The first thing to know is that there are 2 “bitcoins”.
The first is bitcoin the software program and the second is
bitcoin the actually tokens of money being exchanged.
As far as the software platform goes. It is really interesting. Checks take days to clear. Credit cards may take weeks for a merchant to
get their money. Paypal has its delays
too to make sure the consumer is happy.
The bitcoin software takes 10 minutes or less to process a transaction
and it is irreversible. Credit cards charge merchants 5%, the Ebay/Paypal can go even higher. The bitcoin software can send bitcoins
anywhere in the world, any amount, for 5 cents.
People have made transactions for millions of dollars and it cost them
just pennies. The software itself if
implanted correctly by end users is extremely reliable and very safe. That is a big “IF”. To use the software correctly is actually
quite complicated and not something a normal person can do well or easily. It involves many steps of making sure things
are set up just right. When all that is
done, sending a transaction is no more complicated really than sending an
email. The part of sending the money is
actually incredibly simple. It does this
all through a decentralized system. The
benefit of this means that no one person or group can control it. The software, much like “email” doesn't
really exist in one place or can be controlled by one entity. There are very big providers of email, like
gmail and yahoo, and bitcoin has those too, but anybody that wants to be an
email provider and jump on the email bandwagon can do so and nobody can really
stop them. Bitcoin software is a little
like that, but much more friendly towards a home user. It is impossible for a person to download on
their home computer every email that has ever been sent by every person on
Earth, but with bitcoin, that is indeed possible. A person can download every transaction that
has ever been made. Right now the file
is about 10 gigs and is growing. This
file is called the “blockchain” and it shows exactly how every transaction has
been connected to every other transaction.
The blockchain is updated every 10 minutes when a new round of
transactions are cleared. The beauty of
this system is that it is impossible the cheat.
You can know if I have money to send you, and have sent it to you for
real because the blockchain will tell you. We can also both see clearly when it
arrives. And likewise I know that you
know and therefore can't really cheat you.
And furthermore you know that I know that you know...... and so on. So the whole system is very transparent and
both parties can work from the assumption that the other party is a knowledgeable
party to the same information and therefore everyone can act rationally. The software is built upon heavy encryption,
so deeply encrypted, you would be far more likely to count all the stars in the
universe than to crack it.
Seriously. So the bitcoin
software program is a method of sending value that is in a few distinct ways
far better than the any of the major methods of transferring money, but it is
also in some ways complicated to use.
Many big companies have invested millions of dollars into making this
simple, just as simple as sending an email, or in the future even as easy as
sending a text message. That has not
happened yet, but there is definitely an arms race to get there first. To some extent it is just a matter of writing
code since the whole thing lives on the internet. To that extent, it can all be overcome. It isn't exactly that easy, but I expect
before 2016 it will have been simplified for the end user so much so that
pretty much any smartphone user could use it and apps will have been designed
in a way that they can't really be used incorrectly.
Bitcoins themselves are harder to understand and this is
where most of the attention is focused on in the news. In part because their price has fluctuated,
or the bitcoins have been lost or stolen.
It is still hard to define just exactly what a bitcoin is, and the
bitcoin community seemingly still hasn't decided. Many people argue it is like digital gold,
and many people argue it is like digital cash.
In reality, it has things in common with both of these and has
differences with both of these. Right
now, I think both of those camps are wrong.
Right now, to me bitcoin is no more than digital bling bling. For the amount of bitcoins actually being
used to purchase things, it is highly overpriced, maybe by more than a couple
of zeros. That being said, any bitcoin
is worth what another person is willing to pay for it. It sounds over simplified, but a bitcoin is
worth what it is worth. It can't really
be said anymore simply than that. The
price right now is being driven up on two principals as far as I can tell. The first is that a lot of nerds think it is
beautiful. They love the way it is
decentralized. They love that it cannot
be counterfeited, that it cannot be stolen (if used correctly), and they
especially love that no country has control over it, that nobody has control
over it in the same way that nobody really has control over email. Yes, a long time ago some programmer invented
the code for email, but that programmer can no more now shut down email than the
creator of bitcoin can shut down bitcoin.
So some people think since the creator can’t change it anymore, then it
doesn’t matter who created it. But in
fact it does matter A LOT because the inventor has way more bitcoin than
anybody else, in fact so many bitcoins, the creator could probably crash the
whole system if so desired. Since it is
easy to tell every transaction and any decent computer geek can do this, it is
very well known which bitcoins are the creators and in which bitcoin wallets
they exist. Those bitcoins are being
heavily watched and ironically to this day, not one has ever been spent. Speculation runs wild why this is, but the
level of intelligence and work that went into creating this, means the creator probably
didn't do it to get rich, but because they believed in a money not controlled by
any country or company, but instead by the people who hold it.
So the bitcoins themselves don't really exist anywhere, but
they exist everywhere. A copy of my
bitcoin exists out on the web as a bit of encryption on the blockchain being
held on tens of thousands of people’s hard drives. I can throw my computer away, and as long as
I still have the encryption key written down somewhere I can unlock this easily
at any time. Again, a person might as
well try to accurately count the stars in the universe before they could unlock
my bitcoins as it would in reality be a much simpler task. Bitcoins are a little like gold because they
are “mined” by people using their computers to try to find them. They aren't really found, not like a person
finds gold in the ground, but instead are given away more in a lottery like
fashion. Every ten minutes 25 bitcoins
are awarded to a person's computer who has won the lottery. A person's computer can win the lottery by
having the most lottery tickets, and to that extent the person with the biggest
computer wins more often, but just like any lottery, even a person with a small
computer could in theory beat out a person with a big warehouse and this has
and does happen. These people that have
their computers connected to the internet are the computers processing the
transactions, they are registering and recording the transactions, the computer
that wins the round and wins the 25 bitcoins will make a new official entry
into the blockchain of all the transactions it is clearing and then that
message is sent out to all the other computers with blockchains and they add
those entries. All this is done by
complicated math, physics, and cryptology.
