# Is there a simple explanation of Bitcoin?
**URL:** https://boards.straightdope.com/t/is-there-a-simple-explanation-of-bitcoin/692898
**Category:** Factual Questions
**Created:** [July 11, 2014, 11:54pm UTC](https://boards.straightdope.com/t/is-there-a-simple-explanation-of-bitcoin/692898 "2014-07-11T23:54:28Z")
**Posts on this page:** 20
**Page:** 2
### Author:  [@Little\_Nemo](https://boards.straightdope.com/u/Little_Nemo)
#### Post date: [July 13, 2014, 7:29pm UTC](https://boards.straightdope.com/t/is-there-a-simple-explanation-of-bitcoin/692898/21 "2014-07-13T19:29:57Z")
> [@Alessan](#):
>
> 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 .
There’s an equivalent issue with labor (something Marx missed). The value of labor isn’t just the amount of work done - it has to be directed towards a useful end. If a crew of men lay out a line of asphalt in the right place, they’ve built a road. If they lay out the same amount of asphalt in the middle of some random wilderness, they’ve just made a large mess.
And that’s the part I’m not seeing in bitcoin production. Okay, you have to program a computer to perform some very complex mathematical operations to obtain bitcoins. But what purpose does the solution of these mathematical operations achieve? Do these solutions have any real world application? And if not, why should their solution be the basis for a currency?
To me, mining bitcoins seem like the equivalent of solving crossword puzzles. Yes, it takes some effort to accomplish but it’s not like anyone needs the results. Nobody would pay you to complete crossword puzzles so why should somebody pay you to mine bitcoins?
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### Author:  [@friedo](https://boards.straightdope.com/u/friedo)
#### Post date: [July 13, 2014, 8:06pm UTC](https://boards.straightdope.com/t/is-there-a-simple-explanation-of-bitcoin/692898/22 "2014-07-13T20:06:28Z")
> [@Little\_Nemo](#):
>
> And that’s the part I’m not seeing in bitcoin production. Okay, you have to program a computer to perform some very complex mathematical operations to obtain bitcoins. But what purpose does the solution of these mathematical operations achieve? Do these solutions have any real world application? And if not, why should their solution be the basis for a currency?
The problems are not arbitrary. The cryptographic solutions found by miners are what allows the Bitcoin blockchain to be extended.
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### Author:  [@Alessan](https://boards.straightdope.com/u/Alessan)
#### Post date: [July 13, 2014, 9:16pm UTC](https://boards.straightdope.com/t/is-there-a-simple-explanation-of-bitcoin/692898/23 "2014-07-13T21:16:04Z")
> [@friedo](#):
>
> The problems are not arbitrary. The cryptographic solutions found by miners are what allows the Bitcoin blockchain to be extended.
They’re arbitrary in that they have no real-world purpose.
Tell me something - does anyone actually \*want \*bitcoins? Not as an investment or a means of exchange, but in and of themselves? People want gold because it makes pretty jewelry; people want dollars because they need to pay taxes. Why would anyone want a bitcoin?
In other words - for something to have value, it needs to have an end user. Who is the bitcoin’s end user?
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### Author:  [@friedo](https://boards.straightdope.com/u/friedo)
#### Post date: [July 13, 2014, 9:48pm UTC](https://boards.straightdope.com/t/is-there-a-simple-explanation-of-bitcoin/692898/24 "2014-07-13T21:48:16Z")
> [@Alessan](#):
>
> They’re arbitrary in that they have no real-world purpose.
>
> Tell me something - does anyone actually \*want \*bitcoins? Not as an investment or a means of exchange, but in and of themselves? People want gold because it makes pretty jewelry; people want dollars because they need to pay taxes. Why would anyone want a bitcoin?
>
> In other words - for something to have value, it needs to have an end user. Who is the bitcoin’s end user?
This is the same pointless debate we see in every Bitcoin thread, with people trying to shoehorn some personal definition of “value” into transactions that other people are undertaking.
The only correct definition of the value of something is what somebody is willing to exchange for it.
People (at least, some people) are willing to exchange good and services for Bitcoins, because they believe other people down the road will also be willing to do so. Believe it or not, this is no different than dollars, or gold, or shares of stock, or alpacas. Currency is not imbued with any special powers; it is a commodity like everything else. National currencies are a _privileged_ commodity, because they are given special status under the law and serve as a universal baseline for barter, but they don’t function any differently.
