Bitcoin is a peer-to-peer crypto currency. Peer-to-peer means that no central authority issues new money or tracks transactions. These tasks are managed collectively by the network. BitCoin has garnered quite a bit of attention of late. What is it? Why use it? I’ll try to answer this below.
Why BitCoin? With all money there is the problem of double spending. With electronic representation of money in the modern age, it is easy for a financial institution to say that it has your money and then loan it to someone else, then loan it to someone else, etc. The only solution to the problem is heavy government regulation of financial institutions, and we have seen how good that works especially recently (think the Federal Reserve). BitCoin has solved this problem.
How does it work? There is a BitCoin application that you install on your computer. Each computer running this application operates a peer node in the BitCoin network. All the nodes in the network effectively keep account of all of the transactions that take place in the system. The individuals making the transactions are known only by a long number but the transactions themselves are ‘confirmed’ by other clients on the network. New BitCoins are slowly entered into the system in the following way: each client has an option of mining. When a client is mining it will make attempts to solve the next block in a chain; this is really just a long sequence of a mathematical problem. This chain keeps track of the history of all the BitCoin transactions. When a node solves this problem it is rewarded with a set about of BitCoins, over time this amount is more and more slowly decreased. It is extremely rare to get rewarded. Given the current difficulty, a standard desktop would have to mine for something like a year before it might randomly solve one of these problems.
What are the advantages of this system? With our monetary system the only value that the dollar or any other fiat currency has is the faith that you in the issuing institution. BitCoin is completely transparent and open source, so you don’t have to trust it, you can look for yourself at the code and the transactions going on. I KNOW that there are only 5 million BitCoins currently in the world, and I know that there will only be 21 million or so total (in about 100 years), because of the mathematics behind it. Right now, you can trade USD, AUS, RUB, or EUR back and forth for BitCoins. There are people accepting BitCoins in exchange for goods and services.
What are the disadvantages of this system? I worry about BitCoins recent run up; they have gone from around 30 cents a BitCoin on November of 2010, to, as I write this at the end of April, to almost 4$ per BitCoin. On the surface that sounds great, but with a huge upswing in value it is very likely to have a huge downswing at some point soon. Ideally you would want to see a lot more stability around something like this for more widespread adoption. Another problem is that governments may try to make it illegal. Money and monetary policy is the central means by which governments exert power. BitCoin would take away much of that power. You could make the argument that by its nature it would be hard to get rid of, and you would be correct. But, the vast majority of people would probably not use it if it were to become illegal.
What is most likely going to happen? I think BitCoins are going to part of our future. I doubt that I will be able to use them one day to fill up my tank at a gas station, or tip a server at a restaurant. But the real promise is the Internet. Newspapers are going out of business because no one will pay money for access to a news website, because there is so much free news. But, consider if there was a way to pay 2 or 3 cents to view a story from a reputable news source. I might be willing to pay that, but how do I get the money to them? I’d have to enter in my credit card information, but I am not going to do that. Even if I could, the credit card transaction fee would make it a losing scenario for the seller. But what if there was an easy way, built into the browsers to send cents or even fraction of cents to wherever without transaction fees? BitCoin has that potential. My hope is that they will become the de-facto recognized currency for certain things on the Internet, and solve the micro payment problem once and for all.
And by the way, if you like my website or have found it usefully, why consider sending me some BitCoins at this address 173mvmf9Cw2AUKCKf35yG7dPNXN8oySZ3X