Friday, March 29, 2013

Understanding Bitcoins

Note: Bitcoins are not money, at least not yet. They are not accepted in most monetary exchanges. They should be thought of as a type of digital travelers check, with a kicker, and its a big kicker. Unlike, say American Express, which issues a travelers check on a 1 to 1 dollar basis for each new amount of money it takes in, there is a fixed amount of bitcoins so they can fluctuate in price relative to the dollar. In this way they are a little bit like gold--which can fluctuate against the dollar. 

The advantage of bitcoins are that they provide some anonymity in transactions and they are near impossible for the government to confiscate.-RW

By Paul Ford

One of the oddest bits of news to emerge from the economic collapse of Cyprus is a corresponding rise in the value of Bitcoin, the Internet’s favorite, media-friendly, anarchist crypto-currency. In Spain, Google (GOOG) searches for “Bitcoin” and downloads of Bitcoin apps soared. The value of a Bitcoin went up to $78. Someone put out a press release promising a Bitcoin ATM in Cyprus. Far away, in Canada, a man said he’d sell his house for BTC5,362.

Bitcoin was created in 2009 by a pseudonymous hacker who calls him or herself Satoshi Nakamoto (and who might be several people). It’s a form of virtual cash used to buy goods and services online. Even by Web standards, it’s a strange and supergeeky phenomenon. This is what happens when software and networks meet the concept of currency, when you take peer-to-peer networks and advanced cryptography and ask, “How can I make a new economy?”

There are 10,952,975 Bitcoins in circulation. (With a digital currency you can be specific.) Bitcoin isn’t about to replace hard currency—with a market cap of $864 million, all of it is worth less than what Facebook (FB) paid for Instagram—but it’s bigger than anyone expected. And many people will tell you that the emergence of a virtual global money supply beyond the reach and control of any government is very real and that it’s time we take it seriously. As long as the Internet remains turned on, Bitcoin will be there—to its adherents, it’s the Platonic currency.

A dollar bill has a serial number and travels from buyer to seller. A Bitcoin’s not so much a thing as an understanding, a balance in a decentralized general ledger, or “account log.” Bitcoins are created as the side effect of a great deal of meaningless computational work. That is, the computer could be working on protein-folding, or processing images, or doing something else with its time, but instead it’s being used to “mine” Bitcoins—searching for mathematical needles in a networked haystack. Once the needle is found, a “block” of Bitcoins is born. Bitcoins live in a bit of software known as your “wallet.”

How did they get there? Perhaps you minted them by mining, or bought them on an exchange, or received them as part of a barter transaction. Now those Bitcoins are burning a bithole in your bitpocket, and you want to buy something. How do you spend them? Clicking around your wallet app, you set up a payment and put in the Bitcoin address of the recipient—something memorable and fun, like 1Ns17iag9jJgTHD1VXjvLCEnZuQ3rJDE9L. A few minutes later, after the peer-to-peer network has authorized the transaction as legitimate, the recipient’s wallet, wherever it is, will show that you’ve paid up.

Read the rest here.


  1. Although I've found bitcoins interesting, I haven't had any interest or seen any purpose for buying them myself. But I may have changed my mind and see at least one possible reason to buy one.

    Bitcoins can be a part of a bug-out bag that isn't physically present. Part of a 'virtual bug-out bag' available from anywhere someone can access the Internet. It doesn't replace cash or gold, it just augments it.

  2. I think it's a good idea, and the government realizes this. They will fight hard to keep it down. The only skepticism I have is that if it did become money, there would be a large incentive to create technology that can counterfeit it. Knowing how crazed our leaders and their puppeteers get, they probably WOULD (try to) shut down the entire Internet to protect their power over our money.

  3. "When you compound utopian wishfulness with the anxiety of being left behind, you’ll have a bubble."
    "One recipe for Internet success seems to be this: Start at the bottom, at the most awful, ridiculous, essential idea, and own it. Promote it breathlessly, until you’re acquired or you take over the world. Bitcoin is playing out in a similar way. It asks its users to forget about central banking in the same way Steve Jobs asked iPhone (AAPL) users to forget about the mouse."

    These are the two best examples of the author demonstrating his lack of economic knowledge. He doesn't realize the reason bit coins would be perfect for money(unless someone finds a way to counterfeit them). I don't think he even mentions inflation once.

  4. > Bitcoins are not money, at least not yet.

    Bitcoin is kicking "money" butt: