Bitcoin has been one of the rising stars of the internet over the past couple of years. It started back in 2009 when you could use your own computer to reasonably mine for bitcoins and just one coin was worth basically nothing. Bitcoin, or more likely something similar, has the potential to change the way that the world economy works (though not for many, many years to come). Recently, Dave and I sat down on our Retrospectical Podcast to discuss bitcoin.
(Retrospectical Podcast Episode 07: Bitcoin - What is it & How do we use it?)
Like any currency, bitcoin is made stronger when it has a large user base and has a stable value. Unfortunately, Bitcoin currently has neither of these traits, but as a brand new technology, it’s not expected to have these right away. Nevertheless, Bitcoin is still relevant because it’s the world’s first widespread electronic cryptocurrency. Cryptocurrencies are cheaper, more secure and easier to use than traditional paper money.
Bitcoin is vastly more accessible to the entire world, when compared to traditional currencies. Only 7% of adults in developing nations have credit cards and 41% of them have bank accounts (compared to 89% in the developed West). Compare this to access to cellular phones, of which there are nearly 7 billion worldwide. According to the UN, more people have access to a cell phone than have access to a modern toilet. The point here is that there is already infrastructure in place in order to deliver banking services via Bitcoin to the entire world. This is especially beneficial when you consider that half of the world’s population doesn’t really have access to any banking services, even if they wanted it.
The decentralized design of Bitcoin keeps it from being controlled by one entity, like the Federal Reserve Bank in the United States. In this manner, the only changes to the currency are those that are accepted by a majority of the users. The decentralized nature spreads the computing power needed to run the network out across the entire world. This assures that a single entity would not be able to take over the network unless they had more computing power than the rest of the network combined, which is basically impossible.
All Bitcoin transactions are anonymous, but they are far from secret. The bitcoin network has a public ledger called the block chain (read more about it here). This is basically a list of every transaction that every bitcoin has been involved in from its creation. This feature is important because basically every computer on the network must agree that the block chain is correct, thus preventing someone from trying to falsify their copy of the block chain. For more info about the block chain and how bitcoins are created, check out the wiki section on mining, or the article on the bitcoin wiki.
Bitcoin can easily take the place of credit card transactions (maybe debit cards would be a more direct replacement, as Bitcoin does not extend credit to consumers). Bitcoin is vastly cheaper for the merchant than traditional credit cards, with transaction fees either being a fraction of credit card fees or completely nonexistent. Bitcoin can also be spent like cash, enabling a practical micropayment system that doesn’t have to be specific to one company or website.
You can spend bitcoin in denominations down to 1 Satoshi, which is 1/100,000,000th of a bitcoin. For reference, at the time of writing, $1 US is equal to about 410,000 Satoshi (where 1 bitcoin is equal to about $244 US). As a unit of measurement, a Satoshi is not very relevant today, but could be in the future once bitcoin is more widespread and has experienced some built-in deflation.
Today, some people think of bitcoin as an investment. This is mostly due to the volatility in the price and it should be noted that bitcoin is NOT an investment tool. Bitcoin is meant to be used as a currency, and is strongest when people use it as such and don’t treat it as a commodity. Over time, the value will stabilize and it won’t be something that people acquire as an investment, but something that people use as a tool.
Currently, most places to spend your bitcoins are websites, which doesn’t help out the saying that bitcoins “not money for the internet, it’s the internet of money”. Some of the larger websites that accept bitcoin are Expedia, Tiger Direct, Overstock.com, and Malwarebytes. Paypal has also set up an option for their merchants to be able to accept bitcoin now, enabled by just a click of the mouse.
Bitcoin has really not penetrated the brick and mortar stores yet. A quick yelp search only turns up one place in Chicago to spend your bitcoins (though there’s likely more) and just a handful of places in New York City. At least in New York City you can go to the Bitcoin Exchange and buy or sell bitcoins, or use a bitcoin ATM (also a few in Chicago).
So, what does the future have in store for bitcoin? Currently, it would be a stretch to even call the people using bitcoin today early adopters. For the most part, bitcoins do not appear to be used for commerce, though that is changing. I hope that the lunatic fringe gives way to the early adopters and that leads to a worldwide, easily used, and universally accepted cryptocurrency that can be controlled by the people and not a single organization. Call me an idealist, I don’t care, I just think that things can get a lot better with technology.