Today you pay with paper or plastic, but one day will you pay for things with Bitcoin? Let's explore what the concept of "money" really means, and role cryptocurrency may have in our financial future.

If you've been watching headlines for the past year or so, you've likely heard of Bitcoin.  You've probably heard about its wild price fluctuations, its role in the international drug economy, and the collapse of some of the early Bitcoin businesses, like Mt. Gox. Bitcoin has attracted a lot of press, most of it bad.   What you may not have heard about are the real reasons Bitcoin is interesting, and why people care about it at all.

What is this "Money" Stuff, Anyway?

The history of money is a story as old as agriculture.  For as long as humans have had crops and towns, we've required a good that we could use as a convenient "middleman" between horses and swords, kingdoms and plowshares.  Many ancient cultures chose gold as that middleman, because it was convenient.  Gold is desirable, portable, divisible, durable, and scarce - exactly the properties that make for a good currency (though there are differing theories about this).

The switch to paper money was largely an issue of portability.  At some point, somebody realized that rather than hauling lots of gold around, you could instead carry pieces of paper which implied that they could be exchanged for gold at a reputable, gold-owning institution. Plus, it was much easier on your back.

Where you have paper, you of course have counterfeiting, but government action proved capable of keeping that under control.  And, eventually, it became clear that once the certificates were in wide circulation, you didn't actually need the gold anymore.  Thus, the switch to fiat currencies managed by central banks.

A prominent example is the U.S. dollar, which is managed by the central bank of the United States -- the Federal Reserve.

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You can understand Bitcoin by thinking of it as another evolutionary leap, an improvement over fiat money just as fiat money was an improvement over gold.  Bitcoin is portable in a way that nothing else is: you can send and receive Bitcoins from any computer or mobile device with an Internet connection, regardless of national origin.

Bitcoins are unforgeable, do not degrade over time, and, with the right software, are just as easy to use as payment solutions like Paypal.  Eric Voorhees, co-founder of Coinapult, describes the value of Bitcoin like this:

“Economists and journalists often get caught up in this question: Why does Bitcoin have value? And the answer is very easy. Because it is useful and scarce.”

Bitcoin's Early Success

Bitcoin has, for all its volatility, experienced a ludicrous rate of growth for the past year or so, rocketing from small fractions of a cent (someone once spent 10,000 Bitcoins on two Papa John's pizzas) to a peak of more than one thousand dollars per Bitcoin.

In terms of transaction volume, Bitcoin transactions currently amount to about USD $50 million per day.  For perspective, PayPal, the industry leader, averages about USD $580 million a day, about eleven-fold more.  It's a big difference, but Bitcoin's volume is nothing to sneeze at, and it's growing a lot faster than anything else out there.

Beyond just raw numbers, Bitcoin has gained something of a cult following, garnering interest from everyone -- from programmers interested in its implications for computer security and e-commerce to Libertarians who are interested in anything that wrests control away from the Federal Reserve.

The early adopters can be a little strange, but they do spend a lot of time and resources trying to promote Bitcoin and get it into the public consciousness in positive ways, and the results are starting to show.  A number of merchants, from Overstock.com to Virgin Galactic now accept Bitcoin, and the number is growing steadily.

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The Value of Trustlessness

Part of the reason that Bitcoin is popular among Libertarians is that using Bitcoin does not require that you trust the people and organizations that manage the currency.  If you don't trust the government, the option to use a currency that has no central governing body at all is remarkably appealing.  However, even for those of you who do trust the government, there's still real value in removing the need to trust traditional money handlers.

For example: every year, expats all over the world send back hundreds of billions of dollars in remittances, often via services such as Western Union. And every year, they're fleeced to the tune of billions by those services, many of which charge usurious fees for international transactions.  Bitcoin offers a way to sidestep those fees, by providing an international currency system, with which you can transfer money to Tijuana just as easily as Texas, and for the same minimal fees.

Furthermore, those who have done business using PayPal or Amazon payments know the frustration of having to turn over personal information to register, having accounts frozen or suspended semi-arbitrarily by an opaque group of lawyers, and the general tediousness of slogging through the bureaucracy of traditional financial institutions.

Bitcoin has exactly none of those issues: anyone can register a two-factor authentication Bitcoin wallet right now, and be ready to send and receive Bitcoins in minutes - anonymously, easily, for free, and with no risk of third-party interference.

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What Bitcoin Can Do

If Bitcoin has one advantage over other currencies, it is that Bitcoin gets better over time.  A huge crop of so-called altcoins essentially provide a test bed for new Bitcoin features.  The ones that succeed can eventually be folded into the Bitcoin protocol by the consent of a majority of full node operators, making the currency stronger and more useful.

