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BitCoin – Digital Money For What It’s Worth

I was aware of the BitCoin, the digital money, for a while now. But that was it. I read the wikis and browsed the web but, for the life of me, couldn't get a grip on the concept. Sure, independent digital currency that works over P2P network sounded great, but that was all I could tell. 

Now, after the mind-fermentation process took place, I can share some basic and easy-to-digest info about BitCoin. 

What is BitCoin?

BitCoin (BTC) is digital currency, used to transfer relatively small amounts of money over the Internet. It can be exchanged both ways in other currencies like USD, Euro, Yen and others. It's functioning since the January 2009.

two physical BitCoins photo by Zach Copley

Unlike the other currencies, there is no government or even a corporation that stands behind it. It's completely community based. The system is regulated by open-source software, and maintained by its users – all of them – via peer-to-peer network. 

And that's where all the good things about it come from.

What makes BitCoin so good?

The good – well great – thing is the idea of cutting out the middle man as well as the central authority from all our money business. Money is a very useful invention that benefits the community. So why wouldn't we organize and regulate our own common good instead of having somebody else do it with a huge risk of corruption, inflation and all other problems? 

Does digital currency with no government and no banks behind it makes any sense?

Well, yes. Strange as it may sound, governments and banks are not needed to make a money work. Let's take a trip backwards the concept of money. 

You have a bank account and those plastic cards that enable you to use the money from your account. Basically, your account is a number stored in bank's database about the amount of money you own. That number corresponds (and can be exchanged) to cash – pieces of paper with some numbers printed by the government, designating the value of papers. 

We all know that the paper itself is not worth much and that the value of a bill actually comes from the gold and silver it represents. That is, that the paper bills correspond (and can be exchanged) for the gold. That's what the contract between you, me, government and the banks says. 

What is not so widely known is that gold is not as valuable as the money it represents. Sure, gold is nice and shiny and even useful, but the mere gold in a bar with US$1000 imprint on it is not worth US$1000. Gold is not value per se. Gold is historically accepted representation of value. Gold is relatively scarce and stable material so it makes a nice representation for value. But we could use anything else as well.

Gold Bars photo by Digital Gold Currency Magazine

Money gets its value by its ability to be exchanged for goods and services! Money is valuable if you can exchange it for food, new computer, electricity, new haircut, car, concert ticket, baby sitting, massage or whatever your heart desires. If somebody is willing to give you food in exchange for a bag of sand and gravel, then that bag of sand and gravel has a value. It doesn't matter that governments don't print numbers on sandbags. 

So, to get back to our point of interest here, as long as there are people willing to exchange goods and services for BitCoins and there are people willing to exchange BitCoins to and from Euro, USD and other currencies, BitCoin is money as good as any other. Except that it is actually better. 

Why is BitCoin better than the "real" money

Community managed money system that is regulated by open-source software gives 

  • control and transparency of the system itself - you might think that your government is responsible to you about their handling of the common good that is the money system. Well, bad news, they are not. More often that not, you have no insight in how much of it they print, what do they do with it nor how it is regulated. Unlike the state law, computer code is not optional to follow. It will work the way it's intended no matter how much money or political power one has. 
  • stability of the system - any system that is centralized is, by definition, unstable. It takes just one node to crash and the whole system goes down. In decentralized system if one (or much more than one) node fails, the rest of the system keeps functioning without interruption. If Central Bank's computer system gets down (and computers do crash, even those super expensive ones) the whole system is down. It's more than unlikely that all the computers of all the BitCoin users will go down at the same time. And as long as two of them work, those two can deal with money, and when the rest is back, they'll just pick up where they left. 
  • anonymous transactions - BitCoin system is constructed with high security in mind and while all the transactions are visible and public, they are encrypted. What you do with your money is your own business and nobody else's. 
  • impossibility of inflation - System is also preventing the possibility of printing and infusing fresh money in the system after the amount of 21.000.000 BTC is reached. To do that, one has to change the code and make all the other users to accept the change. If you ever dreamt about democratic control of the economy, this is it. 
  • low transfer fees - I'm not quite sure how the transfer fees work here (at the moment there's practically none) but the distributed system makes monopoly on transfers impossible so the high competition is in the play. Where the competition is high the prices are low. 
  • impossibility of state or corporate control over somebody's funding - Remember when PayPal and Mastercard blocked WikiLeaks' account? They did the same with Anonymous and even Diaspora. If there's no central authority nobody can block other's account, nor check who gives money to whom and for which reason. Yeah, it's called freedom. 
  • probably some other things I can't think of now

So this is the basic idea. In the following days I'll write about how BitCoin actually works, both the technical part and in everyday use. In the meanwhile, please share your experience with BitCoin if you have any or what do you think about the idea. 

