Bitcoin recently entered public consciousness as the new “it” thing in business and investment. To some, it offers a potential paradigm shift in how money is used, and can be used to boon a business or become independently wealthy. To others, it is excessively volatile, legally dodgy, or a sign of the coming apocalypse. But what is it, exactly? We’re going to take a look at how it works, and what people think about it.
What the heck is bitcoin?
Bitcoin is an entirely digital currency developed in 2008 by a person under the pseudonym Satoshi Nakamoto. Despite the image you see above, there is no physical element to bitcoin; it exists entirely on computers and has no physical object (such as gold) providing it value. It uses a complicated programming technique to attribute an amount to a user. The user stores a file, known as a wallet, on their computer to access the bitcoins under their possession.
Unlike most currencies, bitcoin is completely decentralized. There is no bank, government, business, organization, or person in control of regulating it. While a wallet file is stored on the user’s computer, bitcoin simultaneously makes use of other users’ computers on the internet to verify its legitimacy. If you’ve heard of the term “block chain,” this is that idea in practice. Because of its complicated encryption algorithm and use of block chain, bitcoin has yet to be hacked or stolen and will likely remain safe for many years.
Ok, so what’s so great about it?
Bitcoin is supported by Libertarians due to its decentralized and individualist nature. Nakamoto originally developed it to avoid a controlling party’s interference as a result of the 2007 economic downturn as a way of providing stability without interference. Bitcoin can’t be tracked, so it can’t be taxed. Also, it will never be minted – at conception, a finite amount of bitcoins were introduced, and there will never be more. As a result, its proponents argue it is ideal for handling loans, as amounts will never be adjusted by an authority.
Business have also adopted bitcoin as the a new trend for increasing profits. Details regarding this are hard to provide because each business can use it differently and because the currency is so new. That said, there is a lot of speculation on how making money will be effected by the currency. Individuals have also found methods to systematically purchase and sell the currency automatically in order to make a profit without doing work. This process is described more below.
But why don’t some people like it?
A number of elements that weren’t predicted have resulted since the currency’s conception. Bitcoin is a notoriously volatile currency. Since the value of bitcoin is based on the value its users attribute to it, it can change drastically depending on whether an organization accepts it as a currency, or refrains from doing so.
Programmers have developed algorithms that track the value of the currency and buy it for traditional currency when it’s low. When the currency can be sold for profit, these programs will sell it automatically. This practice is known as bitcoin mining. It has been profitable for many, but is criticized for being a get-rich-quick scheme. It has greatly inflated the selling price of computer hardware, and the electrical power needed to run mining computers causes strain on the environment.
To many, bitcoin is a scary concept. The idea that a currency is not based on physical objects isn’t new, but adding another layer of decentralization is a major change to the current financial system. How would a government collect taxes on a currency that it can’t track? If a financial system is run by computer algorithms that can adapt to changing factors almost instantly, wouldn’t certain circumstances produce a volatile feedback loop? Or for that matter, how would police organizations monitor criminal spending? The currency originally gained its value from being adopted by the online retailer Silk Road. This organization sold many things, some of which were illicit, such as drugs and weapons. Silk Road has since been shut down, but the potential for supporting a black market still exists, and likely is happening as you read this article.
So that’s bitcoin in a nutshell! If you’re curious for more information, try checking out one of our books on the subject.