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Jumping Into the Bitcoin Bubble

When the Bitcoin bubble popped earlier this month, I thought it would be the perfect opportunity to jump into the market and see what all the fuss was about.

Bitcoin, for the uninitiated, is a digital currency introduced in 2009 by a developer with the pseudonym Satoshi Nakamoto. It is not a physical currency, but rather a digitally maintained public ledger of transactions called the blockchain. When somebody buys Bitcoin, the blockchain is updated to reflect the change in ownership, and again when that person uses the Bitcoin. This is not done with names, but rather anonymous addresses – hence Bitcoin’s designation as a “cryptocurrency.”

The blockchain is maintained by Bitcoin “miners” who are rewarded with newly minted Bitcoin. The mining process originally could be done by any individual with a computer and some tech acumen, but it was purposefully designed to become increasingly more complex, to the point where it now requires tremendous computing power to mine new Bitcoins.

Bitcoin is not 100% anonymous, however, as a savvy individual could use the anonymous addresses from the blockchain to determine the identity of a Bitcoin owner. Nevertheless, it provides greater anonymity than other online transactions such as credit cards and Paypal.

The currency was recently catapulted into the national consciousness when the U.S. government shut down the Silk Road black market, seizing $28.5 million in Bitcoin and arresting its founder, Ross William Ulbricht, AKA Dread Pirate Roberts. This once-obscure cryptocurrency has been steadily gaining value in 2013 and was recently the subject of a congressional hearing.

It was around this time that our publisher, Jane Hamsher, asked if I would be willing to conduct an experiment. My mission was simple: try living on Bitcoin for a week in New York City and write about it. I’m a pretty good candidate for the experiment – I don’t have any children, pets or a mortgage, so I can really only harm myself by doing this. I also live in a city with excellent public transportation, have a steady internet connection and a job – all of which could be major advantages to maintaining a Bitcoin lifestyle.

I began monitoring Bitcoin as its price reached an all-time high and subsequently came tumbling down on the news that the People’s Bank of China would stop financial institutions from selling, trading or storing Bitcoin. Prices plummeted from their late-November high of more than $1,100 per Bitcoin to $522.23 last Wednesday. This was not the first time Bitcoin sustained a serious price tumble (the currency is notoriously volatile), but it was one of the largest devaluations to-date.

As I write this, prices have slightly rebounded to $740/BTC, so perhaps reports of Bitcoin’s demise have been a bit premature. Nevertheless, most Bitcoin observers consider China’s move to be a serious blow to the perceived viability of the cryptocurrency. Bitcoin has already had issues related to theft and fraud, with one user losing as much as $500,000 worth of Bitcoin after being hacked. However, the Chinese crackdown revealed yet another danger for potential investors: it is not completely free from the whims of governments.

I’m not really interested in Bitcoin from a speculative, money-making perspective as most of its investors are – I’m curious about its viability as a useable everyday currency, both online and in the ‘real world.’ So with all this uncertainty, risk and money on the line (and prices at their lowest point in weeks) now sounds like the perfect time to jump on this crazy train!

I want this experience to be as helpful to others as possible. So before I embark on the adventure of living on internet money, let me lay out some of my plans, limitations, ideas and hopes going forward. I’ve done a lot of research, but I’d love the help and input of all of you out there as well.

Timeframe:

I’ll probably spend my week on Bitcoin sometime after the new year. It will take a little time to acquire the Bitcoin. I’ve setup a wallet, the software where one “holds” his bitcoins, but I am still researching the various exchanges where one can purchase Bitcoin. This is an important and complicated first step and if anyone has any recommendations in this regard please leave them in the comments.

Experience:

I’m a Bitcoin novice. I’m not a hacker nor am I an economist with an expertise in monetary policy. I’m hoping to learn more about the technology and economics behind Bitcoin and communicate that via these posts, but I won’t be teaching anyone how to mine Bitcoin.

Limitations:

It’s worth pointing out up front that this is by no means a perfect experiment, nor will I truly be living only on Bitcoin: My rent will already be paid for (I’m fairly certain my very old-school, Italian landlord would smack me upside my head if I suggested paying him in cryptocurrency), as will basic utilities like heat and electricity (although I’d be interested to learn if there were ways to pay these via Bitcoin). Perhaps most importantly, my smartphone, laptop and internet connection are all already paid for. Obviously these are the most essential items to living a Bitcoin lifestyle – so somewhat ironically, it would be very difficult to ascertain Bitcoin without fiat money.

Goals:

I want this to be an interactive experience. I’m certainly not the first person to attempt living on Bitcoin. Kashmir Hill had an excellent series in Forbes earlier this year where she did exactly the same thing. In fact, living on Bitcoin will be easier for me as I work from home and don’t have to worry about the mundane challenge of commuting. So I want to use this opportunity to really evaluate Bitcoin’s usefulness beyond mere practicalities. I want to discover the breadth of items a person can buy and tasks a person can accomplish with Bitcoin, and I want our readership to help suggest those tasks. Can I see a movie with Bitcoin? Get a beer? If you know the answers to these, share them. If you have other questions, share them. We’ll do this together.

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Zach Tomanelli

Zach Tomanelli

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