Everything You Want to Know About Bitcoin, the Digital Currency Worth More Than the Dollar

By Veronique Greenwood | June 10, 2011 12:04 pm

bitcoin

What’s the News: The currency on the tech world’s lips these days isn’t the yen or the yuan. It’s Bitcoin, a digital form of money that’s totally anonymous and currently valued at many times the worth of the dollar and the Euro. How does it work, what can you buy with it, and why is it making people mad?

What’s the Context:

  • The first thing to consider is that currency is just the physical manifestation of a promise. Money issued by governments has value because governments say it does, and its value fluctuates according to people’s faith in the government. It used to be that money was worth something because of the agreed-upon value of its contents, like gold or silver, but modern currencies trade on trust rather than intrinsic value.
  • Digital currency can be made anonymous and independent of third parties like governments or banks. Its advocates, notably the hacker community, see this as a major benefit. It makes other people nervous, however, as it means that people can buy or sell illegal items without giving away their identities.
  • There have been various attempts to launch anonymous, secure digital currencies, but few have taken off like Bitcoin, which was developed [pdf] by a shadowy figure named (or pseudonymed, no one knows) Satoshi Nakamoto in 2008. Nakamoto released the Bitcoin software the next year, and since then, more than 6 million Bitcoins have been authenticated. Their worth currently exceeds $40 million.

How the Heck:

  • Currency has two important characteristics that can be hard to transfer in the digital realm: (1) it can only be spent once, and (2) the supply can’t be infinite or particularly easy to obtain. The digital world is full of things that don’t have either of these qualities—files can be emailed, copied, or downloaded as many times as desired. But if the same piece of money can be spent again and again, or if more can be obtained easily, it has no value.
  • The way Bitcoin deals with the first problem is asymmetric-key cryptography. When you download the Bitcoin software, you receive two keys, which allow you to transfer the coins securely to other parties in the system and receive them. Transactions are publicly announced, so everyone on the network knows that a given coin has been spent by the sender and will not accept it from them again.
  • Then, to generate new Bitcoins, users have set their computers to solve some difficult problems that help verify earlier transactions made with the currency, a kind of “I scratch your back, you scratch mine” system. When one finally solves it, he or she is issued Bitcoins, and the users shift their focus to the next batch of transactions. Getting them is not easy. And the number of Bitcoins issued per batch is getting smaller—once 21 million have been released, the supply will cease. (ArsTechnica provides a splendid technical description of the whole process.)

The Future Holds:

  • At the moment, the things you can buy with Bitcoins are a bit haphazard (firearms, alpaca socks, beef jerky). The selection of services tends to reflect the philosophical viewpoints behind such currency, as vendors who decide to accept them instead of government money generally have to believe that in the long run, Bitcoin will have more going for it than a government.
  • One Bitcoin-using vendor, Silk Road, an online market place of illegal drugs and various other goodies accessible only through the TOR anonymizing system, has attracted government wrath. According to US Senator Chuck Schumer, its anonymity makes it a way to launder money as well as sell or obtain significant amounts of drugs, and it must be shut down. However, the tech community has pointed out that Silk Road is probably not a large source of street drugs or launderer of money, at least at the moment. And how it could reasonably be shut down is another issue all together.
  • Beyond the question of accountability, there is the question of whether Bitcoin’s sudden jump in value is real or ephemeral—in other words, if people will make a serious commitment to the currency or if we’re seeing a Bitcoin bubble. Only time, really, will tell.

Image credit: Wikimedia Commons

CATEGORIZED UNDER: Technology
  • Nesetalis

    It should be pointed out that bitcoins are neither truly anonymous, nor are they really possible to launder.

    Every time a bitcoin is created, it is agreed upon by the entire community that it exist, and belongs to an address.
    then every time some of it is spent, there is a trail left, that ANYONE can see. This trail will stretch from the very first bitcoin all the way up to some one buying alpaca socks some time tomorrow.

    People keep reiterating that its anonymous, but it isnt. It /is/ hard to trace, but certainly possible. Especially so if you know who atleast one of the addresses in the chain belongs to.

  • Bob Maloney

    bitcoin is not “totally anonymous” as you use for your opening paragraph.

    I recommend this source as a good start to learn more about bitcoin:

    http://forum.bitcoin.org/index.php?topic=7269.0

    Thank You

  • Avanti Shrikumar

    Woah, that explanation of public-key cryptography sounded profoundly messed-up. Both your private and public key are used for every communication you make; your public key allows people to decrypt messages you send, and you private key ensures that only you can send the messages you send. Alternatively, your public key allows people to send you messages, and your private key ensures only you will be able to read them. Nowhere will you use JUST the public key or the private key. The wiki link itself has: “When someone wants to send a secure message to the creator of those keys, the sender encrypts it…using the intended recipient’s public key; to decrypt the message, the recipient uses the private key” and elsewhere “the private key is used to sign a message; anyone can check the signature using the public key. Validity depends on security of the private key.”

  • duh

    Did anyone ever consider that the person who created Bitcoin did so with a scheme in mind to either make fake bitcoin or he created millions of bitcoin himself before the value went up and got the network to agree on them. Then when the value (only 21 million is very small considering that is like that 0.0035 bit coin per person on the planet (yes I know not everyone is on the net and will use bitcoin, just saying as an example) goes up this joe smoe who invented it dumps several million bitcoin into firearms and is now rich (after he sells the firearms for real money).

  • Mark Oates

    the article said “more than 6 million Bitcoins have been issued”

    Correction, for more accuracy:

    more than 6 million Bitcoins have been authenticated.

  • jostmey

    To fully appreciate the size and growth of the bitcoin economy, one has to see all the items that may be purchased with the currency. A couple sites now show an aggregation of merchandise and services from various services. It is clear that one can buy almost anything with bitcoins.

    For example, check out searchbitcoin.com or bitcoinbulletin.com

  • Aleksandar Kuktin

    The true value of bitcoins is not in the currency itself, it is in the digital technology that makes it possible. And it’s key point is that it can be decoupled from the bitcoin and used for ANY other currency.

    Say you have 10 bitcoins on you account and you want to hold them in you hand (so you can by regular socks at the store). We could set up money-changing businesses (for example, but it would probably have to start with government institutions). Then you digitally send your coins to such a business, drive to the business, show you ID and pick up 10 shiny new bitcoin bills. :) Then you exchange them for regular socks and the shopowner drives them back to the money-changer who converts the bills back to digital currency and digitally send them to the shop-owners account.

    Infact, why use bitcoins? We can do the EXACT SAME THING with US dollars! Or any other currency.

    It would cut the banks and payment processors out of the loop, which is a huge win in my book.

  • Veronique Greenwood

    @Avanti, Mark, fixed–many thanks.

  • http://iwantfreebitcoins.com bitcoin

    kool post keep em coming. game on brother. peace

  • http://chickencoopsforsaleinfo.com chicken coop

    I loved this quote from the article: “The first thing to consider is that currency is just the physical manifestation of a promise.” I wonder how many people realize just how worthless a physical dollar or coin really is these days. Interesting article. Thank you.

  • http://howtopullagirl.com leah

    It’s like forex exchange not like a bank

  • 31337

    Truth is the large bankers/Bilderberg types don’t like it when somebody else muscles in on their business and they don’t have any control over it and don’t know how to reach the person/group who actually does control it. Meaning the greedy bastards don’t like the competition and want to control it. Its the same reason why they are doing their best to regulate the internet and succeeding in a lot of countries.

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