Unless you've been living under a rock for the last few weeks, you've probably heard the word Bitcoin thrown around in the news quite a bit. If you're a bit more web savvy, or an active Redditor, chances are you've known about it for a few years. But, do you really know what Bitcoin is, how it works, or where it comes from?
Given the recent uptick of interest in, and value of, Bitcoin, I decided to do a little digging to see what I could find out. Going into my investigation into the so-called virtual currency, I found myself pleasantly surprised about a number of things. Specifically, how it functions, how it's created, and the mystery surrounding its founding father.
Bitcoin is a "virtual currency," born on and carried over the internet. It is a virtual currency in so far as it is entirely web-based and does not derive its value from any hard substances like gold or silver. I find myself chuckling a bit when I hear it described as virtual, not that it isn't true, but because all money is an abstract perception of value. Our dollars aren't backed by any hard substance, they're simply a means to avoid bartering. And in the entire USD money supply, only around 3% of it is in paper form, approximately 97% of it exists digitally. On top of that, the supply of money is controlled by a Central Bank, inflating and deflating the money supply as they see fit and as a means of attempting to control business cycles (ha!)
With Bitcoin, there is no central bank. There is no central planner of the bitcoin supply. Why don't we have a look at how Bitcoin is created and distributed. Per a fantastic article in the New Yorker:
bitcoins function essentially like any other currency, and are accepted as payment by a growing number of merchants, both online and in the real world. But they are generated at a predetermined rate by an open-source computer program, which was set in motion in January of 2009. This program produced each one of the nearly eleven million bitcoins in circulation (with a total value just over a billion dollars at the current rate of exchange), and it runs on a massive peer-to-peer network of some twenty thousand independent nodes, which are generally very powerful (and expensive) G.P.U. or ASIC computer systems optimized to compete for new bitcoins.Bitcoin releases a twenty-five-coin reward to the first node in the network that succeeds in solving a difficult mathematical problem requiring a certain amount of brute-force computation (known as a proof-of-work calculation.) The solution is then broadcast throughout the network, and competition for a new block and its twenty-five-coin reward begins.
In this way, bitcoins are mined like gold used to be, in quantities that are small relative to the total supply, so that the supply grows slowly. There is an upper limit of twenty-one million new coins built into the software; the last one is projected to be mined in 2140. After that, it is presumed that there will be enough traffic to keep rewards flowing in the form of transaction fees rather than mining new coins. For now, the bitcoins are initially issued to the miners, but are distributed when miners buy things with them or sell them to non-miners who desire an alternative currency. The chain of ownership of every bitcoin in circulation is verified and registered with a timestamp on all twenty thousand network nodes. This prevents double spending, since no coin can be exchanged without the authentication of some twenty thousand independent cyber-witnesses.
In a sense, the digital currency acts as a natural resource with a finite supply as opposed to a fiat money system that is open to manipulation by banks and governments. There will never be a flood of bitcoins into the market since its very nature ensures that it cannot be counterfeited. It's an ingenius way to create a tamper-free currency for the connected world.
Furthermore, bitcoin users can spend their currency with complete anonymity. This works because every single bitcoin transaction is piped through what is known as a blockchain. Per Bitcoin.org, a blockchain is a shared transaction log on which the entire Bitcoin network relies. All confirmed transactions are included in the blockchain with no exception. This way, new transactions can be verified to be spending bitcoins that are actually owned by the spender. The integrity and the chronological order of the blockchain are enforced with cryptography.
A transaction is the transfer of bitcoins between bitcoin addresses. In order to spend bitcoins, you must download a virtual bitcoin wallet which is given a unique bitcoin address for use in transactions. These wallets use cryptography, in the form of complex mathematical problems, that make it virtually impossible for someone to hack into them and steal bitcoins.
So, we now have an understanding as to what the currency is and how it comes into existence. Are there legitimate uses for it? You bet.
Per a recent article in TechCrunch, bitcoin-related companies are en vogue in select Silicon Valley accelerator programs. Boost VC, a Menlo Park based accelerator, announced that it would be focusing on bitcoin-related startups for its summer class of companies.
And it's not just investors that are interested. More and more notable companies are beginning to allow payment in the form of bitcoins. Select companies include Wordpress, Reddit, and NameCheap (a domain registrar.) What was previously thought of as a currency for use strictly in the darkest depths of the Deep Web is slowly, but surely, turning into a currency for conducting legitimate commerce.
Bitcoin is an open source project that is run similarly to Linux, the open source operating system platform. The community of software developers for the Bitcoin universe is comprised of serious software engineers. But, interestingly enough, the identity of the currency's initial creator is something of a mystery.
Someone known only as Satoshi Nakamoto is believed to be the father of Bitcoin. Only, no one has ever actually met or spoken to him. Known only through online writings on blogs, message boards, and forums, he (or she) remains a mystery. Some believe Satoshi is really a consortium of programmers, others believe he may be a Russian economist / mathematician. No one knows for sure. Personally, I like to believe that Satoshi is an Artificial Intelligence that emerged from the depths of the internet in the aftermath of the Financial Crisis of 2008. Obviously this isn't the case, but given the nature of Bitcoin, it's fun to imagine.
