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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 Twitter IPO, Android Profit, Silk Road Returns, PS4 Exposed [Tech News Digest] Twitter IPO, Android Profit, Silk Road Returns, PS4 Exposed [Tech News Digest] 37signals helps you work remotely, Silk Road 2.0 is launched, the Internet Archive is damaged in a fire, the innards of the PlayStation 4 are exposed to the world, and an iPad Air gets badly... Read More , and the collapse of some of the early Bitcoin businesses, like Mt. Gox Does The Fall Of Mt. Gox Mark The Beginning Of The End For Bitcoin? [MUO Debates] Does The Fall Of Mt. Gox Mark The Beginning Of The End For Bitcoin? [MUO Debates] Does 2014 mark the beginning of the end for Bitcoin?Or, is this only a bump in the road along the evolution of this new form of currency? MakeUseOf.com debates. Read More . 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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BitcoinMagicInternetMoney

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.

BitcoinInNumbersWeTrust

 

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.

bitcoinformats

 

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 3 Bitcoin Alternatives Tested & Compared: Litecoin, Feathercoin, And Terracoin 3 Bitcoin Alternatives Tested & Compared: Litecoin, Feathercoin, And Terracoin Lately, I’ve been trying to earn some money by mining the Bitcoin alternatives, Litecoin, Feathercoin and Terracoin. After spending the entirety of last week attempting to get free money, I may have succeeded, to an... Read More 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.

bitcoinfuture

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 WordPress.com Now Accepts Bitcoin Payments [Updates] WordPress.com Now Accepts Bitcoin Payments [Updates] Bitcoin, a virtual form of currency, has known its share of controversy – mainly around being used for illicit activities. But now the cyber-currency has gotten a much needed boost in legitimacy, with Wordpress.com accepting... Read More 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 Moneerodescribes 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.

BitcoinHacker
This guy just stole all your Bitcoins.

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 How To Spend And Store Bitcoins Safely, Easily, and for Free How To Spend And Store Bitcoins Safely, Easily, and for Free Read More 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 Top 5 Sites With Future Predictions About The World Top 5 Sites With Future Predictions About The World Read More .  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

  1. Phil Dalo
    November 9, 2015 at 5:19 pm

    Good Article sir Andre. How can I reach you? I wonder if I get notified when you respond here so if you could please reach me at dalophil@gmail.com, I have an important motive to discuss with you. Thank you.

  2. Guy M
    July 29, 2014 at 1:13 am

    Bitcoin, specifically, has its issues as others have mentioned here. However, I do believe it heralds a paradigm shift in the way that we think about, and use, money.

    Bitcoin has highlighted to the less-economics-inclined just what fiat currency is, and what troubles we will face with it, so it has served as a lesson of sorts about how money works right now.

    Where I hope it will improve is in the area of being more egalitarian in nature. Right now, those that have the money or those that speculated hard are the ones really making the money. Bitcoin will eventually pool in the pockets of those that adapt capitalistic ways - sometimes unethically. Just like fiat money!

    Perhaps that would be the case with any currency, however I'd like to see it start out as something that represents the value of a person, as we are all equally valuable. At least that's my philosophy. From there, the choices we make would determine to where that value would end up. My hope is that it wouldn't end up in the pockets of a digital-currency 1%.

    Dare to dream!

    One of the nice things about Bitcoin and cryptocurrencies is there should be no way to implement the scam that is fractional reserve banking. Remember where Andre mentioned that paper notes were exchangeable for gold? What wasn't mentioned was that the bankers figured out that they only needed so much gold on hand as it was highly unlikely that everyone would request their gold at once. This allowed them to lend more money than they had gold and make a profit off of something that didn't even exist.

    This continues to this day. The amount of money a bank can lend often exceeds its assets by a factor of 10 or more. Don't you wish you could lend out $10 at 5% for every $1 you have in your pocket? How could you not get rich?

    Then for every $20 or so that you got paid back for that $10 you could lend out ten times as much again! Lend out another $200 that you never had! I want in on that deal.