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### Author:  [@Alessan](https://boards.straightdope.com/u/Alessan)
#### Post date: [July 13, 2014, 10:25pm UTC](https://boards.straightdope.com/t/is-there-a-simple-explanation-of-bitcoin/692898/25 "2014-07-13T22:25:28Z")
> [@friedo](#):
>
> People (at least, some people) are willing to exchange good and services for Bitcoins, because they believe other people down the road will also be willing to do so. Believe it or not, this is no different than dollars, or gold, or shares of stock, or alpacas.
Dollars pay taxes. Gold makes jewelry. Stocks are parts of businesses that make or sell something someone wants. Alpacas make sweaters. What do bitcoins do?
And yeah, right now people are willing to exchange goods and services for bitcoins; And then they hurry to pass them on to someone else before the bottom drops out. That’s how pyramid schemes work.
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### Author:  [@friedo](https://boards.straightdope.com/u/friedo)
#### Post date: [July 13, 2014, 10:57pm UTC](https://boards.straightdope.com/t/is-there-a-simple-explanation-of-bitcoin/692898/26 "2014-07-13T22:57:19Z")
> [@Alessan](#):
>
> Dollars pay taxes.
So? What is the origin of your premise that a medium of exchange must “do” something other than being a medium of exchange? You can’t pay your taxes with greenstamps, Ithaca Hours, or SkyMiles, but people can and do use all those things for trade.
> [@](#):
>
> And yeah, right now people are willing to exchange goods and services for bitcoins; And then they hurry to pass them on to someone else before the bottom drops out. That’s how pyramid schemes work.
No, it isn’t. You might be thinking of Ponzi schemes, though. Bitcoin is a lot of things, but it is neither a pyramid scheme nor a Ponzi scheme, both of which require centralized management by definition.
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### Author:  [@msmith537](https://boards.straightdope.com/u/msmith537)
#### Post date: [July 13, 2014, 11:11pm UTC](https://boards.straightdope.com/t/is-there-a-simple-explanation-of-bitcoin/692898/27 "2014-07-13T23:11:19Z")
> [@Mosier](#):
>
> 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.
No, but all currencies are backed by some government.
> [@Mosier](#):
>
> Second, the whole concept of currency is relatively new in human civilization.
I guess, if you consider 2000 BC “relatively new”.
> [@Mosier](#):
>
> 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.
Currency and monetary systems continue to evolve. But generally, yes, backing by some government and difficulty to counterfeit tends to be two key criteria of a good currency. Saying “people have faith in it” is simplistic. They have faith because they know they can go to the bank, take out some money and use it pretty much anywhere as a form of exchange.
> [@Mosier](#):
>
> 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.
The advantage that it doesn’t have is:
Wild price fluctuations
Perception that it is primarily a medium of exchange for black markets and organized crime
Difficult to use (how exactly would I go about using BitCoin to transfer wealth to someone else?)
Also, your perception that the US Dollar is somehow “arbitrary” or “unstable” shows your own lack of understanding. The USD does not wildly fluctuate gaining 5x it’s value in one month then losing it the next. The US government has a lot of checks and balances in place to make sure no “radical political movement deliberately sabotages” the USD.
[BitCoin is also subject to market crashes and theft.](http://www.nytimes.com/2014/02/25/business/apparent-theft-at-mt-gox-shakes-bitcoin-world.html?_r=0) Except unlike US dollars in your bank, they aren’t insured by the FDIC.
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### Author:  [@Little\_Nemo](https://boards.straightdope.com/u/Little_Nemo)
#### Post date: [July 13, 2014, 11:20pm UTC](https://boards.straightdope.com/t/is-there-a-simple-explanation-of-bitcoin/692898/28 "2014-07-13T23:20:02Z")
> [@friedo](#):
>
> The problems are not arbitrary. The cryptographic solutions found by miners are what allows the Bitcoin blockchain to be extended.
I’ve asked this before and never gotten a straight answer. Do the solutions to the math operations used in the production of bitcoins have any use outside of the production of bitcoins?
