I read information on the Bitcoin.org website, but it didn’t really help.
How is Bitcoin a reliable medium for trade? How does it store value? I understand that I can buy bitcoins using US dollars, Euros, Yen, etc. Does that mean it is just points, like frequent flyer miles? What keeps me (or anyone) from claiming to have a million bitcoins and spending them?
I realize that, except for cash on hand, all of the money that I have exists merely as data in a computer somewhere. The only reason it has value is because the people and businesses I trade with agree that it has value. So, how does bitcoin differ from the US dollars that I already spend? When I sit down to pay my monthly bills, all I do is go to my bank’s website and play with numbers. No real money moves at all. Is that how bitcoin works?
I feel like I understand so little that I don’t even know how to ask questions.
What is bitcoin, how can I use it, and would I want to?
This about as basic as it gets…(clarifications welcome but no nitpicks, I’m sacrificing pedantry for simplicity))
To mine bitcoins you have your computer do math problems, and when it correctly solves one you get some bitcoins.
You’ll send them to your wallet address, which is a piece of software. Think of the key that allows you to then send them on as a code of sorts.
You can’t forge bitcoins because the blockchain would reject them as not valid, the blockchain has to confirm all transfers.
Why would you want to use bitcoins? Well maybe you want to buy drugs on one of the silkroad copy cats, or maybe your local currency is subject to wild fluctuation and you’d like to keep it in bitcoins. Or maybe you want to transfer money overseas without transporting actual cash or using expensive services, send bitcoin and the person on the other end can cash them out by selling them to others for cash.
It is just points, a little bit like frequent flyer miles, but:
It doesn’t have a fixed exchange rate, in dollars or Big Macs or flights to Miami. It fluctuates like a real-life currency.
There’s no central computer that stores the value of your wallet. However, there is a distributed, decentralised system that establishes a consensus on how many bitcoins exist and which wallet owns what. Think of it as a big “ledger” that everybody can read. A transaction (spending or receiving bitcoins) is a transfer from one wallet to another within this system. The system makes it extremely difficult to cheat. This is what keeps you from claiming to have more bitcoins than you actually have.
How that system works is, well, complicated. But it’s based on computational complexity. Some operations, like verifying that a transaction has taken place, cost almost nothing to calculate, so all computers can easily agree on the correct contents of the “ledger”.
But, by design, the lengthening of the “ledger” is very expensive, computationally speaking. The system rewards those computers that contribute to maintaining the “ledger” by issuing free bitcoins to the corresponding wallets. The computations involved are complex enough that you could easily spend more on electricity to run your computer than the value of the bitcoins you earn; only the latest GPUs or custom chips can perform these computations efficiently. A person who participates in this way (and receives bitcoins for it) is said to be mining bitcoins (by analogy: working hard to get something valuable).
But an individual can possess bitcoins without doing any mining, just by purchasing them using a normal currency, or receiving them in exchange for goods or services as they would receive cash.
Another kind of big picture idea is that all forms of money are really just numbers. Hundred dollar bills are just pieces of paper with no intrinsic value, so bit coins are like all other forms of money, and, indeed, like all forms of commerce… a bitcoin is worth whatever people are willing to pay for it. Just as are dollars, yen, and bushels of wheat.
That’s not really true. The government of the United States issues hundred dollar bills and it has undeniable real world assets to back up their value. Bitcoins don’t have that. They’re the ultimate fiat currency with nothing behind them.
Yes, but there isn’t a real-world asset to back every US dollar. The bottom line is that US dollars are created out of thin air when the government says they’re created. The reason we trust the value of a US dollar is because someone can’t just write “100 US dollars” on a piece of paper and say here’s some money. With Bitcoin, the government has been replaced with very complicated math. You know what it takes for a Bitcoin to be created and you can make the decision whether you trust the scarcity enough to accept it as currency.
The other important things to realize about bitcoin are that it’s impossible to track, and that it’s very easy to track.
That is to say, it was designed to be impossible to track and perfectly anonymous, a trait which is very desirable for, for instance, international drug traffickers. And, in fact, if everyone uses the system in such a way as to maximize anonymity, it works mathematically perfectly for this purpose. But the catch is that it’s really inconvenient and inefficient to use the system in such a way, and if you don’t, then there’s a clear network of activity for anyone to see. Add just a little bit of old-fashioned detective work (say, catching a few low-level criminals, or setting up a front business as a bitcoin exchange), and you can connect a great many numbers to names.
Personally, I suspect that the system was actually invented by law enforcement agencies, just to make it easier to catch sloppy criminals.
Is anybody mining bitcoins by harnassing zillions of computers while they are ‘asleep’ or when their screensavers would otherwise be active, i.e. sorta like SETI@home or any of the other collective computer undertakings. I’m thinking, for example, of having all of some large institution’s computers mine bit coins rather than displaying flying toasters.
