By now you’ve probably heard about “Bitcoin”. But if you’re like most people you don’t know much about it. That’s understandable, because bitcoins aren’t real. They constitute a crypto, or virtual, currency that only exists by the mutual consent of those who deal in it. You can’t touch bitcoins. You can’t hoard them in your mattress or use them to buy Real Crisps at the pub. No one even knows who created them. Their invention is credited to one Satoshi Nakamoto, but that’s a pseudonym. All anyone can say with any degree of certainty is that they were created by a computer programmer, or programmers, in 2009 and have slowly gained currency (pun intended) in the years since.
What is Bitcoin?
Bitcoin was intended by whoever created it to take the middleman – i.e. governments and bankers – out of financial transactions. There is no regulating body overseeing bitcoin monetary policy and if you use bitcoins to make a purchase there are no transaction fees and no one demanding details of your personal life before they’ll do business with you. For all these reasons and more bitcoin has found a lot of believers.
How does it Work?
Bitcoins are generated through something called “mining”. But this is not mining as it’s commonly understood. In this case mining entails a series of mathematical problems which if solved result in the creation of new bitcoins. Computers are used to solve those math problems and over the years they have become progressively more powerful as the problems themselves have become more complex. Today there are “mining farms” which are banks of powerful computers working together to tackle those problems and mine new bitcoins.
It’s important to understand that there is a limit on the number of bitcoins that will be created. Currently 12.5 bitcoins are released about every 10 minutes to join the “blockchain” that is the defacto record of the currency’s existence. Eventually there will be 21 million in virtual circulation. That’s it. No more. This prevents the currency from being subjected to inflationary pressures or from losing value because some quasi government agency decides it’s time to print new ones to cover debts. Like dollars and pounds every bitcoin is broken down into smaller units (1000 millibits = 1 bitcoin). Since the relative value of one bitcoin is constantly in flux so too is the relative value of these sub-bits. Right now there is something of a bitcoin bubble underway as the value of a single bitcoin has risen from just over $500 in January 2017 to some $2,500 as of late June 2017.
Storing and Using Your Bitcoins
Since bitcoins aren’t “real” you need to have a virtual way to store them. Enterprising programmers have developed several types of virtual “wallets” that can be used for this purpose. Your bitcoins always remain part of the bitcoin blockchain (which as mentioned above grows by 12.5 bitcoins every 10 minutes or so) but the virtual wallet allows you sole access to those bitcoins at a specific part of the blockchain that are designated as yours. In some ways the whole thing is not unlike owning shares in a company. You may never actually see the shares you own in a company but they’re there, set aside specifically for you. The difference is that, while you can sell your bitcoins as you can shares, you can also use bitcoins to buy things as you would with any other currency.
Who Uses Bitcoin?
Corporate giants like Microsoft, Home Depot and Expedia now accept bitcoins and the number of other corporations adopting the currency is growing rapidly. In addition, many small businesses have figured out how to make bitcoins work for them. You might suspect that such a quasi-currency with no regulation and no questions asked would attract a certain criminal element and you’d be right. It seems, however, that as mining for bitcoins has become a more involved process the criminal element has been losing interest. Apparently it’s becoming too much work.
- Transparency – Every bitcoin transaction ever undertaken is recorded in the bitcoin blockchain. While there are no names or other personal information you can nonetheless see, if you have the right software, every instance of the currency being used or sold. There are no secret transactions, only secret transactors.
- No fees – If you use bitcoins to purchase something there’s no fee for you at any point in the transaction. Likewise whereas merchants typically pay a credit card processing fee when customers whip out the plastic, they pay no fees to anyone when someone uses bitcoin.
- Anonymity – As mentioned there are no secret transactions only secret transactors. This fact makes bitcoin very attractive to a large number of people who see their privacy being eroded more every day by various types of surveillance and information sharing between large corporations.
- Volatility – As mentioned above bitcoin values have quintupled in just the past 6 months and there is no type of regulation in place to prevent them from crashing tomorrow. If you’re not careful then this could cause financial problems which could result in your having to enter an Individual Voluntary Arrangement (IVA)
- Limited Usability – While some companies both large and small have found ways to make bitcoin work for them the overwhelming majority of companies have shown little interest.
- Hackers – As a virtual currency that basically exists in cyberspace bitcoin wallets, bitcoin exchanges and the bitcoin blockchain that underpins the whole enterprise are susceptible to hacking. Significant hacks have already occurred that resulted in millions lost.
The Road Ahead
The fact that no one is in charge of bitcoin means no one is accountable if the whole thing goes bottoms up. There are in fact, a good number of intelligent people who believe bitcoin is nothing more than an elaborate Ponzi scheme or that it’s doomed to be crushed by the weight of its own theoretical shortcomings, which are far more real than the currency itself. But no matter which side of the issue you come down on you have to admit that Mr Nakamoto (whoever that turns out to be) really started something with his or her little currency experiment.