As Bitcoin continues to gain ground and legitimacy, it will inevitably face scrutiny from government entities. It has already begun in earnest and will almost certainly increase as time goes on. While central banks inflate away the value of the dollar and the euro and financial crises continue to spread throughout the Eurozone, Bitcoin will only grow in value and notoriety. I am fascinated to see where this leads.
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What do you guys think? Anyone on WSO have a Bitcoin Wallet? Anybody have any experience buying things with bitcoins? What about the long run? Is Bitcoin here to stay or will major governments step in to crush it? Let me know in the comments.
no.
Man, I thought BitCoin was what people were using in black market deals (which gained it infamy), but I didn't know the complexity and just how intense this can get. I just wish it wasn't called "BitCoin", it makes it sound game-esque. But, this is not a game.
you beat me to a bitcoin article. Have a Silver Banana (not a de-centralized currency :(-dictator Patrick controls all supply)
Can we discuss investing / trading bitcoins? What are the market determinants (obviously supply / demand), but how do you determine a fundamental outlook? Seems to me that users should think of it less as a currency and more as a commodity (ie: due to the mining aspect as opposed to a central bank controlling supply). In essence, the supply side is easy, so now it's based on the demand side. Any thoughts?
Tulip mania anyone?
The bitcoin market is incredibly illiquid at this point, so the volatility will be very high when large orders are placed Large volatility leads to investor panic Leads to currency crash Businesses holding bitcoins get screwed and go under The only 'true' use for bitcoins is bartering illegally on the internet via silk road Don't believe the hype and don't be the last one to sell
Example the largest bitcoin marketplace crashed today, Mt. Gox http://qz.com/70381/bitcoins-largest-market-crashes-after-wild-price-sw…
Of course! How else am I going to fund my post-Singularity Anarcho-Capitalist cyborg lifestyle aboard a Seastead!?
WhoIsSatoshiNakamoto? #Nakamoto'sGulch
I thought it was an interesting idea until I read up on bitcoin mining. Bitcoins roots are in drug deals and other transactions you wouldn't want traced back to you, wouldn't be surprised if gov'ts began outlawing bitcoin if it ever grew to the size where it would rival a nations currency in the name of 'freedom.'
Not being able to short BitCoin right now is one of the biggest obstacles the market for this thing has to overcome before it really takes off. Can't really do options until this happens either
I've been following BTC for awhile now. On the the surface it sounds a little scammy, but in principle it is pretty ingenious - as far as the tech that underlies it anyway. If you're a Libertarian you should really be cheering it on. Will it work long-term? Who knows.
History shows that when you challenge the reserve currency of the world...things end badly. I read a story about a dude who wanted to be one of the first people to transact with BTC, so he bought a pizza. BTC has appreciated enormously since then, so now that pizza is worth about $950,000 LOL
Bottom-line: if Gov't finds a way to monitor it, and take their cut...it will probably succeed. If not, you'll be hearing about terrorists using BTC's really soon...
How long until there is a BitCoin denominated bond? I set the over/under at 07/01/2025.
I believe BitCoin is going to change the future world, it won’t be adopted right now, nor will it be BitCoin that carries itself to the future generation, BitCoin is simply the start of the idea and beating the path so exceedingly powerful 2.0 systems can make their way through. But, BitCoin will be credited heavily for the start.
I own a powerful chart calculating developments in society with algorithms in three industries, around 21 sectors, and virtual currency should be prevalent in a mainstream fashion (similar how PayPal is implemented on the internet almost everywhere, but with obvious implications) 2018 - 2019.
Also, worth noting: there are rumors that Amazon is creating an online currency of sorts as well.
bitcoin is its own demise. It cannot be a widely available currency by definition and so cannot be held in quantity by lots of people. Currency is only valued while other people believe it has value. If only a few people believe it has value then it prices will fluctuate massively. You can't have a currency that behaves in that way. It's great for trading and black market stuff, but once cash goes electronic, it'll go where it belongs, in the recycle bin.
Speaking of reddit, this post displays the Bitcoin hype perfectly.
Bitcoin overlayed against a hype cycle
Awesome chart
Great chart. This "bitcoin" bullshit is probably the latest example of socially awkward emo kids displaying their programming skill. NSA will eliminate it if its concerning.
Nice chart
Cool chart
NP, thought it was quite fitting.
Does anyone truly believe that "bitcoins" are going to replace any type of standardized currency currently used in the world. You can't get countries in Europe to stop using the Pound, let alone get a billion people or more using some kind of imaginary digital currency. Hype...nothing more.
I wonder if I can just get some bitcoin on PirateBay for free. Gonna hafta queue up some torrents though. What a joke.
BitCoins is either the future, or the model that monetary system will be modeled against one day. Question is when. Unfortunately, capitalism is flawed in many ways. BitCoins are way ahead of its time.
i bet the drug syndicates on silkroad are very pleased with what's happening
I recommend anyone who is knocking Bitcoin or labeling the minds behind it as hippy anarchist types to read up on the currency. I also thought it was just a way to buy illegal things on a .onion / deep web browser. But, it's moving far beyond that. And, honestly, the way it is "mined" and new currency enters the system is ingenius. Plus, there's definitely plenty of people on here that are anti-Fed and anti-money supply manipulation, this is right up your alley if you are in that camp.
