The Bitcoin headlines are ubiquitous. A recent U.S. government raid of the world’s largest Bitcoin exchange signals impending regulation. The infamous Winklevoss twins were keynote speakers at the Bitcoin 2013 conference in San Jose, which just wrapped yesterday. Bitcoin ATMs, which accept global currencies, may even spark an economic revolution.
All of which begs the question: what is a Bitcoin?
According to Bitcoin, it is a digital currency that “uses peer-to-peer technology to operate with no central authority; managing transactions and the issuing of bitcoins is carried out collectively by the network.” Bitcoin was created in 2009 by an anonymous founder who went by the pseudonym Satoshi Nakamoto. His or her true identity remains unknown, although there’s no shortage of speculation.
The currency is decentralized, not controlled by any government or company, mostly anonymous and practically free of transaction costs. With the big question shifting from whether or not Bitcoin will succeed, to just how big it can get, entrepreneurs and venture capitalists are shifting their attention and resources accordingly toward the open-source project.
While the science behind Bitcoin is complex, using it is quite simple. New users install any one of a variety of “wallets” onto their computers and/or mobile phones. Each user is assigned an address, which can be shared with others to accept payments or vice versa. All payments are posted to a shared public transaction log called a block chain, which aids in the verification of each transaction. Explains Bitcoin, “Cryptography is used to make it impossible for anybody to spend funds from another user’s wallet or to corrupt the block chain.”
The sharp rise in demand for Bitcoin is fueled in part by scarcity. Satoshi Nakamoto capped the total possible number of Bitcoins at 21 million, and about half have been mined and put into circulation. Given the highly speculative nature of the Bitcoin market, prices have been volatile, ranging from $5 per Bitcoin in June 2012 to more than $250 last month. The process of acquiring Bitcoins is best illustrated in this piece from Slate’s Farhad Manjoo on the current “shadiness” of the Bitcoin market.
However, the variety and scale of merchants that accept Bitcoin continues to grow. Reddit, which was highly influential in the rise of one-to-one Bitcoin transactions, now accepts the digital currency as payment for its Reddit Gold premium service. Online dating site OkCupid now accepts BitCoin, as does a New York City bar and a Texas-based lawyer. One Forbes writer was able to live on Bitcoin in San Francisco for a full week.
Opinions are varied regarding the future of Bitcoin, but these five economists (including a couple of business school professors) are cautiously optimistic about the digital currency’s chances of survival. As one Bloomberg Businessweek writer and Bitcoin conference goer suggests, “A lot of very smart and credible people are putting a lot of time and money on the line in an effort to redefine the world’s financial infrastructure.”