03 June 2011

Meet the "bitcoin"

According to Smart Money, the cybercurrency bitcoin is experiencing a surge in popularity - and in value:
The best performing currency of the past year isn't Brazil's real, up 15% versus the U.S. dollar, or Australia's dollar, up 27%. It's the Bitcoin. A year ago one was worth half a penny. Thursday morning it hit $10.50. That's a gain of more than 200,000%.

What's a Bitcoin? It's a peer-to-peer system of electronic money that allows payments to be sent directly between two parties without the need for a financial institution...

There are about six million Bitcoins today. The number will approach 21 million beginning in the 2030s but never exceed it. The finite supply of Bitcoins might help explain the frantic demand for them...

Users get Bitcoins in one of several ways. "Miners" set their computers to work solving problems in exchange for coins. The more miners there are, the more difficult the problems become, which keeps the rate of supply stable. At recent exchange rates, high-end machines can produce $30 worth of Bitcoins per day, but consume a vast amount of energy in doing so...

Any fiat currency -- dollars, euros, Bitcoins -- gets its value from trust. Dollars can't be cashed in for anything; rather, we accept them as payment with the belief that others will accept them, too. That's another reason the price of Bitcoins has rocketed over the past year. Two years ago, almost no one accepted them for payment. Over the past year, a handful of early adopters began trading services for them -- mostly programmers offering things like website design and hacking consultation. In recent months, a handful of pioneers have begun selling real goods for the start-up money...

More than a dozen sites now sell goods for Bitcoins, including T-shirts, coffee and natural pet food. At least one, The Arms Locker, says it offers firearms. Another, Silk Road, is a forum for people selling recreational drugs. How can that be? Bitcoin transactions leave a record of times and amounts, but not identities...

It's not clear what regulators think of Bitcoin. The Constitution gives Congress the sole authority over U.S. money. In March, a North Carolina resident was convicted of minting his own Liberty Dollars to reduce reliance on and compete with the greenback. He faces up to 15 years in prison.

Bitcoins aren't U.S. currency, however, and Norman says the Bitcoin Consultancy doesn't operate in the U.S. And as with file-sharing software, Bitcoin operates as a peer-to-peer network, raising the question of how regulators could stop it if they wanted to. The FBI didn't respond to requests for comment.
It's not discussed in the article, but I suspect bitcoins offer a way for users and merchants to avoid a variety of taxes, both on income and on transactions.  It will be interesting to see how this plays out.


  1. The problem with bitcoins is deflation. As the amount of money is fixed at around 21 million coins, this trend will continue to accelerate.

    As everyone will hoard more and more bitcoins in anticipation of even higher profits, the currency itself will stall, at some point.

    Even if bitcoin 2.0 comes around, offering more possible coins, many, or most, people will still stick to the old currency as it will be worth more.

    So yes, it will be interesting to see how it plays out, but I am not sure it will be of much actual use in the real world. At least not in this iteration.

  2. There's a good article here on the problems with BitCoin. http://www.quora.com/Is-the-cryptocurrency-Bitcoin-a-good-idea/answer/Adam-Cohen-2

  3. Let me begin with a point of order - Bitcoins aren't fiat currency. There are a finite number of them and the market governs their price.

    That being said: all currencies, fiat or no, are based on trust.

    Articles critical of bitcoins by Adam Cohen: part one, and part two.

    He seems to think that the built-in deflation of bitcoins will cause Gresham's law ("bad money drives out good") to come into effect which I don't think is the case since no one is required to accept bitcoins (i.e. they aren't legal tender).

  4. This kind of side-stepping of national fiscal regulation isn't anything new - think of brandy smuggling in the 18th C.
    Whether brought about by a new technology, or by a change in rules, or governance perceived as oppressive, it'll happen.
    And, surely the authorities will try to fight back with tools already at their disposal, or new powers they can grant themselves. This instance is perhaps a little harder to crack than some, and there will be considerable propaganda saying that it's the root of all evil, but what would you expect when revenues are threatened?

  5. Update: mt.gox a major bitcoin exchange was compromised.


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