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### Author:  [@Alessan](https://boards.straightdope.com/u/Alessan)
#### Post date: [July 13, 2014, 11:23pm UTC](https://boards.straightdope.com/t/is-there-a-simple-explanation-of-bitcoin/692898/29 "2014-07-13T23:23:30Z")
> [@friedo](#):
>
> So? What is the origin of your premise that a medium of exchange must “do” something other than being a medium of exchange? You can’t pay your taxes with greenstamps, Ithaca Hours, or SkyMiles, but people can and do use all those things for trade.
Companies have a legal obligation to exchange Greenstamps and SkyMiles for goods and services, respectively. Hours were a fad that fell into disuse. Try again.
> [@friedo](#):
>
> No, it isn’t. You might be thinking of Ponzi schemes, though. Bitcoin is a lot of things, but it is neither a pyramid scheme nor a Ponzi scheme, both of which require centralized management by definition.
My mistake. It is, however a bubble; in fact, any value Bitcoins have is a bubble - as a bubble is “trade in high volumes at prices that are considerably at variance with intrinsic values” (as per Wikipedia), and the intrinsic value of a Bitcoin is zero.
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### Author:  [@friedo](https://boards.straightdope.com/u/friedo)
#### Post date: [July 14, 2014, 4:37pm UTC](https://boards.straightdope.com/t/is-there-a-simple-explanation-of-bitcoin/692898/30 "2014-07-14T16:37:39Z")
> [@Little\_Nemo](#):
>
> I’ve asked this before and never gotten a straight answer. Do the solutions to the math operations used in the production of bitcoins have any use outside of the production of bitcoins?
Not that I can think of. Although the technology being developed to do really fast Bitcoin mining might have practical applications elsewhere.
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### Author:  [@friedo](https://boards.straightdope.com/u/friedo)
#### Post date: [July 14, 2014, 4:39pm UTC](https://boards.straightdope.com/t/is-there-a-simple-explanation-of-bitcoin/692898/31 "2014-07-14T16:39:49Z")
> [@Alessan](#):
>
> Companies have a legal obligation to exchange Greenstamps and SkyMiles for goods and services, respectively.
And if I execute a contract that says I will pay for something in Bitcoins then I have a legal obligation to provide goods or services for Bitcoins. What’s the difference?
> [@](#):
>
> My mistake. It is, however a bubble; in fact, any value Bitcoins have is a bubble - as a bubble is “trade in high volumes at prices that are considerably at variance with intrinsic values” (as per Wikipedia), and the intrinsic value of a Bitcoin is zero.
Yes, I would certainly agree that Bitcoins are currently over-valued (by a lot.) But that doesn’t mean that they don’t have value.
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### Author:  [@Little\_Nemo](https://boards.straightdope.com/u/Little_Nemo)
#### Post date: [July 14, 2014, 10:33pm UTC](https://boards.straightdope.com/t/is-there-a-simple-explanation-of-bitcoin/692898/32 "2014-07-14T22:33:48Z")
> [@friedo](#):
>
> And if I execute a contract that says I will pay for something in Bitcoins then I have a legal obligation to provide goods or services for Bitcoins. What’s the difference?
Skymiles and greenstamps are issued by corporations and are promises to provide future goods or services. They’re the equivalent of a coupon. Their value is dependent on the desire for that good or service and the expectation that the corporation will be able and willing to deliver it. But there’s at least something measurable behind skymiles and greenstamps.
What’s the equivalent for bitcoins? The people that issue them are not promising to accept them in exchange for anything.
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### Author:  [@Mosier](https://boards.straightdope.com/u/Mosier)
#### Post date: [July 15, 2014, 2:18am UTC](https://boards.straightdope.com/t/is-there-a-simple-explanation-of-bitcoin/692898/33 "2014-07-15T02:18:47Z")
> [@msmith537](#):
>
> No, but all currencies are backed by some government.
No, they’re not. Bitcoins are one example. World of Warcraft gold is another example. The only difference between them and “real” money is how widely accepted they are.
> [@](#):
>
> I guess, if you consider 2000 BC “relatively new”.
The “currency” of 4,000 years ago wasn’t currency. It was stamped metal that was worth nothing more than the melted value of that metal. Currency today means something more complex than that. If a dollar only bought the amount of goods worth the paper it was printed on, we’d all be in trouble!
> [@](#):
>
> Currency and monetary systems continue to evolve. But generally, yes, backing by some government and difficulty to counterfeit tends to be two key criteria of a good currency.