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5 comments to BitCoin – Digital Money For What It’s Worth

  • Ian

    Interesting article, was looking into Bit Coin myself, but for the record the US Dollar or just about any other currency out there hasn't been tied to gold or silver for many many decades. The  real value of a dollar is zero, or maybe it is worth the cost to print and distribute it. 
    In the end it only represents possible value and that value is fleeting..

  • Timwatt

    This is great to see someone taking the time to explore Bitcoin and share their insight so thank you.

    I was quite intrigued in March when I looked at the currency it was trading at $0.70 and I though it was a good idea I never invested in it but setup my PC to mine on its CPU, (to no avail) you need high end GPU's to mine.

    None the less I started looking more seriously when it hit $30/ Bitcoin.

    So beside Bitcoin being a good idea and all I began to think how do you make this work? and you thoughts on the topic would be welcome:

    The system is so open it allows for some critical thinking which is great.

    First off my Brother in law stumped me when he asked who owns most of the Bitcoin, and  you can see a list here http://Bitcoinreport.blogspot.com/ at the time one address owned about 7% of the currency, juxtaposed against the 1% / 99% movement, this didn't look good.

    So thinking on the history of money and how it came to be is interesting, more to the point is the History of US money as it flew in the face of global wisdom at the time. The story of how it has catalyzed the success of the US over the past few hundred years is amassing.  Here I would recommend reading The Wonderful Wizard of Oz  I would recommend getting hold of http://www.themoneymasters.com/mm/ the Secret of Oz.

    On to my third point, and this sold me on the whole idea of "Austrian Economics"  (I guess an economic theory made possible by Bitcoin.)

    In a deflationary economy – predicted to be caused by the Bitcoin economy, consumers would be encouraged to save and spend less now so they can have more in the future.  eg. Say in an inflationary economy if I have $5 and an apple cost $1, and I need to buy an apple a day to live, I must buy all my apples today to get the best value (another problem is I can’t save them because they go rotten after a while). This taxes the environment, and limits supply the pour can only afford to buy 1 apple, and live to find another one tomorrow. (environmentalists call this corporate greed but I see it more as a law of nature, socialists think you need to tax the wealth to compensate for the pour – but it is just a result of our economic system) so inflation encourages overconsumption and causes poverty and created ill will between classes. Now in a deflationary economy,  if I have $5 today and an apple costs $1 today and $.80 tomorrow, if I save my money only buy what I need I can buy 6 apples (always fresh) with the same money, (the sum is greater than the parts.)  by contrast if I save my money in an inflationary economy I can only buy 4 apples.  the benefit of deflation is we just consume the recourses we need, less environmental demand, and the financially savvy get more fore there money not at the expense of the pour.

    So a fixed currency like Bitcoin has the ability to regulate through natural forces human greed.

    This brings me back to my first point, being the concentration of wealth, Historically money has come from Barter, and the goods that are produced to barter have come from the land. So land has been the key to generating wealth.  (not the case with Bitcoin) People have fort for land and as a result feudalism arose as a form of governance to protect the people of the land, there are many atrocities in history and it hasn't exactly been a symbiotic relationship with the protectors of the land and the subjects in the evolutionary quest to democracy. (a problem we have now is ignorant people create ignorant democracy, and the greater good is not well managed when you have lobbyists pushing corporate interests over individual interests – a solution to that problem is here.

    My concern with the propagation of Bitcoin is the wealth is inappropriately distributed,  if you read up on this the reason it is: well the early adopters made it all happen so why shouldn't they benefit. (and people who built crazy mining rigs should see a return on their investment) ( the truth is GPU mining rigs were not conserved in the original model but a network of individual PC's – the users )

    More to the point, I expect: to whom much has been given much is to be expected.  so the building of a bit coin equivalent of the 7th wonders of the world (public assets) is the responsibility of  the Bitcoin wealthy,  the new Feudal Kings.

  • Ian,

    U.S. government is not obliged to pay some amount of gold or silver in exchange to dollar bill anymore? Well, I guess they stripped off one layer of the scam then. :)

  • Tim, 
    Thanks for the thoughts and the links (btw, comment went to the pending section as it had some styling inside), sorry for the delay….
    I tend to see BitCoin as an experiment. We never had this kind of currency before, not even in this, limited, volume. In its time USSR had tendency to keep its currency (both the primary mission and prices) fixed and, as we know, hasn't ended well. But USSR screwed many much better ideas so it comes as no surprise. 
    I'm actually not sure that deflatory currency can survive, for many reasons. In short, current system enables some people to be very very rich and they won't let the change happen easily. And then, the system itself is bugged if the amount of money is not "breathing" with the amount of transactions. I'll try to address both of these issues in the third part of this BitCoin series. 

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