Bitcoin!

Bitcoin_logo_svgA month ago I decided to find out what all the fuss was about. The media had been banging on for a while about Bitcoin so I just decided to find out more. The first I took was literally to buy a Bitcoin.

A single Bitcoin is pretty expensive right now. As of today it's more than $500 or £300+. I don't have the actual exchange rate to hand but unless you have a specific purchase in mind then just being curious is expensive. So I bought 0.1 of a Bitcoin - expressed as 0.1 BTC.

Bitcoin is totally digital. It's just a number. So you need a 'digital wallet' to store it. Actually you can create as many digital wallets as you want. Coinbase is one of the digital wallets. Once you have a digital wallet you need some digital money to put in it. The way I did it was make a small purchase of £25 of Bitcoins and I used the address of my account in the wallet as a store. Sure enough within a few minutes I had 0.1 BTC. A few days later this was worth about £26.00 at the then exchange rate and today it is worth £30.00.

This brings me to the first point. Bitcoin is a pretty immature and volatile currency. Some would even regard the word currency as wrong. Like any commodity it has dragged in speculators who buy in the hope the price goes up. A 'currency' gets real traction when ordinary people can buy stuff with it. At present you can't buy a lot. One couple decided to see if they could live only using Bitcoin and their story is here; Life on Bitcoin

If you watch their video you do get the impression that some people are using Bitcoin as a currency. The case against the Bitcoin is that is really just a money laundering scheme for criminals to avoid the police. Of course traditional currency is not immune from criminals either.

Back to the question of what is a Bitcoin. It's a number. It's a number that is so mathematically complex that it takes a lot of computing resources to create it. When a computer generates a number that demonstrates it used a lot of electricity and a lot of computing resources it can become a Bitcoin. In fact graphics cards are good at this job and people have built highly specialist PCs with more than a dozen graphics cards just to calculate impressive numbers using the Bitcoin algorithm. This process is called 'mining'. Creating these numbers is as rare as discovering gold which gives Bitcoin it's commodity status.

Real currency is controlled by Governments or Central Banks. The scarcity of circulation is decided by committee. If too much cash is supplied and you have too few goods you get inflation. Bitcoin is restricted by maths. Only a limited number of Bitcoins can ever be produced and the maths to create them makes it ever more difficult to produce a Bitcoin. Some people believe the lack of a regulator presents a problem in that no one makes sure that suitable people are engaged in Bitcoin trading. (Back to the criminal use/fraud argument).

Some people who, post economic crash, are annoyed at the banks are looking to lock them out of financial transactions all together. This is almost like a political reason rather than a purely financial one to promote Bitcoin.

Bitcoins are registered in something called a 'blockchain'. This is basically a list of transactions in blocks validated by the network. Some people query whether blocks can be faked or forged. Others take the view that if Bitcoin is successful there will no way that the blockchain will scale up to manage millions of transactions per second. A Bitcoin 'payment' is just a transaction on the blockchain. How busy the blockchain is will determine how fast the transfer is.

The  curiosity of the Internet is that everything is non-geographic except for money. There are many attempts at digital wallets. In the UK we have 'pingit', 'paym' and others. In the USA there is 'Google Wallet', 'Isis' and others. There is also Paypal. All of which propose revolutionising money. Bitcoin is a non-national, non-geographic replacement for money. So it's interesting.

So far my small experiment has allowed me to pre-register for a digital download of a movie. Worth about $20. A some point I will get to do the download. Looking more widely it does provocatively ask the question 'What is money'. In a sense 'money' is what someone accepts for goods and services. If Bitcoin becomes widely accepted it could become a currency. However outside technical people the process of buying and exchanging coins is still a bit complicated. To become acceptable it has to be a no brainer.

One major criticism is that Bitcoin is a bubble waiting to explode. MtGox, a big Bitcoin exchange, recently went bankrupt taking people's money with it. Non-regulation is also dangerous to your wealth.

I wont be giving up the pound really soon but Bitcoin is interesting and I shall keep an eye on it.

Links

Wikipedia on Bitcoin

 Coinbase

Life on Bitcoin

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