No, a government does not have to back a currency for it to be valuable. The only reason it seems so is because there isn’t currently a counter-example. A government backing a currency doesn’t add anything more than extra layers of confidence. If that confidence could come from another source, it could stand on its own without a government backing it.
> [@](#):
>
> Saying “people have faith in it” is simplistic. They have faith because they know they can go to the bank, take out some money and use it pretty much anywhere as a form of exchange.
Obviously not that simple. The value of the dollar rises and falls due to varying degrees of faith people have in it, just like bitcoins.
> [@](#):
>
> The advantage that it doesn’t have is:
> Wild price fluctuations
Not true. Dollars fluctuate less now than before, and less than what other currencies do, but lots of real-world currencies have fluctuated in value every bit as much as bitcoin has. My argument is that bitcoin, being the only currency that isn’t limited arbitrarily, will suffer less from wild fluctuations over time.
Also, you can’t point to pretty much the only 30 year period of history that the dollar has been mostly stable, and proclaim “see, this is how currencies are supposed to work!” Try Comparing bitcoins to Continental currency printed by the colonies around the time of the Revolution. Talk about wild price fluctuations!
> [@](#):
>
> Perception that it is primarily a medium of exchange for black markets and organized crime
This is only a problem as long as people think it is. For the record, this perception is already starting to change. Dollars are probably more likely to be used for illegal transactions than bitcoins are, now.
> [@](#):
>
> Difficult to use (how exactly would I go about using BitCoin to transfer wealth to someone else?)
This is not an issue. Anything that allows you to transfer information from one machine to another will work, every bit as fast and smooth as your credit card.
> [@](#):
>
> Also, your perception that the US Dollar is somehow “arbitrary” or “unstable” shows your own lack of understanding. The USD does not wildly fluctuate gaining 5x it’s value in one month then losing it the next. The US government has a lot of checks and balances in place to make sure no “radical political movement deliberately sabotages” the USD.
I think you missed the reference I was making, where this very thing nearly happened very recently.
Anyway, the fact that dollars are stable NOW doesn’t mean dollars have always been stable, or that they won’t become unstable in the future. Dollars are subject to political whim. Bitcoins aren’t (kind of…there’s always the chance that a government will make it illegal, but that doesn’t make dollars inherently better than bitcoins any more than outlawing electric cars makes combustion vehicles better).
> [@](#):
>
> [BitCoin is also subject to market crashes and theft.](http://www.nytimes.com/2014/02/25/business/apparent-theft-at-mt-gox-shakes-bitcoin-world.html?_r=0) Except unlike US dollars in your bank, they aren’t insured by the FDIC.
The Mt Gox theft was not a hack, or an exploit, or any type of thing unique to digital currency. It was straight up embezzlement. The fact is, Dollars are easier to steal than bitcoins. The FDIC doesn’t magically insure your dollars for free. They charge you (well, us) for that service, even though you don’t typically notice it. Bitcoins would be easier to insure (again, because they’re harder to steal) and therefore cheaper and more efficient to insure.
Bitcoin’s problem at the moment is that people are treating it like a commodity, and not like a currency. People understand buying low, selling high. They’re saying “my bitcoins are worth X dollars/euros, etc” because it hasn’t quite sunk in yet that this could replace real currencies, not just be exchanged for them.
Finally, in the very article you linked there’s an important bit from a Bank of America report, which weighs in on the value of digital currency. “A December report from Bank of America said that virtual currencies could become an important new part of the payment system, allowing money to move more cheaply than it does with credit cards and money transmitters like Western Union.”
In fifty years, either virtual currencies will be circulated more than government currency is, or governments will have just outlawed virtual currencies to protect their own power.
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### Author:  [@Mosier](https://boards.straightdope.com/u/Mosier)
#### Post date: [July 15, 2014, 2:28am UTC](https://boards.straightdope.com/t/is-there-a-simple-explanation-of-bitcoin/692898/34 "2014-07-15T02:28:32Z")
> [@Alessan](#):
>
> My mistake. It is, however a bubble; in fact, any value Bitcoins have is a bubble - as a bubble is “trade in high volumes at prices that are considerably at variance with intrinsic values” (as per Wikipedia), and the intrinsic value of a Bitcoin is zero.
There is no currency anywhere that has intrinsic value. Rubles and dollars and rupees and yen are all intrinsically worthless. They’re just paper, or common metal.
