Understanding the Bitcoin Currency
Maybe you’ve heard of Bitcoin, a virtual digital currency that wants to shake the entire global economy, and has become the financial bubble with a skyrocketing value. It’s online money—an alternative to dollars and euros. Well what does that mean? It’s complicated, but we break it down.
Bitcoin was introduced in 2009 by a mysterious programmer known only as Satoshi Nakamoto, which is thought to be a pseudonym, and who has never given an interview. Previously the domain of technology-friendly libertarians, bitcoin has shot to mainstream financial attention after its value increased by up to 1,000 per cent since the start of the year.
Bitcoin is not real money. It’s an online “currency”—virtual tokens that can be exchanged for goods and services at places that accept it, the same way you’d give someone a dollar for a cookie. But unlike a dollar, a Bitcoin has no serial number or any possible mechanism that could be used to trace it back to a buyer or seller. This makes it attractive to drug dealers and/or privacy advocates.
In their YouTube manifesto, Bitcoin’s creators say they’re going to revolutionize global finance the way the web changed publishing. So! Kind of a lofty goal, aiming to be a global currency up there with (or replacing) the dollar. Right now, that’s still the pipiest of pipe dreams.
Aside from the software developers who work on new versions of the code that underpins Bitcoin, there’s no Central Bitcoin Bank—no virtual Federal Reserve. Bitcoins are backed by no one and nothing and completely unregulated.
When you write your friend a check, money from your account is withdrawn from your bank, and then transferred to her bank, and then she withdraws it as cash (maybe). With BitCoin, there are no middlemen (other than the users that comprise the network itself). Money goes straight from you to whomever, through the BitCoin P2P system, with no intermediary agency passing along the chips.
This is where it starts to get a little weird! Unlike traditional currency, that’s backed up bysomething, (be it gold, silver, or a central bank), Bitcoins are generated out of thin air. Through a process called “mining,” a little app sits on your computer and slowly—very slowly—creates new Bitcoins in exchange for providing the computational power to process transactions. When a new batch of coins is ready, they’re distributed in probabilistic accordance to whomever had the highest computing power in the mining process. The system is rigged so that no more than 21 million BitCoins will ever exist—so the mining process will yield less and less as time goes on, and more people sign up. This makes the whole system a lot sweeter for early adopters.
Compared to “real money,” few places accept Bitcoin at the moment. But that’s quickly changing. There’s decent incentive for small businesses to accept Bitcoins—it’s free to use, and there aren’t any transaction fees. At the moment you can buy the services of a web designer, indie PC games, homemade jewelry, guns, and even cocaine. If the internet is the Wild West, BitCoin is its wampum.
Just like you can trade in yen for dollars, you can swap your BitCoins with other users for several “real world” currencies. And right now, the BitCoin is trading very high! When we first published this post in May 2011, one Bitcoin was worth $7.50. Today it’s over $250. And climbing. And climbing and climbing.
But like any bubble—or perhaps more so than most bubbles—the digital coin rush could collapse at any moment, leaving a lot of people with a lot of virtual nothing.
