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How to Spend Bitcoin

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Exit strategies of cryptocurrency

So you’ve owned bitcoin for a while and have even made a little money on it. It has been fun watching the market value of bitcoin go up, but now you need to buy a few things and don’t have any fiat currency. This means it’s time to spend your bitcoin.

There are major paths to spending your bitcoin. You can either find a place that directly accepts cryptocurrency, use a wallet that converts the cryptocurrency to fiat currency before paying, or convert your cryptocurrency back to fiat currency yourself before paying.

Find a Place that Accepts Bitcoin

As simple as this sounds, bitcoin is still not widely accepted by merchants, online or brick-and-mortar, in the world. You will have to seek out merchants who accept bitcoin and then hope they have what you’re looking for.

In addition to simply paying for a good or service, you could trying gambling or donating your bitcoin. Casinos have started permitting deposits using bitcoin, and the result has worked out relatively well so far, so this is expected to continue. Donations are possible for certain charities,

Paying Online

Merchants such as Microsoft, Overstock, Newegg, and Dell are probably the largest companies who work with bitcoin. The hope is Amazon will begin to accept it in the future, but for now this is a great start and opens up a lot of options for users looking to spend their bitcoin.

The biggest reason why these companies are willing to accept it is it is an appreciating good and there are lower fees than if a user buys something with a credit card. Credit card companies take a percentage cut which hurts the company in the long-run. In this sense, bitcoin is disrupting those companies as well.

In terms of large platforms, PayPal and Shopify both have an integrated bitcoin payment capability. This will have an even larger effect than the previously mentioned merchants accepting bitcoin because of the scalability of the use. It will allow a large percentage of merchants to accept the cryptocurrency with little to no work, and will therefore greatly increase the utility of bitcoin.

Paying in Person

It is rare you will find a store that accepts bitcoin by happenstance. Right now, this occurs more often as a form of gimmick or promotion that will get a store or restaurant publicity. Some places have put out QR codes for tips or donations, but this is the exception and shouldn’t be counted on.

If you are intent on spending your bitcoin in person – meaning you transfer the money directly from your wallet to the merchant’s wallet, then do your research ahead of time. Coinmap.com is a service which provides an aggregation of all the known stores who accept bitcoin.

Use a Wallet

Now that cryptocurrencies have reached somewhat of a critical mass, we are seeing a lot more businesses pop up with the goal of making it easier to spend your bitcoin. There is a huge opportunity in being able to unlock the utility of bitcoin as a medium of transfer, and these businesses are working on doing just that.

Companies like TenX and Monaco whose sole goal is unlocking the spending power of bitcoin. These companies work to integrate their platform so when you use their version of a credit card, it converts your cryptocurrency into the appropriate currency and spends it. Their product depends on cheap conversion fees and maximum convenience.

Even if you had never held bitcoin before, having a credit card that could spend your money in the appropriate fiat currency and minimize your fees would be a superior value proposition. These companies know what ails most consumers and want to make it easier to manage all your finances in a centralized manner.

Basically, they are using the opportunity afforded by cryptocurrency’s inconvenience to leverage their platform so they can replace the service offering of big banks. By providing flawless currency management, helping to manage spending, and enabling frictionless instant payments, they become the best option in the market.

Convert it Yourself

Sometimes the easiest way to spend your bitcoin is to just convert it back to fiat currency and spend it yourself. This would be done over an online exchange, but requires less of a time investment and is more convenient. You will have enjoyed an increase in the market value of your investment, and even though this might be the most inefficient in terms of transaction fees, it gives you the most freedom to spend your cryptocurrency on whatever you wish.

Conclusion

Every day it becomes slightly easier for you to spend bitcoin. Businesses want to make it as easy as possible for people to pay with it, not to mention the fact that it doesn’t cost them as much as if you were to use credit cards. Online payment processors and wallet start-ups are both working to make it a simpler process to utilize bitcoin freely. As a result, a few years from now you will probably find there is minimal friction when you go to spend bitcoin. In a way, this is what technologists mean when they talk about bitcoin being widely adopted.

Featured image courtesy of Shutterstock.

Important: Never invest (trade with) money you can't afford to comfortably lose. Always do your own research and due diligence before placing a trade. Read our Terms & Conditions here. Trade recommendations and analysis are written by our analysts which might have different opinions. Read my 6 Golden Steps to Financial Freedom here. Best regards, Jonas Borchgrevink.

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  1. topsytervy

    February 22, 2018 at 9:39 pm

    Hi i have commented on a different post on hacked as well, I am unsure why ten X and monaco are being brought up as industry leaders in this area. Considering wavecrest has made the VISA partnerships useless to current card holders. STK token has a beta version available and you will be able to spend crypto via their app in Canada(card or tech similar to apple pay) in June and then in the US after the Canada launch.(5 year mastercard partnership already in place) I believe they will be first to market but METAL seems to be close behind.Thanks for the article, will be great when this gap is merged.

