Glen Filthie asked if I could do a post about crypto currencies - what's the big deal, and why does anyone care? I'm not an expert, but here's a quick overview.
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.