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Bitcoins: Rare Opportunity to Watch Currency Evolve

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 [3]. Now there are companies offering bank-like services for Bitcoin [4], after the theft. There’s also now malware that steals Bitcoins [5]. 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 [6].

If you want a more comprehensive write-up of the nature of Bitcoin, especially the nuts and bolts details, The Economist [7] has the best one I’ve read so far.