If Bitcoin fails to integrate new features quickly enough, other altcoins could outcompete and replace it entirely.  New altcoin features include confirming transactions more quickly, removing the necessity of expensive and environmentally unfriendly mining, allowing the currency's network to be used for file timestamping or DNS resolution, and even the possibility of truly anonymous transactions, based on zero-knowledge proofs.

When was the last time someone patched the U.S. dollar?  The U.S. mint can't even take pennies (an expensive, clumsy relic of an older time) out of circulation.

The Bitcoin block chain provides a public, secure, and unchangeable log of information.  Alongside the transaction details that allow Bitcoin to exist, other data can be stored in this block chain, allowing it to serve as the backbone of other brand new, decentralized and secure applications yet to be imagined.  Paul Buchheit, one of the creators of Gmail, once referred to it as "the TCP/IP of money," meaning the backbone upon which the future of Internet money can be constructed.

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The Future of Bitcoin

Looking forward into the future, it's easy to imagine a world in which a currency like Bitcoin has become the dominant way that people spend money. It's a world that looks very different than the world we live in today.  What would such a Bitcoin future look like?

Currency of Convenience

In a Bitcoin economy, commerce is simple.  If you go to the grocery story to buy things, you scan a QR code with your phone, verify the amount, and click 'pay.'  Moments later, you're done.  If you want to buy something on Amazon, it's exactly the same process.  Scan, check, click.  Ditto for donating to a charity.

Bitcoin, with good wallet software, is downright easy to use -- and, instead of receipts, you can prove, cryptographically, exactly what transactions took place and when, simply by looking at the block chain.

Bitcoin is the easiest currency to spend, particularly over the Internet, and the infrastructure that can be built on top of Bitcoin can make it even easier to use.  An example is "tip bots" on Reddit, which handle millions of dollars worth of tips and small payments, from Redditors to Redditors, simply by registering an account and typing a few words into a comment box.  Similar tools exist for Facebook, Twitter and WordPress as well.

Globalization 2.0

One of the upshots to such a global currency is that it allows fluid international commerce that doesn't depend upon any particular central bank management.  In places like South and Central America, where hyperinflation is rampant and there's a general distrust of local currency, there's the potential for Bitcoin to become the primary currency in circulation, as people choose to hang their hats on the increasingly stable Bitcoin economy over the whims of their own central bank.

Mauro Betschart, CEO and co-founder of Monero, describes the situation like this:

"People living in Latin America, especially those living in Argentina, do not trust the government on monetary policy. They have suffered first-hand the effects of chronic hyperinflation, banking crises, and currency restrictions.  Many have lost their life-long savings due to central bank policies.  Bitcoin can empower Latin-American citizens. The bitcoin network will be able to provide banking services to most of the unbanked population, which in the region amounts to about 60 percent. Using existing cellphone infrastructure, we are able to reach 6.8 billion active mobile phones. Most of the planet’s 7 billion people will be able to access financial services that are simply out of their reach at the moment."

Bitcoin also makes it easier to run multinational companies with employees scattered all over the world, especially for small, startup-style enterprises.  A company using Bitcoin would find it very easy to hire people in Bangladesh or Brazil for one-off tasks, allowing for huge international online communities of skilled, freelance labor that simply don't exist today.

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Computer Security & Bitcoin

One unanticipated side-effect of Bitcoin might be that it will finally trigger a movement towards a more security-conscious computer culture.  As matters stand right now, only one barely-used experimental operating system (Plan 9) does proper memory sandboxing (preventing applications from accessing each other's data and resources).

Memory sandboxing is a feature that prevents your sketchy screensaver from stealing your Bitcoin wallet's private key, and really ought to be a standard feature of every operating system.  Right now, even decently secure approaches to Bitcoin storage are still, at some point, vulnerable to opportunistic malware.  The adoption of Bitcoin would create a financial incentive to finally address this gaping chest wound in mainstream computer security.  A Bitcoin-powered future might be a future with much safer computer systems, more privacy and a more robust defense against Internet attackers.

The future of Bitcoin is by no means guaranteed: many things could go wrong between now and that future world.  Even at the best of times, predicting the future is hard.  But, if Bitcoin can overcome its sketchy, rickety beginnings and bloom into its full potential, the impact on the world will be tremendous, and, I suspect, largely positive.

Do you think a future world based upon cryptocurrencies will improve things? What's your opinion on the future of Bitcoin? Share your thoughts in the comments section below.

Image Credit:  "Bitcoin" by Sean MacEntee, "Bitcoin" by BTC Keychain, "Hacker", by Ed McGowan, "Bitcoin" Jonathan Waller