    Yes that's a broad generalization , but essentially that's how fractional reserve banking works.

  3. dragonmouth
    July 28, 2014 at 10:52 pm

    "Bitcoins are unforgeable, do not degrade over time, and, with the right software, are just as easy to use as payment solutions like Paypal."
    But it undergoes wild swings in value. Before Mt. Gox went caput, Bitcoin was over a $1000, Now it is down to $600. That's as bad, if not worse, than gold. I certainly would not want to be paid with currency that changes its value that quickly.

    BTW - where are the millions that were recovered from Mt. Gox? Somebody is living high on the hog.

  4. michel
    July 28, 2014 at 7:32 pm

    But it really only has any value because people believe it, right? So in this sense, it's just another fiat currency. And this: "no central governing body at all" is later completely contradicted by this: "by the consent of a majority of full node operators". So you still have to trust strangers. Plus, I already have the convenience of instant payment and money transfer. Finally, if it's worth hacking, it will be hacked.

    I would be more impressed if you'd actually compared the pros and cons, the benefits and risks, and not just campaigned for how great it is. For instance, outsourcing labour to the third world is great for business people, but has been disastrous for the unemployment rate.

    • Andre I
      July 28, 2014 at 8:28 pm

      The value of Bitcoin and traditional fiat currencies is based on people's trust in the system and their ability to liquidate their assets for tangible goods. Bitcoin is very easy to trust, by virtue of being open source. It's not as spendable as the US dollar right now, but give it a couple of years.

      As far as the question of a governing body goes... it's complicated. If a majority of full node operators had a stroke and decided to switch over to running new software that destroyed the anonymity of users or something, but a minority kept running Bitcoin, then Bitcoin would continue to exist. There would be a 'hard fork' as people found that they no owned equal amounts of Bitcoin and the new, shitty cryptocurrency. They'd vote with their feet back to Bitcoin, and the new fork would die, as its value crashed and mining it became unprofitable. Bitcoin is very democratic in that way. It only exists so long as people choose to use it, and there will always be options. available to those people.

      On to your other points: You do not have the ability to cheaply move money internationally on a whim in a couple of minutes without using Bitcoin unless you're a Die Hard villain. You can't hack Bitcoin: cryptography is strong, and the network is decentralized, so there's no single computer you could compromise to seriously futz with the network as a whole.

    • Jonathan
      July 28, 2014 at 9:08 pm

      Fiat currency is currency by decree. The no central governing body at all is not contradicted; you trust nobody. Plus the miners, which you are referring to as the governing body of the network is P2P.

      You don't have a convenience of instant payment and money transfer anything like that of Bitcoin. Can you send $1b to somebody across the world for almost no fee? Can you send it without requesting permission of a government and the entity that holds your funds?

      If it's worth hacking, it will be hacked? The only 'hack' there could be on Bitcoin is totally theoretical. If a bunch (A BUNCH) of the miners get together to plan an attack and gain more than 50% of the network power, than they can 'hack' it. But based on the way the protocol is designed, you would make more money by continuing to support the network instead.

      And on your unrelated note, outsourcing labor to the third world is great for a lot of people. It can be disastrous for the unemployment rate in the country where the labor costs are too high for the business, but the terrible jobs that are outsourced to the third world countries are in fact terrific jobs compared to what they would have to do instead...

  5. Nikolaj Knudsen
    July 28, 2014 at 4:09 pm

    It's a hoax and somewhere someone is laughing all the way to the (real) bank :-)

    • Clayton
      July 28, 2014 at 7:00 pm

      The completely decentralized, open-source nature of the protocol ensure this is and will not happen.

    • David
      July 28, 2014 at 8:42 pm

      It's not a hoax. My friend spent the money his computer made for him.com

  6. David
    July 28, 2014 at 4:07 pm

    OK, I kind of get it. It replaces money. But I don't understand how making bit coins is legal. So, I can make money and buy what I can afford depending on how many bit coins I make? What am I missing here?