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The Sharding Solution

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In recent months, the news has been rife with cryptocurrency detractors quick to point out flaws in bitcoin or Ethereum, and this has created the need for the development community to come up with novel solutions to the problem at hand.

First – What’s the Problem?

Bitcoin and Ethereum both currently operate on a proof-of-work protocol. This protocol offers a very high level of security; however, this comes at the catch of being very resource intensive. As these cryptocurrencies continue to scale, this is becoming an issue.

The three big issues that are presenting themselves are latency, throughput and scalability (inability to perform at an even higher volume). With some transactions taking between a few minutes and a few days (depending on the transaction fee you pay), it is hard to imagine how this model could handle higher traffic. Bitcoin is currently limited, to 3-7 transactions per second, and Ethereum is limited to 7-15. Neither of these figures are encouraging.

As a result, novel solutions like “proof-of-stake” protocols are being invented in order to improve the speed at which transactions can be processed. Sharding is an offshoot that shows promise, and the founder of Ethereum has indicated it will likely be implemented in the future for the network.

Explaining Sharding

A common engineering solution is to split a bigger problem into smaller problems and solve them one at a time. Sharding is a solution that follows a similar train of thought. The way it works is by taking the entire network and splitting it into a bunch of smaller subsets. Each subset of nodes is called a shard, and this takes away the need for each node to go through the entire transaction history in order to verify a transaction.

The term “shard” comes from the idea of a fragment of glass or pottery. The whole is split into smaller component pieces that govern themselves much like states do within a larger country.

One possible means to split up the network is based on the first digits of the public addresses, but there are many other methods that are being floated around.

By requiring its own set of validators, proof-of-stake becomes a prerequisite for the functioning of a shard. By requiring a proof-of-stake protocol to properly function, sharding becomes more practical for Ethereum in the short-term when you examine Vitalik Buterin’s recent comments on the scaling of Ethereum.

Benefits of Sharding

Sharding is necessary for the key reason that these networks need to find a way to grow, otherwise their value will be significantly limited. Implementing a solution like sharding serves to both increase the flexibility of the network while limiting the amount of storage required for it to function.

The difficulty in changing the networks from their current proof-of-work protocols is that they need to keep maintain their security, otherwise they lose all value. Sharding seems to be one of the few solutions that solves the scalability problems while still being secure.

Potential Risks

Every solution comes with downsides, and it is important we address those of sharding. As with proof-of-work, the problem comes from the same thing that makes sharding powerful. Shards are designed to make it easy to transact with other users on the same shard. However, transactions between shards becomes complicated and add an extra layer of complexity to the solution.

If facilitating communication between the shards proves to be too difficult, then the solution has no merit. There are several workarounds that have been theorized (such as transaction receipts), although a lot of work must be done before this is brought to fruition.

Another potential issue is what happens when you create all these small shards. Will they be vulnerable to 51% attacks because of their size, or will the proof-of-stake method still make this too costly to be feasible? The value of the bitcoin and Ethereum network is in their security, so they need to be able to guarantee sharding’s efficacy before implementation.

The final thing to make clear is that this is only a potential solution, and it has not been tested yet, so we have no idea how well it would work or what the results of its implementation will be. For that, only time may tell.

Featured image courtesy of Shutterstock.

Important: Never invest (trade with) money you can't afford to comfortably lose. Always do your own research and due diligence before placing a trade. Read our Terms & Conditions here. Trade recommendations and analysis are written by our analysts which might have different opinions. Read my 6 Golden Steps to Financial Freedom here. Best regards, Jonas Borchgrevink.

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Understanding the Lightning Network: Where We Stand

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The scaling of bitcoin’s network has long been a source of strife among supporters and detractors alike. As the network gained momentum over the last few years, users have seen both the transaction fees and wait times increase significantly.

Other cryptocurrencies have spawned based on this weakness, but bitcoin’s development community is hard at work on the scalability problem. The most promising project at the moment is the Lightning Network.

The Shortcomings of Bitcoin

Bitcoin’s original promise of being able to create a trustless network that enabled immutable financial transactions is still true to this day. With the implementation of SegWit on August 24th, 2017, it was hoped that the issues could be solved by finding a roundabout way to increase the block size. However, the protocol has not been widely adopted, and as such, a new solution is required.

This is where the need for the Lightning Network arose from, and it has been in development since 2015. The simplest way to understand the network is that it helps manage bitcoin transactions without executing them directly on the Bitcoin blockchain.

The Basics of the Technology

The core idea behind the Lightning Network is that you can create small “bidirectional payment channels” that act as a running tab between two accounts. The smart contracts determine how much is owed to who, but none of this is stored directly on the blockchain until a payment is rendered. Basically, it is a running tab system that allows for microtransactions. Allocations are made between parties off-blockchain, with all the confidence of performing commerce on-blockchain.

Multi-signature wallets are the connecting force that acts as a running tab in a safety deposit box for the two parties. Their cryptocurrency sits in the wallet and is debited and credited according to the pre-existing agreement.

The result is that all of the different payment channels connect multi-sig wallets to create a network of two-party ledger entries. This means you don’t need to have a wallet between every duo that wishes to do transfer money. The connections can occur across a network of users with the same effect.

The Benefits of Lightning

The most salient benefit of the Lightning Network are the faster payments at a lower cost. The presence of instant payments will increase the usability of the entire network, and the smart contracts used will still be secure enough to prevent tampering.

As we mentioned before, the Bitcoin network was previously limited by its lack of scalability, so on a meta-level, the lightning network is enabling the network to continue its expansion.

The presence of the Lightning Network will also enable cross blockchain transactions (also known as atomic swaps), even with heterogeneous blockchain consensus rules. The enablement of these instant transactions between blockchains will eliminate the need for third party custodians and change the way the networks interact.

Where We Are Now

In order for Bitcoin to be a viable payment option in the future, something like the lightning network is absolutely essential. Scaling requires the ability for small payments to be made quickly, otherwise it will never be feasible to make everyday purchases like coffee or lunch with bitcoin.

Looking at all the potential benefits listed above, it is clear that the lightning network will have a drastic effect not only on the Bitcoin network, but the entire cryptocurrency ecosystem. As such, the protocol is not only being developed for the Bitcoin network, but many other of the top cryptocurrencies (Litecoin, Stellar, zcash, Ethereum, and Ripple). The test results are starting to come in, however, none of the implementations are ready for launch yet. Lightning Labs has released a beta version, but before this technology can change the industry, a lot more work must be done.

Featured image courtesy of Shutterstock. 

Important: Never invest (trade with) money you can't afford to comfortably lose. Always do your own research and due diligence before placing a trade. Read our Terms & Conditions here. Trade recommendations and analysis are written by our analysts which might have different opinions. Read my 6 Golden Steps to Financial Freedom here. Best regards, Jonas Borchgrevink.

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What is Proof of Stake?

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Newbies to the cryptocurrency space often struggle to understand how the mining mechanism works. The idea of having a cryptographic algorithm that mints new coins to reward those who help maintain the blockchain isn’t exactly a natural one, and a long explanation is usually required.

But once this group understands how the traditional proof of work theorem functions, they often find out that there are algorithms different than the one implemented by Satoshi in the beginning.

Where Proof of Work Falls Short

News stories keep surfacing about the growing energy requirements of networks using proof of work algorithms. The enforced scarcity of coins means that as more miners join the network, the amount of computation required continues to increase. Not only is this not sustainable in the future, but it also prices out smaller mining pools that don’t have the capital required, leaving a market structure similar to the oligopoly of the banking industry.

Additionally, from an economic standpoint, the proof of work theorem is vulnerable to the tragedy of the commons. This is an economic scenario where users are incentivized to act in accordance with what is best for them, rather than what is best for the group. Profitability on mining coins like Bitcoin will begin to fall, and that will drive miners out of the market, hurting the whole network.

Proof of Stake as an Alternative

So if proof of work rewards you for the amount of work you do, proof of stake will reward you for the amount of coins you hold. You will mine coins in proportion to the amount you hold, which is much like the traditional interest rate structure.

Our previously described tragedy of the commons issue is solved, because people now have reason to continue holding the coin and are rewarded for it. Additionally, the centralization risks are minimized, as those with the most mining power or capital are no longer in control.

51% attacks are hardly a worry on the Bitcoin network, because you’d need to gain access to more than 51% of the computing power of the network. However, with PoS there is an even smaller risk because of how expensive it would be to buy 51% of a coin, only to devalue it.

Many Cryptocurrencies Using It

Since the incentives are different, proof of stake algorithms essentially change the entire structure of the market for a cryptocurrency. The fact you can earn coins just by holding cryptocurrency would be very appealing as an alternative to using tons of electricity.

Dash, or digital cash, may be the best known cryptocurrency using PoS, but NEO, PIVX, and many more are currently using it. The incentives change when you use these coins, because of all the additional benefits of just holding them. Often the only way to gain this interest is by joining a masternode or having a significant amount of coins yourself, but it is still something worth looking into.

Finally, we are finally starting to see larger cryptocurrencies like Ethereum considering a move to a hybrid algorithm that uses proof of stake as well, it is clear the consensus method will finally get tested at scale.

The Risks of PoS

As with any solution, there are risks involved with the potential implementation of proof of stake algorithms. The biggest risk inherent in a proof of stake system is that the bad actors aren’t pruned out in the same way as with a proof of work system. They can continue to collect “interest” while they vote for “invalid” blocks, and not be harmed in any way. For the proof of stake system to work, this problem will eventually need to be solved, but at the same time, it shows a lot of potential.

Featured image courtesy of Shutterstock. 

Important: Never invest (trade with) money you can't afford to comfortably lose. Always do your own research and due diligence before placing a trade. Read our Terms & Conditions here. Trade recommendations and analysis are written by our analysts which might have different opinions. Read my 6 Golden Steps to Financial Freedom here. Best regards, Jonas Borchgrevink.

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