It is regulated by science and can't really be broken or
manipulated. (Until it is) It is an open source software program. Anybody can download it and examine it and
yes, try to hack it. If they do hack it,
everyone will instantly know and quickly a patch will be made to protect
against the hack. At this point, the
people looking at the software don't hack it, because to hack it and steal the
bitcoins would mean that it wouldn't be worth anything anymore and so to steal
it would make it not worth stealing.
Instead when a hacker finds a fault in the code, he submits it to the
community. Big investors with a lot of
bitcoins then usually give said person a huge reward in bitcoin for having done
so. So by finding a flaw, it is actually
in the hacker’s best interest to try to fix the flaw instead of exploit it. This is completely different than real
cash. If I find a way to steal money
from a bank, I could keep the money and be rich (if I wanted to be a
hacker/bank robber) and as soon as I stole the money it would still be worth a
lot, not worthless. So far this system
has been working quite well and most of the flaws have been worked out. What happened with Mount Gox where all the
bitcoins were stolen was that a known and published flaw wasn't being protected
against specifically by the Mt. Gox company.
The Gox programmers were being lazy and trying to speed up
transactions. Most of the other bitcoin companies
were not doing this because they knew that it could be a problem. Gox was being sloppy and their bitcoins got
stolen. But in some ways, it was the
owners of the bitcoins that were at fault too.
They had literally given all their bitcoins to Gox to hold, instead of
holding them on their own computers. To
be fair, I also don't hold my bitcoins on my computer either. I use Coinbase. It is as easy as logging in and sending an
email, and I think Coinbase knows what they are doing and weren't at all
affected by the same problem Gox was affected by. (until they are)
Many people are anti-government and believe the government
is printing too much money. The
government is constantly printing and printing new money. And every time the government prints a new
dollar, it makes the dollar I own worth a little less because now the dollar I
own is a little less special. If the government
prints a ton more money, then my dollar is a ton less special. Right now most of the governments of the
world are printing a ton more money to balance their budgets. The governments are in debt and instead of
earning money the good old fashion way by earning it, they just create money
out of thin air and use that money to pay off the debts. (We call that raising the national debt.) The
United States is a particularly bad offender and that is why the debt is at unprecedented
rates. Many geeks think bitcoin is
beautiful because nobody can just decide to print more bitcoins making old bitcoins
worth less. So geeks feel like their
money is safe. If I own a couple of
pounds of gold, and a huge new gold mine is found under the Ocean that just
goes for miles, the gold I own will be worthless. All the gold in the world could fit in any
high school's football stadium. A truly
large mine would make the current world's gold supply worthless. The same with governments just printing
money. At least with bitcoin, a person
knows exactly how many bitcoin have been created and exactly how many will be
created and so can kind of guess all things being equal what their bitcoins
should be worth. Not all things of
course are equal. The price is heavily
speculated on. Geeks think bitcoins are beautiful
the same way a rapper thinks gold chains are beautiful. That rapper pays far more for the chains than
the actual real value of the gold, far more.
Likewise, many believers in the payment aspect of the bitcoin software
feel like it is a very forward thinking system. They have speculated on the
price of bitcoins assuming that someday as a successful payment processing
system those bitcoins will actually be valuable other than just as geek bling
bling. Right now bitcoins are neither
really gold or a currency, falling short of both. Still in some ways bitcoin has the opportunity
to be the best of both. It is just so
young now.
More and more people live online with facebook and twitter
and all the other sites. Many people
couldn't understand how a website that lets you send messages to your friends
and post pictures could be more valuable than a car company, but it is. Still... our money remains old money, based
on the old way of holding value, except it’s not. Dollars used to be backed by gold. For hundreds of years every dollar the US
printed was worth a chunk of real gold in a real place somewhere, that was
until Nixon. Now a dollar is worth a
dollar, just like a bitcoin is worth a bitcoin.
But bitcoins live online, in the cloud and on people's hard drives much
the same way our Facebook profiles, Skype phone calls, forums, blogs and newspapers
do. It is a new way of thinking about
money, about creating money, about transferring money, about valuing money that
it is a total paradigm shift from anything that any human culture anywhere has
known. Seriously. It is also for this reason hard to explain and
have people get their heads around. They think in terms of paper money and
credit cards, and bitcoin is far different from these. The implications of this
cannot yet be known. It is like watching
a baby grow. It might not make it. I might very well fail. Or it might find a place in the world as a
way of having and sending money. I seriously
doubt it won't take over the financial system anytime soon if it even ever
does, but I think it is a unique enough idea and brings many things to the
table that it can at least find some kind of niche. Whether that niche is big or small, I don't
know, and doubt anybody that says they do.
So far the niche has most famously been for scams, buying drugs, internet
porn, and gambling. In some ways
mirroring the birth of the internet itself.
As we know, the internet eventually grew into something much bigger
though than any of these things. It is a
dirty and nasty aspect of bitcoin, but it is also in some ways justifying
it.