    • Andre I
      July 28, 2014 at 8:19 pm

      I've been paid for work in Bitcoins before. It's just money. You do a job and someone pays you, you turn around and spend that money on groceries and videogames and whatever else suits your fancy. What would be illegal about that?

    • David
      July 28, 2014 at 8:41 pm

      There is nothing illegal about what you are doing; you earned it. My friend had made $6000 without lifting a finger.

    • Tze Yu C
      July 29, 2014 at 6:15 am

      David, could you please clarify your definition of 'legal'? At this time of writing, the few countries (China, Indonesia etc) that explicitly outlaw the usage of bitcoin and cryptocurrencies do so because of strict monetary policy and economic regulation, not because people can easily 'make' it via mining. This is unsurprising considering the fact that the main goal of bitcoin was to establish a financial system free from government control.

      The reason you don't understand how 'making' bitcoins is 'legal' is because you don't understand the process of 'making' (let's call it mining from now on) bitcoins. The common perception on bitcoin mining is that you run an application on your computer, wait for some time to pass, and voila, you've made money without working for it.

      Sounds simple, but it's far from the truth. In reality, bitcoin mining is a transaction, or trade, between you and the Bitcoin network. By running that mining application, your computer processes the complex mathematical computations that facilitate and process transactions to happen on the Bitcoin network. In turn, you are rewarded with a sum of bitcoins relative to the amount of computational work you contributed. Without people to mine for bitcoins, transactions won't get processed, Bitcoin's role as a medium of exchange will cease to exist, and that’s why miners are rewarded. However, when you mine for bitcoins, you bear the cost of:
      - Electricity consumed by your mining equipment
      - Purchasing and maintaining the dedicated (and expensive) mining hardware
      - Depreciating value of your mining hardware (future mining hardware will undoubtedly be faster, more energy efficient and cheaper to produce)
      - Volatility (By far the biggest cost here, as the ‘reward’ you gain from mining is paid in bitcoins, not dollars, making it difficult—if not impossible—to even guess the rate of return of your initial investment in hardware and electricity costs)

      In essence, mining for bitcoins is akin to debt investment—albeit a very speculative form of it when compared to conventional instruments such as bonds. Investments might carry risk, but bitcoin mining comes at the greater cost of uncertainty. You won’t be able to estimate your returns, making the possibility of losing a lot of money very real. To sum things up, I think that by using the word 'legal', you actually mean 'fair'. That being said, it’s easy to be envious of the people who easily made fortunes from being early adopters of bitcoin (they had more luck than foresight actually), but there is nothing ‘illegal’ about making a windfall—those people just happened to be at the right place and time. Think about it : Is winning the lottery illegal just because you didn’t work hard for the money? Or better still, is being born into a wealthy family illegal? Fairness and legality and entirely different terms. Don't interchange them at whim.

    • David
      July 29, 2014 at 10:27 am

      Tze Yu C,
      Thank you. It all makes sense now. Thank you for clarifying. After making a bit coin, how would I contribute? Would I upload the bit coin somewhere?

    • Tze Yu C
      August 3, 2014 at 9:27 am

      Sorry for the late reply David. As for your question, by making a bitcoin, you've already contributed! The bitcoins you get are your reward for managing a transaction on the bitcoin network (it's basically an open sourced version of Visanet). Technically, all the bitcoins in the world are kept in the 'blockchain', a public ledger that tracks who owns how much. Google Rai stones and you'll get a better idea on the concept. While the mathematics behind bitcoin is pretty advanced, the economic fundamentals behind it are rather simple (and much more applicable to the real world and fun) in contrast. Personally, I wouldn't invest too much time or money speculating on bitcoin's value. It's the technology behind it that sets it apart from S.W.I.F.T and Visa, but we won't know how well it'll integrate with our current financial system.

    • GOD
      August 5, 2014 at 3:50 pm

      Money cannot make a better place FULL STOP

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