That's the one major thing that I don't trust about Bitcoins; it's vulnerable to manipulation and thus, worthless as a currency. People who are on the Bitcoin bandwagon seem to think that the Fed couldn't manipulate it if they wanted to. That's bull. If the Fed wished to crush it as an alternative to the dollar, they would (and easily). For example, they could buy up as many Bitcoins as they wished, cause rampant valuation of it, then dump it like it's no tomorrow. Wash, rinse, and repeat. It would shatter normal people's use of it as it would be wildly unstable. Or they could just horde the Bitcoins, thus making them so scarce they would be worthless to use for transactions. IMO Bitcoins in its current form is not a currency, it's a digital commodity. It's a tech geek's version of gold. And just as gold is worthless as a currency (cause really, who has bought something with gold or sold something in exchange for gold?), Bitcoins will be worthless as a currency too.
Another interesting article: http://www.newstatesman.com/economics/2013/04/bitcoin-hyperdeflation
The bitcoin system has a controlled growth of its "money supply", making it out to be more of a commodity than currency. Bitcoin production has already been halved, which, along with increased reporting on it and speculation, led to a sevenfold increase in its value. Once the growth levels off and it becomes harder to mine the coins, the marginal bitcoin miner will drop out. However, since the system relies on aggregate computing power, fewer miners mean less protection. This is a well known vulnerability and since the entire bitcoin system, like any form of money, is built on trust, I can't see the system working out in the long run.
The main threat to bitcoins will be bitcoin competitors. I.e. if somebody comes up with a (40%+) better bitcoin and it takes off, the value of bitcoins (their scarcity protecting it as a commodity) will go down drastically. My limited understanding is that it would be hard to make a better bitcoin, though.
You'll note a bitcoin ATM has opened in Cyprus, where some stores are starting to accept it, and Western Union has started adopting bitcoin as a means of wealth transfer. This is very encouraging as it is precisely in FUBAR EMs that bitcoins can be most powerful. Zimbabwe only recovered once hyperinflation destroyed government power and foreign currencies became the de facto trade currencies in the street. Untraceable, unbreakable, and enforced in a way that does not require government stability. What makes it perfect for drug dealers also makes it perfect for transferring wealth in places with dubious governments wanting to imitate the Argie corralito. Or what about transferring a large cash sum through dangerous borders? If you are relatively quick and there is a dealer on either side, "carrying" bitcoins in your head might be cheaper than getting "taxed" at customs.
Is it a good investment, right now, considering the retail bubble (Business Insider headlines anyone?), I'm not sure. In the long term, is it promising in a world of increasing government control over your assets and decreasing government solvency, hell yeah.
http://www.businessinsider.com/texas-family-we-sold-this-porsche-last-n…
Shit is getting real.
Can't wait to follow-up once it goes bust.
Buy high, sell higher?
I'd like to add that if anyone here is looking at getting into Bitcoins make sure you keep an offline, encrypted backup of your wallet. Do your homework on secure BTC storage and use or you run a good chance of having all of your Bitcoins stolen.
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sub d
one of the problems with bitcoins is that the only thing you can buy with them is fake acid from online drug dealers
Look, here's the thing about Bitcoin: it's NOT a currency, at least right now. Do you know any large merchants that would accept, say, Portlandia dollars, if they'd appreciated 1000% against the dollar in the last month? No, of course not. Their value could be cut in half overnight, and then you're fucked. Currencies are supposed to be stores of value, and BTC is nothing close to that right now. It's just way too volatile. And if a currency is appreciating rapidly, that rise in value should be driven up because increasing demand for them as a unit of exchange for trade. Like, you need a bunch because Portlandia is suddenly a huge oil exporter. Nobody's buying BTC because they want to get iPhones anonymously. The buyers are all speculative. That's not a good thing for its prospects in the long run. There's no fundamental value.
So what are Bitcoins then? They're a thinly traded commodity, and a shitty one at that. At leas with gold you have the physical product if the market for it tanks. With BTC, you have, what, an electronic piece of encrypted code? What the fuck do you do with that if the speculators abandon it and drug dealers stop taking it?
Bitcoin value is all speculative. They're at what, $200 right now? Would you be shocked if it fell to $20 by December? I wouldn't.
The US Dollar was also extremely unstable when it was first established. So, what?
Yes, and that was 250 years ago, when just about every major currency was explicitly backed by gold (sometimes silver as well), and people would actually trade with gold and silver coins/bars, or even barter with wheat, sheep, etc if they had serious inflation concerns. So thank you for proving my point.
Four days till December and it is above $1000, just fact-checking
What fact are you checking? Thats like someone saying they wouldnt be surprised if a particular stock decreased in value and then it didnt. There are no facts to check.
Yeah I really want to own a currency that can be devalued by over 40% in a matter of minutes from a DDoS attack.
http://techcrunch.com/2013/04/10/bitcoin-crash/
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