For what it’s worth, I think bitcoins are absolutely severely overvalued at the moment. This is because people are speculating in bitcoins instead of treating it like money. The wild price fluctuations aren’t due to anything intrinsically wrong with bitcoin; the fluctuations are due to ignorance and psychology.
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### Author:  [@Mosier](https://boards.straightdope.com/u/Mosier)
#### Post date: [July 15, 2014, 2:36am UTC](https://boards.straightdope.com/t/is-there-a-simple-explanation-of-bitcoin/692898/35 "2014-07-15T02:36:16Z")
> [@Little\_Nemo](#):
>
> I’ve asked this before and never gotten a straight answer. Do the solutions to the math operations used in the production of bitcoins have any use outside of the production of bitcoins?
No. The calculations are basically “maintenance” for the bitcoin system. Your calculations maintain the bitcoin ledger, which is a bunch of data that documents every transaction that has ever been made with bitcoin. Everyone can read the ledger, which is how bitcoin transactions are verified. Anyone trying to do a transaction with spoofed data will be rejected, because the data differs from the ledger. It is thus impossible to spend a “fake” bitcoin.
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### Author:  [@Mijin](https://boards.straightdope.com/u/Mijin)
#### Post date: [July 15, 2014, 4:05am UTC](https://boards.straightdope.com/t/is-there-a-simple-explanation-of-bitcoin/692898/36 "2014-07-15T04:05:48Z")
> [@Little\_Nemo](#):
>
> I’ve asked this before and never gotten a straight answer. Do the solutions to the math operations used in the production of bitcoins have any use outside of the production of bitcoins?
No; and that’s one real criticism of Bitcoin; that an awful lot of energy and processor cycles are essentially doing busywork. Although of course, it’s not like all the other microprocessors out there are calculating the genome of a tumor or whatever.
Nonetheless many of the current and proposed successors to bitcoin use less computationally-intensive means of providing scarcity / authentication.
I’m not aware of any that require calculations of real-world problems, and I think that would be problematic, as what if someone finds an alternative means of solving that problem? With concrete mathematical problems we can formally say you need at least X cycles to calculate blah (so while computers may get faster it’s not like one individual will break the system overnight by making a hyperfast computer).
BTW I say “real” criticism, as once again a bitcoin thread has been hijacked, by people that confuse their own discomfort at using such a currency, with the definition of currency.
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### Author:  [@Alessan](https://boards.straightdope.com/u/Alessan)
#### Post date: [July 15, 2014, 5:44am UTC](https://boards.straightdope.com/t/is-there-a-simple-explanation-of-bitcoin/692898/37 "2014-07-15T05:44:42Z")
> [@Mosier](#):
>
> There is no currency anywhere that has intrinsic value. Rubles and dollars and rupees and yen are all intrinsically worthless. They’re just paper, or common metal.
Let’s just agree to disagree. I think that if someone has a legal obligation to accept something, that gives that thing intrinsic value. You don’t. Cool
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### Author:  [@Mijin](https://boards.straightdope.com/u/Mijin)
#### Post date: [July 15, 2014, 6:07am UTC](https://boards.straightdope.com/t/is-there-a-simple-explanation-of-bitcoin/692898/38 "2014-07-15T06:07:24Z")
> [@Alessan](#):
>
> Let’s just agree to disagree. I think that if someone has a legal obligation to accept something, that gives that thing intrinsic value. You don’t. Cool
So a currency undergoing hyperinflation has intrinsic value?
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### Author:  [@SHARKBITEATTACK](https://boards.straightdope.com/u/SHARKBITEATTACK)
#### Post date: [July 15, 2014, 6:46am UTC](https://boards.straightdope.com/t/is-there-a-simple-explanation-of-bitcoin/692898/39 "2014-07-15T06:46:10Z")
What I want to know is what exactly are these “math problems” people are using their rigs to solve? Who is benefits from the mining process?
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### Author:  [@Little\_Nemo](https://boards.straightdope.com/u/Little_Nemo)
#### Post date: [July 15, 2014, 9:08am UTC](https://boards.straightdope.com/t/is-there-a-simple-explanation-of-bitcoin/692898/40 "2014-07-15T09:08:18Z")
I still smell tulips in the air. Anytime you have a financial operation going on that appears to be growing just fine but nobody can point to exactly where the value is coming from, I think the likeliest explanation is it’s a speculation bubble.
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