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Bitcoins: Rare Opportunity to Watch Currency Evolve

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Bitcoin is a type of virtual currency that has been getting a lot of attention lately. I first read about it a few weeks ago (from some post I can’t find anymore on Reddit) and was amazed at how quickly it was being accepted. It’s billed as a “peer to peer currency” and as such there is no central bank or authority that issues currency or tracks the transactions. Whereas United States dollars are issued and backed by the United States government, there is no such entity for Bitcoin. The anonymity is the appeal, but it’s also where it opens itself up for attack.

A bitcoin is a lot like a dollar bill in that there’s no tracking and possession is ownership. If I were to steal a dollar out of your wallet (sorry!), there’s very little you could do, after the fact, to prove the dollar was yours. Since there’s no tracking of transaction information, there’s no way for you to otherwise prove the dollar was yours. When you use bitcoin, you will typically have a wallet file on your computer or with a third party wallet service. You send money to others with a Bitcoin address, much like Paypal with government backed currencies, and all is well and good… until someone steals your wallet.

In the physical world, if you lose your wallet, you lose your cash. In the Bitcoin world, if you lose your wallet, you lose your Bitcoins. And someone just recently lost half a million dollars in Bitcoins. Now there are companies offering bank-like services for Bitcoin, after the theft. There’s also now malware that steals Bitcoins. As it gains notoriety, scammers are popping up to figure out ways to steal it… just like virtual game currencies.

So you have the intrigue of a maturing currency on the one hand and the rise of theft on the other, which already make for a compelling story to follow. Now add a third hand into the mix: the assault on fiat currency. Unlike virtual game currencies, which you can use inside a game to buy virtual stuff (but at least it’s stuff), bitcoin has no central bank. Our dollars have value in part because of the market and because they are backed by the United States Government. Bitcoin has no backing. It’s value comes entirely from the market. While a central bank can’t dilute it’s value by printing more, you also don’t have any institutional support. The only way to make more is by producing it in a computationally expensive process. If that wasn’t enough, the anonymity and lack of government tracking makes it perfect for illegal activity. Bitcoins can’t be traced.

It’s truly a rare opportunity to watch a currency evolve… and potentially legislated to death.

If you want a more comprehensive write-up of the nature of Bitcoin, especially the nuts and bolts details, The Economist has the best one I’ve read so far.

{ 15 comments, please add your thoughts now! }

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15 Responses to “Bitcoins: Rare Opportunity to Watch Currency Evolve”

  1. DJ Wetzel says:

    This is interesting. I have never even heard of bitcoins, until a friend of mine mentioned them at a wedding we both attended over the weekend. He is a rare coin collector, and he was disgusted at the practice of trading virtual coins. For him, the enjoyment comes out of the intrinsic and antique value of these coins, and thus virtual coins takes all of the aura of coin collecting away. I will have to say though, that this is fascinating to me.

    • Steven says:

      Well, it’s not for collecting per se. It’s someone trying to start a new currency.

    • julz says:

      Maybe your coin collection friend should consider buying some bitcoins in the form of bitbills. Perhaps the first run of them will become highly collectible!

  2. As they say, buyer beware. Bitcoin has been having lots of problems, including their main trading platform getting hacked and a lot of bitcoins being stolen…….. it is questionable whether they will survive. If they do, you still have to worry about the wild fluctuations of prices for a bitcoin in dollar-terms.

    • The main exchanged was hacked, so Bitcoin is not safe? This is akin to saying the dollar is not safe because Indymac failed or because paypal has been hacked again and again.

      The exchange != Bitcoin. Bitcoin will survive without the exchange and will continue to survive as long as there are people running the Bitcoin client and connected to the internet. This is how a p2p decentralized network works.

      While bitcoin may have some flaws, the dollar has plenty of flaws as well and this hasn’t halted it’s adoption.

      What intrinsic value do they have? Nothing. They are shiny on your computer, Just like Gold is shiny in real life. People who invest in Gold don’t do so because they foresee smelting the Gold into something useful and the same is true for those who invest in Bitcoin.

