Why would anyone want a Cryptocurrency?
Most financial transactions are controlled by central banks like the Federal Reserve or Bank of England, etc. Electronic transactions are done bank-to-bank through networks like the SWIFT network. This is globally scalablable and very convenient, but is explicitly not anonymous - the central bank (i.e. the Government) knows where your money is going.
If you want anonymous financial transactions, you really need to use cash. Credit cards (or ATM/Debit cards) transactions are all done through a centralized organization (your bank or MasterCard/VISA/AmEx/etc), and so are, again, explicitly not anonymous.
The problem with cash is that you have to be physically present to buy something. You can't just go online to order something from Joe's Pretty Good Cake Shoppe. You need to get in the car and schlep on down to Joe's. That's inconvenient if you are in Oklahoma City and Joe is in London.
This is where Cryptocurrency in general and Bitcoin in particular come in. It is a distributed, peer-to-peer currency based on encryption technology. Since it is distributed, there is no central authority involved, i.e. the Government can't get all up in your business when you buy something.
How does Bitcoin Work?
Bitcoin, like all cryptocurrencies (well, the ones I've looked at) use a built-in ledger system. When you spend a bitcoin, both you and the other party cryptographically sign the ledger transferring the coin. The ledger is called the Blockchain and is maintained in a distributed manner by a number of Internet servers that essentially maintain a distributed database of bitcoins. When you sign the blockchain, that transaction is broadcast to the network which validates the transaction and adds it to its transaction database (the blockchain ledger).
You will notice that the government is not involved in any of this, so you have the possibility of anonymous payment without having to physically hand over cash. There's a pretty good introduction to how Blockchain works at Zerohedge.
So who "mints" Bitcoins?
Each cryptocurrency has its own way to cryptographically creating new coins. This is called "mining" and is very CPU intensive. The encryption algorithms used are designed to be highly resistant to forgery (as you can imagine this is an absolute requirement for a currency) but the downside is that you need to do a lot of calculations.
Interestingly, we're starting to see coin mining being used behind the scenes, as a replacement for web ads. We are also beginning to see malware that does coin mining on your computer, rather than doing click fraud. As always, it's the advertisers and Black Hats who figure out how to monitize the 'net.
Each cryptocurrency has designed a limit for how many coins can be mined. Bitcoin will only allow 21 Million coins. They expect this to be reached in 20 years or so.
How do I use it?
You need software (typically called a "wallet"). There are web-based wallets that maintain everything on the 'net, you can install software on your computer (remember to back up your data!), and there are hardware smart cards that will keep your bitcoins on an easily transported (and possibly harder for malware to steal) device.
You can spend Bitcoins wherever they are accepted. Paypal does (or did) accept bitcoins, as do kind of a lot of other places.
C'mon Borepatch - you know this is just for buying weed, right?
Whenever you talk about Bitcoin, there's a lot of talk about the "Dark Internet", underground economy, and black market. There's a problem with this.
Your Bitcoin identity is not anonymous like with cash. You need a pseudonym to use it. Depending on your operational security this may be easy or hard to link to your physical identity. This gets into cloak and dagger tradecraft, which I won't go into here, but caveat emptor. If you're looking to buy weed off the Dark Net then you'd want very good tradecraft indeed I would imagine.
Ransomware (like WannaCry) have demanded payment in Bitcoin, so there's attention in the Bad Guy community.
Other than Anarcho-capitalist techno-cred (which probably has peaked anyway), it looks like most of the action in Bitcoin is financial speculation. This is really high risk because there are nearly a thousand different cryptocurrencies and most are very likely going to end up worthless.
Do Governments hate Bitcoin?
Probably. Remember, it was designed to be distributed, not requiring a central bank. Governments like central banks because it gives them a control point. There's some speculation that governments will crack down, and China (at least) has outlawed purchase of physical goods using bitcoin. Where this will go remains to be seen.
So there you have it, the world's shortest overview of Bitcoin.
UPDATE 20 December 2017 10:16: Robert Graham has some interesting thoughts on Bitcoin here.
4 comments:
I may have missed this but I don't think I did; who decides what 1 bitcoin is worth in real world assets? Did a group of people just decide to declare it valuable and start swapping it for goods and services? Where does it's intrinsic value come from?
Could you elaborate on that a bit please?
Educated Savage - I can add a little. Who sets the value? No One. It's determined by the demand and acceptability to both parties. Open market. The favorite story is the first use of Bitcoin in the US was to buy a pizza. On a bitcoin forum, the guy offered 10,000 bitcoins to anybody who would buy him a pizza. So in that transaction, figure a pizza cost 10 or 12 bucks (Pappa John's), or 1 to 1.2 cents per coin. Today that coin is worth $5450, and what he paid for that pizza would be $54.5 Million.
I don't know if either or both of the parties has killed themselves over this.
Personally, I think we're in a big bubble on cryptocurrencies right now. There have been a lot of initial coin offerings and they're being pumped up like crazy. Most of these ICOs have no hope of succeeding. This is looking like the dot-com craze at the end of the 1990s or any other bubble. How many cryptocurrencies do we need? OK, probably not one, probably "a few to several" is about right.
Remember, when you buy one coin you're buying exactly nothing. Its only possible value is someone else deciding they'll accept it.
In your opinion, BP, can a crack down like the one in China work?
Put it this way: the way I understand it, in the Dirty 30's FDR wanted Americans to use the currency and the banks. The problem was guys like me -who didn't trust the gubbimint, their currency or their economics. These guys stacked gold, silver and precious metals and dealt with them and barter instead. To combat this (so I'm told, please correct me if I'm wrong) FDR mandated that private citizens could not own any more than $100 dollars worth of gold and silver, and that there be an IRS agent at all banks that had to be present when you accessed your safety deposit boxes at the bank. From what I read there were some nasty cases of confiscations.
For a financial SHTF scenario like the stock crash of '29, or say the Weimar Republic and their massive hyper-inflation... would you rather have a hoard of bitcoins or physical gold and silver? Is that even a question you would be qualified to answer? (Not trying to be a wank; I don't understand modern geo-economics and what little I DO understand, I disagree with!). Throw in the complexities of crypto-currencies and I am lost...
Questions:
I once got hacked in a case of identity theft and crooks stole my identity and tried to run up my line of credit. Could similar scams loot my computer 'wallet'?
What about other SHTF scenarios like EMP pulses or massive power outages? Can a wallet of bitcoins survive that?
Why do the other crypto-currencies have to die? We must have at least a thousand different standard currencies in the world today and travellers convert between them without a second thought... can't crypto go the same way?
I cannot see the money men, the banksters, the govt and other turdies and hucksters sitting idly by while they are dealt out of the currency markets. Can you speculate on how they will get back into the game?
Glen, I linked to this in the post, but it's directly applicable to your questions about government crackdown:
http://unqualified-reservations.blogspot.com/2013/04/bitcoin-panic-light-flashing-bright.html
The bankers will go along if they can make money. Wall Street seems involved in the ICOs. As long as bitcoin is treated sort of like commodity trading, they government is unlikely to act. But the reason that bitcoin has gone up in value is because people see it as a potential currency. I don't expect that governments will like this.
My guess is that the Fed is watching to see if the whole thing simply crashes. If it's a bubble, they don't need to do anything other than wait for it to pop.
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