Friday, May 3, 2013

On Bitcoin

The vast majority of this blog's readership demands that I explain what Bitcoin is and why its important, and so I shall.

Its a currency, and its also a means of exchanging currency.

Its got several interesting characteristics in both domains. As a currency: its supply grows at a constant rate. No one can make any more of it any faster than its designed to be made. In this respect, its somewhat similar to gold. Why does this matter? Well, institutions capable of creating currency at will have a rich history of abusing the power by creating as much of it as they feel suits their needs, and it tends to end in tears.

As a medium of exchange: it can be traded instantly between any two parties, regardless of physical location or borders between them. Its apolitical. Further: it doesn't require any one central institution to make the transaction happen. Why does this matter? People can make their own decisions about how to spend, and there's nothing any outside power can do about it.

How does it work? Think first of how the current US dollar works. The vast majority of dollars in existence have never been printed; they exist as records in a ledger in a central bank, the Federal Reserve. That ledger has entries in it saying that some number of dollars exist and have been moved to smaller banks, and those banks have ledgers with records in them saying that some number of dollars have been transfered to you. Fundamentally, the money is nothing more than records in a ledger that people tend to trust.

Bitcoin is the nearly same. The only difference: instead of having one ledger that everyone has to trust, copies of the ledger are distributed to anyone who wants to hold on to it, and updated every time someone creates a record that says some of their currency is to be transfered to someone else (how this is done is the clever technological bit). This means that no one, no matter how rich or powerful, has the ability to cheat by altering the ledger.

Why is this better? Again: no need to trust the issuing entity not to abuse the power.  If you live an a polity that's financially unstable and has the power alter the ledgers (for example Cyprus, Zimbabwe, Argentina... I could go on), it would be a very good thing indeed to have records in a ledger that they cannot alter.  What if you don't live in an untrustworthy polity? Well, its often hard to know that it's untrustworthy in advance. The thing is: they almost always are untrustworthy, eventually.

Also, again, theres no way to shut it down.

Now, ask yourself: if the claims I've made prove to be true, what are the implications? What would widespread use of it as a currency mean? If governments loose control of the money supply, how will they survive when they get into trouble with debt? If they fail to manage their debt crises and truly loose the ability to govern, how can a peaceful, prosperous civilization be maintained?

These points give the barest glimmer of why I think this phenomenon is worth paying attention to. Suffice to say: it could be very, very important if it survives. And I think it will probably survive.

And now for the links. The first says what I've just said in greater length and detail (and possibly eloquence):

The second is a place to buy them:

The third is a program that helps you store them:

And the fourth is a place to spend them (or earn them, since its an auction site):