By the way, could a country’s government make the use or ‘possession’ of bitcoins by its citizens illegal? Could the US government do so? Or would that violate some legal or Constitutional principle of which I am unaware?
I don’t think the US government would want to outlaw possession of Bitcoins. The Treasury just made a nice chunk of change auctioning off Bitcoins seized from Silk Road.
I didn’t say the United States was putting real-world assets behind dollars. They’re fiat currency. But the United States as a guarantor of dollars is a lot more credible than the public opinion that is the apparent guarantor of bitcoins.
It does not “store” value. Its value comes from the perception that the supply is limited (“mining” bitcoin takes both time and energy and that cost is elastic and will expand if the process becomes too easy) and that it can be verified by any user (the blockchain mentioned elsewhere). Assuming that its value becomes stable at some point, users can depend that it will not lose undue value to inflation, and they can spend it without the intervention of one or more third parties, all of whom would take a cut.
Absolutely. All currencies involve a leap of faith, it’s just the leap may be of different degrees depending on whether it’s the US, Germany during the era of hyperinflation, or Bitcoin, etc.
Um…what do you think a personal check is, if not someone just writing “here’s some money” on a piece of paper?
The reason we trust the US dollar is because they are issued as legal currency by the stable government of the largest economy on the planet. Or more specifically, US dollars used by and accepted at any US bank (and pretty much any foreign one).
Probably more importantly, the US dollar is the only acceptable form of payment of your tax obligation to the Federal, State and in some cases local government.
Just because something has a value in trade does not make it a good form of currency. The recent crash of a major BitCoin exchange and the disappearance of millions in Bitcoins for example. Another example is how I typically resolve such discussion about the value of BitCoins by asking the other person to go pay our bar tab in BitCoins.
BitCoins are more like virtual diamonds:
They are more or less untraceable
Their value is arbitrarily kept high by a small cartel who controls most of the supply
They can be traded, often for drugs, guns, human trafficking, and other contraband
I like tech shit as much as the next guy. But I’m unclear how a “currency” that’s not backed by any stable government and seems to primarily used by hobbyists, shady start-up entrepreneurs or black market exchanges is a good thing.
There are bitcoin miner screensavers and simple java based miners that you can run just by going to a url with a code designating your account. There are also bootable linux live cd’s you set to your account and can just pop into a machine and they just start mining.
There are a couple of points worth countering here.
First, bitcoin vs dollar is an unfair comparison. It lets you say things like “backed by the strongest government” without acknowledging that US dollars are just one example of a currency. Plenty of currencies are not backed by the US government.
Second, the whole concept of currency is relatively new in human civilization. We’re still working out all the details, from an anthropological perspective. All that is necessary for a currency to exist is that people have faith in it. Whether that faith is due to a government guaranteeing it, or a creation process that makes it impossible to forge, doesn’t matter. If people trust the currency, they’ll use it.
You don’t trust bitcoin because you’re not convinced that it will ever be widely accepted, or that it’s impossible to forge, or, you think the total number of bitcoins is arbitrary (like US dollars aren’t!), or a number of other reasons. However, I think there’s a good chance that bitcoin or something like it will be the first true universal global currency. Governments can change the rules of their currency whenever they want to. National currencies like dollars are unstable and (truly) arbitrary, and you never know when some radical political movement will finally succeed in deliberately sabotaging it. People only use dollars because there’s no other option.
Bitcoin on the other hand, has several advantages over dollars. It’s harder to steal. It’s value is immune to political financial whims. It’s truly international. Nobody has yet figured out how to forge them, despite a huge incentive to do so. The one, single advantage it doesn’t have is that it’s still too new to be widely accepted, and therefore people are (rightly) not convinced that it’s truly as good as it seems. The fact that mostly lowlifes are using it doesn’t change the fact that its a damn good, maybe as perfect as we’ll ever see, form of currency.
I’m not sure why people think that scarcity creates value. That simply isn’t true: scarcity *of something someone wants *creates value. If nobody wants something, then it’s worthless no matter how rare it is.
For instance, gold is worth more than silver because it’s rarer. But both gold and silver have value because they’re pretty, and people want pretty things. If gold looked like lead, it would be worth much, much less .
What I’ve read is that it’s perfectly easy to maintain anonymity when owning Bitcoin - you pay by card, put them in your wallet, then ‘wash’ them using an online service so the replacement coins - which go into an anonymous online wallet - have no trackable trace. Only you have the requisite codes to use it, which you do from a public computer.
The problems occur when spending them. Where are you going to have your drugs delivered to? A P.O. box can be anonymous but if the po-po want to know who picks them up that wouldn’t exactly be difficult. If you consider that less of a risk than going to a street supplier and risking being robbed or worse, that’s your choice.
Plus the government can always act as a supplier on one of the secret online marketplaces. They probably wouldn’t bother with small time buyers but if you’re wanting to purchase a lot - or mad stuff like a dirty bomb - then you’d likely be taking an enormous, stupid risk.
