whitepaper outlining the fundamentals of Bitcoin was

Although journalists from The New Yorker, Fast Company

published in 2008 by Satoshi Nakamoto, and the first open

and other publications have spent an impressive amount of

source code based on the whitepaper was released in 2009.

effort attempting to determine the true identify of Satoshi,
the fact that Satoshi’s identity is unknown is less important

In the ensuing years, it has come to light that “Satoshi Na-

than the system itself. Since the system is transparent, it

kamoto” is itself a pseudonym for the developer (or group

matters little who created it.

of developers) who created Bitcoin. While the true identity
of Satoshi is unknown, there is negligible impact to Bitcoin
itself as a result of this “mystery.”
Since Bitcoin is an open source protocol, any developer
can examine firsthand the code that underpins the system.
In fact, thousands of individuals have done so over the
ensuing years. In this fashion, the Bitcoin system is no
different than other open internet standards such as HTTP
and SMTP (the protocol that underpins internet email).

21

What is Bitcoin mining?

One of the interesting aspects of the Bitcoin network is that

on the network to validate the current set of transactions

there is a predictable, consistent approach to the number

(called a “block”) and solve an intensive cryptographic

of bitcoins that are in circulation. New bitcoins are added

puzzle is rewarded with a bounty of bitcoins. At the current

to the economy on a regular schedule by way of a process

time, the reward is the sum of 25 bitcoins, which is about

called mining. There are currently approximately 12 million

USD$25,000 at current exchange rates. In other words,

bitcoins in circulation, a number that will rise to 21 million

about once every ten minutes, a miner on the network is

by about the year 2140.

reaping a fairly sizable reward.

When someone sends bitcoins to another individual on the

This mining reward is one of the keys to the growth of the

network, that transaction needs to be verified by the mem-

Bitcoin network. In the early days of Bitcoin, the crypto-

bers of the network in order to prevent individuals from

graphic puzzles were comparatively easy. However, the

attempting to “double spend” those bitcoins. All of the

creators of the Bitcoin protocol anticipated the fact that

computers attached to the Bitcoin network are engaged in

there may be an explosion of interest in the system, and

the process of verifying those transactions. The incenti-

built in a number of thoughtful mechanisms. For example,

ve to keep one’s computer attached to the network is that

mining of bitcoins gets more difficult if there are many

once every ten minutes or so, the first computer (miner)

computers connected to the network, and the bounties get

23

smaller over time as well. Both these factors contribute to
predictability in the number of bitcoins that are created.
In the early days of Bitcoin, mining was often done on a
home computer. However, as the cryptographic puzzles
have become more complex, the computing power required
to solve the current block has outstripped the capabilities
of most home miners, and is now performed almost exclusively on purpose-built, high-performance hardware that is
specifically built for mining bitcoins.

24

What are the risks?
Isn’t it a Ponzi scheme?
Bitcoin is only beginning to move past the earliest adop-

investments in mining hardware will become obsolete at

ters and be noticed by the mainstream. As such, much of

an ever-increasing rate. Alternative cryptocurrencies (e.g.

the true “risk” around solutions and companies being crea-

Litecoin) could come into vogue and reduce the interest in

ted using the Bitcoin network is due to market acceptance

Bitcoin. In classic early-market fashion, there are many un-

and timing, rather than technical uncertainties in the un-

certainties.

derlying Bitcoin protocol itself. As has been noted, the Bitcoin network itself is built using open source code, which is

A lesser-discussed, but notable risk in any system with limi-

available for inspection by anyone.

ted resources is the “power law” problem. Simply put, many
systems, and especially financial systems, have a tendency

There are definitely risks in the overall Bitcoin ecosystem.

to concentrate wealth. Bitcoin seems to be no exception,

Speculation on the value of bitcoins themselves is currently

with some estimates stating that half of all bitcoins are

an extremely volatile proposition. The exchange rate bet-

owned by only 927 people. This makes the concentration of

ween bitcoins and other currencies fluctuates wildly. Ra-

wealth in bitcoins slightly worse than the concentration of

pid advances in mining technology based on ASIC (appli-

wealth in the United States, where the top 1% of individuals

cation-specific integrated circuit) technology means that

hold on the order of 40% of the national wealth.

25

A commonly-asked question is “is Bitcoin a Ponzi scheme?”
In a Ponzi scheme, later investors are the source of cash for
the early investors, and the entire scheme is built on that
pyramid structure. Bitcoin does not have these traits. Yes,
there are aspects of risks, but, no, Bitcoin is not a Ponzi
scheme.

26

Acknowledgements
The ecosystem around Bitcoin is evolving rapidly, and this document is a snapshot in time as this market begins
to evolve. A special thank you to Steve Alter, Jay Baer, Micah Baldwin, Sean Bohan, Rick Calvert, Zachary Chastaine, Virginia DeBolt, Julie Schwab Delgado, Chris Eldridge, Susan Etlinger, Jonathan Faustine, Tom Foremski,
Janet Fouts, Tom Gebarowski, Heather Gold, John C. Havens, Kevin Jones, Douglas Karr, Eric Kaun, David Kay, Ellen Petry Leanse, Mark Nelson, Lizanne Ray, John Scholvin, Marla Schulman, Susan Scrupski, Ted Shelton, Marty
Thompson, Kelly Galvin Tirman, Robert Tolmach, Josh Weinberger, Joel Winter and most importantly Lisa Stone
for their questions, input and support.

http://coindale.com/bitcoinbook


Conversational Bitcoin: The Ebook

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