What your future wallet could look like
When was the last time you paid cash for something? Even though a few vendors still prefer cash, I know I use my credit card for almost everything I buy these days — that is, if I’m not using PayPal or my phone! Virtual money is just so much easier to use. Now bitcoin is the new up-and-coming denomination of value which exists only in virtual form – and, just like gold, but unlike online gaming currency, it’s inherently scarce.
In 2009, bitcoins were invented: a currency with no physical form or issuing authority, just cryptography protecting them from copying or counterfeit. Their nuts and bolts are based on a whitepaper written by someone called Satoshi Nakamoto [PDF]. People started collecting these coins; select online stores started accepting them in lieu of normal money; and the rest is history.
Bitcoins are a “cryptocurrency”. Instead of being backed by physical scarcity, they’re generated mathematically. There can never be more than twenty-one million of them. Until that limit is reached (projected to be in 2140) anyone can make bitcoins at home by running algorithms to discover them. Called “mining”, generating bitcoins involves nothing more than downloading the freeware bitcoin client and selecting a menu option. But you’re not guaranteed to find any in your first hour of hunting or even your first year, and it gets harder as more and more people jump on the bandwagon. Especially when some such jumpers are building dedicated “mining rigs” that turn GPUs over to the task and can sift through the work much faster than your laptop.
If you don’t want to pour electricity and computing power into this lottery, you can also simply buy bitcoins – and once you have them, you can sell them. They’re worth money, in various conventional formats; several different websites provide exchanges. You can also spend bitcoins: a variety of vendors already accept them for goods and services.
Some people are very excited about bitcoins. There’s a few good reasons. One, they’re decentralized: unlike government-generated currencies, no person or organization can exert control over bitcoins in general. They might inflate or deflate depending on what the market is doing, but there is no danger of a Central Bitcoin Treasury deciding to spontaneously triple the number of coins in existence and drop their value that way. Two, bitcoins operate on peer-to-peer software: if you want to give your friend a bitcoin, you lose one bitcoin and your friend gains one bitcoin, with no one helping themselves to a little off the top as a transaction fee. There are fees associated with changing bitcoins into other currencies, and if you want them held in escrow that can also cost you, but just straight-up handing them over is free. And three, they seem to be going up over time: if you were a lucky miner back when bitcoins were new, and found a bundle of fifty to call your own, those fifty bitcoins are now worth hundreds of dollars, compared to the zilch you could have sold them for when they were still completely obscure. For these reasons and others, bitcoins are becoming increasingly popular among early technology adopters (new!), wall street commodity investors (money!), and even survivalists (no government!).
Like dollars — except worth something in 2050 after all the world governments collapse
On the other side of the (bit)coin, some people are very dismissive of the new technology. Some concerns (“it’s a bubble”) are more valid than others (“it’s a pyramid scheme”). While bitcoins could persist indefinitely as an alternative currency – even grow in popularity until they’re used everywhere dollars and euros and whatnot are used now – they could also suffer from a sudden collapse of attention, and therefore devalue. It’s not a pyramid scheme, because you don’t have to pay anyone to start participating in the bitcoin economy and your success or failure doesn’t depend on recruiting others. But on the other hand, people who got into bitcoins when they were new got to take advantage of easy initial mining and have amassed large fortunes that you can’t duplicate now that miners are starting to compete so much harder for the remaining bitcoins. And if you start to value bitcoins, that drives their price up and makes those early adopters that much richer.
Other criticisms include the electronic-dependent nature of the currency. You can’t easily stash bitcoins under your mattress. (Well, unless you want to print them out on paper!) And if your area’s Internet goes down, you can still walk to the convenience store and pay for a soda, but you can’t buy anything with your bitcoins. Then again, that’s true of anything you’d buy online with any currency. Finally, because bitcoins run on cryptography, there’s some risk that a combination of advanced cryptanalysis could crack them wide open and leave them vulnerable to copying or theft. Although this is not a weakness bitcoins currently have and most knowledgeable observers believe their open source implementation is mathematically secure, there’s been over 125 cryptographic algorithms which were released, only to later be broken. Then there’s what happened in the recent Mt. Gox debacle, which involved a single user account on the website being breached and the hacker selling off the many coins in said account… enough to temporarily crash the market. Still, banks dealing in standard denominations send warnings about being careful with one’s account information too; this risk is not unique.
Overall, bitcoins have advantages and disadvantages relative to standard currency that make them appealing to a growing niche. Their bubble could burst or they could fall prey to black hats, but they could also deliver on all their promise and come to encompass a substantial fraction of the world’s wealth with their twenty-one million units of cryptocurrency. As my friend who recently purchased $1000 worth of bitcoins put it, “It would be really embarrassing if they went up 1000x again and I was the only one of my friends who wasn’t a bitcoin billionaire”. And even if bitcoins in particular fail, the idea of an online crypto-currency is likely to live on. Decentralized, organic peer-to-peer money is a compelling idea and bitcoins could have any number of successor denominations with the same appeal.
