In a society where we pay bills online, transfer money via the internet, and can buy virtually anything on the web, would you be surprised to know that a currency has been developed that only exists in digital form?
BitCoin is a currency invented not by a government, or a large bank, but by a person or perhaps few people, nobody actually knows exactly who. It has no government backing, no tie to any precious metal and is entirely unregulated. However, on the afternoon of Monday, September 16 the exchange rate for one Bitcoin was more than 126 dollars.
BitCoins is a currency that exists only in the digital form. Bitcoin transactions are encrypted as a result of individuals using the processing power on their computers to encrypt the block chains of BitCoin transactions. The reward for the individual who turn out these these blocks is Bitcoins. And while no one really knows who wrote the original code, the network function on the premise that what ever 51% of the network considers to be true is true, making it virtually impossible to forge BitCoins.
There are now more than 10,000 merchants who accept Bitcoins, or if someone is willing to buy one's Bitcoins using a regulated currency, such as the dollar, one can cash them in on trading sites such as Mt. Gox.com. Companies such as Wordpress.com, OkCupid.com and Reddit are accepting Bitcoins.
So how does somebody get involved in the encrypting/decrypting process? Josh Zerlan of Butterfly Labs sought to tackle this question by developing a business that creates and sells Bitcoin mining hardware. This computer hardware's sole job is to encrypt and decrypt the code in the block chains that could give an individual Bitcoins. The rate of encryption of a block chain is rest by the network every week so that a block is encrypted once every 10 minutes somewhere in the world. Who ever encrypts the block first receives the BitCoins. However, because the process is essentially random it only slightly improves your chances of being that random person to have a faster or dedicated computer.
But how is the Bitcoin different than our dollar-based economy that relies heavily on online transactions? Whereas dollars could be considered "IOU's" from the bank, Bitcoins are not issued by the government. And yet, Bitcoins are more like gold or silver because the computer programming that produced Bitcoins has cleverly made them scarce. Whereas in the dollar economy, we hope that the government will keep the dollar scarce so that it keeps its worth, the Bitcoin's scarcity is absolute. No more than 21 million Bitcoins will ever exist. However, the number of Bitcoins has not yet reached this number.
Feeling confused? That's ok. Bitcoins has opened up the conversation about why or how a currency even has value. As the dollar is no longer backed by gold, why is a small rectangular-shaped piece of paper with writing on it of value? When I make a large purchase online or transfer money, are physical dollars being transferred from one place to another? Or is our own currency becoming just as digital and intangible as the Bitcoin?
While we might not be able to legally print our own dollars, participants in the Bitcoin system are almost doing just that. By using their own processing power to encrypt the transactions and getting paid in new BitCoins in return, these individuals are essentially making money for what their machines are doing. Nonetheless, this process, up until now, is unregulated by the government and anyone willing to take the risk can get involved.
- Josh Zerlan, COO of Butterfly Labs
- Dr. George Selgin, Professor of Economics at University of Georgia