More than $1 billion dollars worth of a digital currency – bitcoins are not issued by a government or even a private company. Instead, the currency is run by computer code that distributes new bitcoins at a set rate to people who devote web servers to keep the code running.
Economic collapse of Cyprus is a corresponding rise in the value of Bitcoin. Unlike traditional currency, bitcoins are not issued by a government or even a private company. Instead, the currency is run by computer code that distributes new bitcoins at a set rate to people who devote web servers to keep the code running. The bitcoins are then bought and sold for regular U.S. dollars online.
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 1Ns17iag9jJgTHD1VXjvLCEnZuJDE9L. 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.
How is this different from PayPal (EBAY)? In theory anyone could run his own version of PayPal on a server and use that to transfer funds between parties. But he’d also need to handle world currencies, deal with security, and handle regulations. Similarly, physical banks promise protections above and beyond stuffing cash in a mattress or dropping it off in paper bags. Financial institutions commodify trust—it’s not their money, after all. It’s yours. Yet you trust them more than you trust yourself.
Bitcoin shrugs all this off. It’s not pegged to anything, and there are no regulations. It’s a supercomputer-size chore to counterfeit. The key thing to understand is that there’s no bank, no Federal Reserve, in the middle. It’s not unlike an exchange-traded fund (for example, FORX, from Pimco)—a mix of non-U.S. currencies—designed as a hedge against the dollar. Bitcoin is a hedge against the entire global currency system. And no exchange is needed, unless you want to convert your Bitcoin into an actual hard currency.
Bitcoin is no more arbitrary than derivatives or credit default swaps. Given that regular folks, if they’re nerdy and interested in Bitcoins, can use the currency for all manner of things, including illegal things, it’s arguably a far less arbitrary instrument.
Maybe Bitcoin’s devotees are right, and it’s the currency of the future. Or perhaps it’s a ridiculous joke—a speculative, hilarious enterprise taken to its most insane conclusion. Given that the founder is nowhere to be found, it feels like a hoax, a parody of the global economy. That the technology used to implement it has, so far, shown itself to be impeccable and completely functional, and that it’s actually being exchanged, just makes it a better joke. The truth is, it doesn’t much matter if it’s a joke or not. It works.
The Internet is a big fan of the worst-possible-thing. Many people thought Twitter was the worst possible way for people to communicate, little more than discourse abbreviated into tiny little chunks; Facebook was a horrible way to experience human relationships, commodifying them into a list of friends whom one pokes. The Arab Spring changed the story somewhat. (BuzzFeed is another example—let them eat cat pictures.) 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.
I have an intense memory from the early 1990s, when I was just out of college. I was seated alone in a diner. Suddenly a loud man behind me pronounced, “Internet time is like regular time but seven times faster.” I turned around to see a well-dressed adult, a serious person. I was mystified. How could he believe something so facile and arbitrary? On and on he went, expounding on the magical number seven.
Having been through one or two bubbles, I’ve learned that people can believe exactly what they want to believe. That’s one of the privileges of being a human with money to spend. When you compound utopian wishfulness with the anxiety of being left behind, you’ll have a bubble. Then again, we may be at the forefront of the coming Bitcoin revolution. There’s no way to be sure. I’ll admit to having run the Bitcoin mining software a few years ago for a week until I became convinced it was a poor use of limited computer resources. I had work to do. I expected Bitcoins to remain in the background with all of the other anarchist crypto-chatter that makes up an essential substratum of modern network thinking.
But Bitcoins didn’t go away. And I’m increasingly convinced there’s one thing that Bitcoins do that’s genuinely interesting. They decentralize trust. Trust is hard to earn; verifying transactions is a brutal problem, which is why PayPal locks down your account when there’s too much money flowing into it. Creating trust is traditionally the work of federal governments and branding agencies. Trust is also an easy thing to squander. Just close a beloved service, à la Google Reader. Or allow your banks to fail, causing an entire country to suddenly realize that the value of their deposits, the fundamental integrity of their financial selves, was arbitrary all along.
Along comes Bitcoin, a currency in which every transaction is stored by the entire network and every coin has its own story. There’s nothing to trust but math. Suddenly an idea that sounded terrible—a totally decentralized currency without a central authority, where semi-anonymous parties exchange meaningless tokens—becomes almost comforting, a source of power and authority.
That’s where Bitcoin thrives: where people would prefer to throw in their lot with anonymous strangers instead of the world economy. It’s gold-bug thinking reinvented for an age of fluid transparency and instantaneous transactions. And as such it’s an excellent indicator of anxiety. Where you see Bitcoins in action you find a weird and heady mix of speculative angst, a fear of being left behind, and people who appear to have lost faith in institutions, who feel most left behind. These are people who’ll trade in purely arbitrary tokens, willing to forgo the comfort of banking systems for the weight of mathematics and the Internet behind it.
Bitcoin isn’t tied to any commodity—besides trust.
A Bitcoin address is like a physical address or an email. It is the only information you need to provide for someone to pay you with Bitcoin.
The blockchain is a public record of all Bitcoin transactions, in chronological order. The blockchain is shared between all Bitcoin users. It is used to verify the balance of Bitcoin addresses and to prevent double spending.
A block is a record in the blockchain that contains and confirms many waiting transactions. Roughly every 10 minutes on average, a new block including transactions is appended to the blockchain through mining.
BTC is the unofficial three letter code for Bitcoin. It can be used as an abbreviation, like USD for US dollar.
Confirmation means that a transaction has been verified by the network and is highly unlikely to be reversed. One confirmation is pretty secure. Though for larger amounts ( ex. 1000 $USD and above ), one can wait for a transaction to have more confirmations – 6 is a frequently chosen number. Each new confirmation decreases the risk of a reversal exponentially.
Cryptography is the branch of mathematics that lets us create mathematical proofs that provide high levels of security. Online commerce and banking already uses cryptography. In the case of Bitcoin, cryptography is used to make it impossible for anybody to spend funds from another user’s wallet or to corrupt the blockchain. It can also be used to encrypt a wallet, so that it cannot be used without a password.
Read More: Businessweek