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The how and why of buying bitcoin

The basic idea of bitcoin is simple: Instead of a financial institution holding a bank ledger, a chain of computers linked through the internet are all using the same software to record and verify every transaction. But how can a cryptocurrency be worth anything in the first place? Economics correspondent Paul Solman reports.

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  • Judy Woodruff:

    You have probably been hearing a lot about the digital currency Bitcoin, and the technology behind it called blockchain.

    You may have had the time, though, to ask, what is it and why would you want to use it?

    Our economics correspondent, Paul Solman, is here to help explain.

    It's part of his weekly series, Making Sense, which appears every Thursday.

  • Paul Solman:

    Think of this story as news you can use – how to buy Bitcoin, and know what you're buying. Turns out, in many big cities, you can do it right around the corner, though I wrangled an MIT computer scientist, Neha Narula, into coming with me for guidance.

  • Neha Narula:

    It actually works the opposite way to a regular ATM. You give it cash, and it gives you Bitcoin.

  • Paul Solman:

    True, I could have just gone to the online currency exchange Coinbase, which, in the midst of this cryptocurrency craze, now has more account holders than Charles Schwab. But, hey, why go online when you can hop on down to a Quality Mart, the kind of emporium where crypto-ATMs are cropping up?

  • Chafik Hamadeh:

    I thought it was going to be a waste of space, but I was very wrong. A lot of people come and use it, a lot.

  • Paul Solman:

    Co-owner Chafik Hamadeh was initially sold by the $300 he got to host the machine. Turns out to have more than earned its keep.

  • Chafik Hamadeh:

    It brings in a lot of traffic, people that normally wouldn't be coming to this area.

  • Paul Solman:

    And how much money does a typical customer put in, as near as you can tell?

  • Chafik Hamadeh:

    A lot. I have seen people put in a lot of money in that machine.

  • Paul Solman:

    Really?

  • Chafik Hamadeh:

    Yes. I have seen people put in $6,000. I have seen people put in thousands.

  • Paul Solman:

    Are you amazed when you see it?

  • Chafik Hamadeh:

    I am. I'm kind of shocked.

  • Paul Solman:

    And the higher Bitcoin's price, the nuttier things get, says Narula.

  • Neha Narula:

    This technology is really exciting. And I think it could potentially change the world, but the mania and the hype right now is completely insane and unfounded.

  • Paul Solman:

    Hey, you can even see the mania at MIT, in its Media Lab's insanely popular cryptocurrency design class, standing room only.

  • Man:

    Today, I'm going to talk about signatures.

  • Paul Solman:

    Good thing I brought Narula, who runs the course, to the Quality Mart, because some of us need an MIT professor just to buy $20 bucks worth of Bitcoin, much less figure out what we're really doing.

    So I'm setting up my Bitcoin wallet. The wallet, which holds the key to the Bitcoin, is a sine qua non. Narula advised me to set up mine up via mobile app called Copay.

    Are you being watched? Now is the perfect time to assess your surroundings. Nearby windows? Hidden camera? Shoulder spies? Apparently not. Anyone with your backup phrase can access or spend your Bitcoin. You can make a safe backup with physical paper and a pen. I understand.

    The backup phrase is literally your personal key, a dozen words in a particular order.

    And so these are just 12 sort or random words, all simple words.

  • Neha Narula:

    Yes, English words. That way, it's easier to write down. And even if you lose this phone, right, even if this phone falls into the ocean…

  • Paul Solman:

    Yes.

  • Neha Narula:

    … you can use those 12 words to get your money.

  • Paul Solman:

    But if you lose the phrase, bye-bye, Bitcoin.

  • Neha Narula:

    The company that made this app doesn't have access to your money at all. Only you have access to your money. And what that means is that, if you lose this, you can't call them up and ask them to help you get your money back. It's gone.

  • Paul Solman:

    Forever. So, now I'm writing these down.

  • Neha Narula:

    Yes.

  • Paul Solman:

    I have to do this, so that the camera doesn't see.

  • Neha Narula:

    Yes. And, normally, I shouldn't see either. But it's only $20. So…

  • Paul Solman:

    You know what? If my $20 suddenly disappears, you're the prime suspect.

    (LAUGHTER)

  • Paul Solman:

    I'm now going to put it in my wallet.

  • Neha Narula:

    Yes.

  • Paul Solman:

    But, of course, I almost left my wallet somewhere yesterday.

  • Neha Narula:

    Exactly.

  • Paul Solman:

    That's my leather wallet. But I need to get my smidgen of cryptocurrency into the cyber-wallet.

  • Neha Narula:

    You're going to scan it right there.

  • Paul Solman:

    So the ATM scans the wallet you have just created.

  • Neha Narula:

    I think it worked.

  • Paul Solman:

    And then you put some good old-fashioned paper money into the automated teller machine.

    Take a $20 bill out of here. And let's see. We put it in here.

    And after paying over $6 in processing and transaction fees…

  • Neha Narula:

    You're going to get .0016 Bitcoin.