[image credits: joeduncko.com; bitcoin.org]
Comments
Exactly what does mining bitcoins do? What is that computing used for? Does it contribute anything to humanity?
You’d be surprised how much computing power doesn’t contribute anything to humanity. Look at the banks for one. And now the are developing one of the most well-financed A.I.’s and algorithms simply for micro-trading stocks thousands off times a minute.
Unfortunately knowledge and energy doesn’t go to where its most needed, but to where it can make the most money.
I believe that bitcoins are going to change the world. I recommend that everyone read up about them. If you are interested in buying/selling bitcoins, I personally use and recommend http://www.tradehill.com – they have lower fees than the main exchange (mtgox), and their website seems more professional IMHO.
Also, I have a code that will get you 10% off trading fees there for life: TH-R1168
Enjoy!
What thousands of people fail to realize is that bitcoins are already hyperinflated. This is because bitcoins aren’t based on the uniqueness of the coin, but the security of the system as a whole. As demonstrated when the price dropped when a single hacker crashed the market. Any chink in the armor either on the client side or the server side or in the cryptographic algorithm itself is enough to crash the markets.
I have one comment to the main article; as mining returns diminishes, it may become difficult to do free transactions in a timely manner. This is because the mining process (in addition to mine coins), also verifies the transactions, and eventually this work has to be paid for in a different manner, also called transactions fees. If you look closer at the bitcoin client, you can see that you have the option to add a fee (what you wish to pay for the transaction). Miners will then have the opportunity to prioritize better paying transactions.
This article is a nice summary of bitcoin.
You mentioned that: “And if your area’s Internet goes down, you can still walk to the convenience store and pay for a soda, but you can’t buy anything with your bitcoins”
This isn’t strictly true, as there is at least one company (bitbills.com) which allows you to buy holographic credit-card sized cards denominated in BTC.
E.g you can buy a 1BTC, 5BTC, 10BTC etc card. So long as the card hasn’t been tampered with – it can be trusted to be worth the number of bitcoins shown on the card and used like cash.
You can verify that the card is worth what it says by entering it’s displayed address into blockexplorer.com to see the value in the shared blockchain.
These bitbills do have the limitation that you can’t split them into smaller amounts or easily get change in bitcoins – but apparently this company will soon be producing sub-bitcoin denominated cards too.
By destructively opening up the card to read the private key – the bitcoin value of the card could be transferred back to a standard bitcoin in a computerized wallet. This is why bitbills should only be accepted if they are completely intact.
I actually downloaded the software and participated in this for a whopping two weeks. I managed to amass a whole single bitcoin. I can see the value in it, overall, but it’s definitely a speculator’s currency. I personally would have just as much luck buying physical reality gold. I suppose if I had left the algorithm running on my machine, I’d have a few more now. I think it should be viewed more as an “investment”, than an everyday spendable currency. And with the shaky economy, I need everyday spendable denominations accepted by places like WalMart. Maybe one day when Google Wallet is a reality, I’ll get back into bitcoins again. And as for my single bitcoin? Once you uninstall the software, you effectively stop participating. The coin is gone, someday to be regenerated for some other investor. The program knows exactly how many bitcoins exist, and who owns them. You can’t scam the system.
Joe, your coin is gone if you deleted the ‘wallet.dat’ file in your appdata directory.
If that’s the case – nobody will ever get that coin again – it’s simply gone from the system forever. There are probably many thousands of coins that have been lost in this way already, but as bitcoins are divisible down to 8 decimal places, this is generally not considered a problem.
At current valuation of about $13USD – perhaps it’s not interesting to you to retrieve that 1BTC.. but maybe you should look for that wallet.dat file and store it away.. just in case bitcoin really does take off and that 1BTC is more valuable
@Joe: When you uninstall the software, your coin isn’t necessarily gone. It won’t be until you delete your wallet file. And when you do that, then it will be gone forever, for anyone. A coin is never regenerated. Deleting your wallet file (and all backups of it) equates to burning all your bills and melting your coins.
This can of course be considered an additional danger with bitcoin; if something happens with the machine where you had your bitcoins, then you may have lost your fortune. Of course, unlike normal money, you _can_ backup your bitcoins.
@jmn & @larsivi Sometimes it’s good not to know too much about how Windows does its directories. I do indeed still have my wallet.dat file. So maybe I’ll reinstall the Bitcoin program, and just let it run. Maybe check on it once a week, rather than daily, which is why I got frustrated with it in the first place. Thanks, guys!
As a final comment to my thread, I have reinstalled. And all my information is as though I never deleted the program. Except, of course, I still only have that single Bitcoin. Thanks, again!