      All fiat currencies are based upon faith. With the dollar or any nation-based currency you are betting on that nation, with Bitcoin you are betting on SHA-256 cryptography.

      If the question is whether computers or humans are going to screw things up first, my bet is on humans, and that’s why I run bitcoin venture capital.

      • I’ve read the initial heist was roughly a $500,000, followed by the attack on the Mt. Gox Bitcoin Exchanged attempting convert 400,000 Bitcoin credits to $9 million “real money”. That suspiciously large transaction caused Mt. Gox to take itself offline to investigate, and the resulting panic caused Bitcoin’s real money value to drop dramatically, like from $17.50 to $.01. The value of a bitcoin has since recovered to around $16.73.

        Symantec has also identified a Trojan called Infostealer.Coinbit that has one motive: to locate your Bitcoin wallet.dat file and email it to the attacker. So you’d better encrypt your hard drive with some fairly strong encryption. Bitcoin is an interesting concept, but not for the risk adverse.

  3. mannymacho says:

    I heard about this on NPR. I still don’t really understand what people buy with it other than drugs.

    • NateUVM says:

      New to this, myself, but there are, apparently, plenty of goods/services that can be bought using Bitcoins.

      And one defense of Bitcoins that I have heard in response to the issue of “Silk Road,” is that to complain about Bitcoins and their tie to illicit activities would be tantamount to complaining about cash and ITS tie to illicit activities…

      Not sure I totally buy the rationale if they and the networks that are used make it even easier to participate in these illicit activities but, there it is.

  4. Just read a few articles on this “latest” money trend, one at Invest it Wisely and the other at Businessweek. I’m fascinated, but not ready to dive in ans start trading or using bitcoins.

  5. zapeta says:

    I’ve been “mining” bitcoins through my computer for several months now. Given the network difficulty I don’t think this is the time to start mining but bitcoins can be purchased on several exchanges.

    There are tons of services out there that buy bitcoins for giftcard, prepaid credit cards, or cash. You can even buy your (non-perishable) groceries with bitcoins through services like bitmunchies. The chances of your wallet being stolen are practically zero if you take even minimal steps to secure it. I think that bitcoins will hold their value as long as people are using it. The number of bitcoins available will max out at 21 million over time so we all know that eventually no more will be created to dilute the value.

    I’d recommend the Economist article if you want to learn more.

  6. ross says:

    I think there is money to be made with bitcoins, but i don’t think bitcoins are ready for prime time, especially if you aren’t tech savvy. There have been so many problems with hacking that. How secure are these things?
    Also wait till the govt catches on to what they are. Cue the legislation.

  7. metamantis says:

    I have read up completely on bitcoins, and have to argue with a couple of points.

    Number one part of the value of the bitcoin is that there will only ever be 20,999,999.9769 BTC.

    Yes these coins are put into circulation by rewards to computers operating the infrastructure that processes transactions(also known as mining due to the pay out) In the future that same infrastructure will be paid for by transactions fees.

    Where I really differ is when you say these transactions are untraceable if you look at the block chain the actual record of transactions you can tell when every individual bitcoin was created and every subsequent transfer of that money by user id. So if the FBI or IRS got the persons computer they could tell every transaction the person made receiving and sending money in the form of BTCs. They could also tell through a wire tap of the internet connection every transaction the person made as all transactions are sent and stored in plain text.

  8. Rev. Scott U says:

    What I don’t “get” is, if only 30 million bitcoins will ever be “made”, and maybe only a small % of those made will be circulated (traded) at any given moment, how will they function as a currency?

    If only 12 million exist how will they keep circulating when more than 12 million people hold them (assuming only bitcoin per person, which is unlikely)?

    If they don’t circulate openly, who will place value on them except as speculation?

    Also, how do you partially spend a bitcoin–say you have a bitcoin worth $200 but only want to purchase $20 worth of Tide & $50 of scotch?

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