  • Paul Solman:

    Sixteen-then-thousandths of a Bitcoin?

  • Neha Narula:

    That's how much that $20 turns into.

  • Paul Solman:

    At that day's Bitcoin price of $8,600, the equivalent of $13.82.

  • Neha Narula:

    Man, this thing charges a lot of money.

  • Paul Solman:

    OK, without spooking you with the highfalutin math that goes into actually buying and spending what's in your wallet, hacker-free, the basic idea is simple.

  • Neha Narula:

    Really, it's an entry in a ledger, except, instead of a financial institution holding this ledger for us, there's a whole bunch of nodes all around the world that are running this computer program that takes care of the ledger for us, makes sure all the transactions are correct and keeps track of who has what Bitcoin.

  • Paul Solman:

    And that is the Bitcoin blockchain, a chain of computers linked through the Internet, all using the same software, to record and verify every Bitcoin transaction.

    And, therefore, nobody can cheat because everybody is watching.

  • Neha Narula:

    Exactly. And no one controls it. It's controlled by everybody altogether.

  • Vikram Mansharamani:

    It's a distributed form of trust.

  • Paul Solman:

    A single individual can't corrupt the blockchain, says investment guru Vikram Mansharamani.

    But we don't know if somebody cannot figure out a way…

  • Vikram Mansharamani:

    That's true.

  • Paul Solman:

    … to manipulate an entire network.

  • Vikram Mansharamani:

    Sure.

    Yes. I mean, look, there are rumors that there are fields and fields of computers at work in Eastern European and other parts of the world designed explicitly to take over networks.

  • Paul Solman:

    Indeed, there's speculation, and some evidence, that Russia is both mining Bitcoins and hoarding them.

  • Neha Narula:

    Part of Bitcoin's threat model is that no single entity ends up getting a majority of the processing power in the network.

  • Paul Solman:

    This is the 51 percent attack.

  • Neha Narula:

    Yes. If somebody got 51 percent of the processing power in the network, they could theoretically rewrite history and change the state of transactions in the ledger.

  • Vikram Mansharamani:

    So they haven't been successful yet. Might they be successful in the future? Who knows? None of this is purely failsafe.

  • Paul Solman:

    Now, you may also be wondering, how can a cryptocurrency like Bitcoin, which is nothing but computer code, be worth anything anyway?

    Or, as Bill Maher put it-

  • Bill Maher:

    Someone has to explain to me the difference between Bitcoin and me saying, this hunk of foil I just rolled up into a ball is worth a million dollars.

    (LAUGHTER)

  • Paul Solman:

    Well, says Neha Narula:

  • Neha Narula:

    Why is gold worth anything, right? And money's sort of the system that we created to be able to transact with each other efficiently. And the reason that a bead or a shell or a gold bar or a coin or Bitcoin has value is because we have all decided it has value.

  • Paul Solman:

    And it's even more valuable to those who use it for illegal transactions, since it's hard to tax, hard to trace.

    Now, just like there are different kinds of physical currency, gold, silver, greenbacks, yen, so there are different cryptocurrencies, hundreds of them now. Even the Quality Mart ATM offers several crypto-options.

    So, I can buy Bitcoin, Litecoin or Ethereum here?

  • Neha Narula:

    Yes, looks like it. Yes, this supports all three of them.

  • Paul Solman:

    So why so many?

  • Neha Narula:

    We're in a stage where we really need to experiment. We don't know that Bitcoin is the right design. And Bitcoin, because it's very decentralized and it's very robust to failure, it's actually really hard to change.

    So one way that we experiment in this space is with other cryptocurrencies. We design a new one that works slightly differently than Bitcoin, and we see how that goes.

  • Paul Solman:

    And differently means what?

  • Neha Narula:

    One thing differently could mean is, it processes more transactions per second, it makes different trade-offs in terms of security vs. ease of use.

  • Paul Solman:

    But I'm a Bitcoin man and I have got a stake worth nearly $14 when I bought it in February. Less than $12 as I record this in late March. Maybe more than $25 if the price goes back to where it was in January, or maybe down to, I don't know, 25 cents if Bitcoin retreats to the price it was when we did our first such story back in 2013, Bitcoin at what then seemed a stratospheric $125.

    But at the Quality Mart on the corner of Boston's Mass Ave and Beacon Street, even though Bitcoin has lost more than half its value since the start of the year, folks were still buying.

  • Chafik Hamadeh:

    Yesterday, I saw someone put in 3,000.

  • Paul Solman:

    Were people putting in money when Bitcoin was up $18,000, $20,000?

  • Neha Narula:

    More so than now. Yes, they were buying a lot, thinking it was going to keep going.

  • Paul Solman:

    At the moment, of course, it looks like they were buying high.

    And, in fact, there are plenty reasons to think today's price is still a hot air balloon, with nowhere to go but down. That, however, is a story for another Thursday.

    For now, this is economics correspondent Paul Solman, reporting from Boston for the "PBS NewsHour."

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