Over the last few months this seemingly simple question has crossed the minds of academics, reporters and many others. In the Centre for Digital Business our discussions have focussed on the real impact that bitcoins will have on mainstream eCommerce.
For the moment we have no definitive conclusion. However, the technology press picked up on the rapid increase in the exchange value of these things called bitcoins and, slowly, ripples of awareness have spread more widely. The enthusiasm is explainable.
The exchange rate for bitcoins has risen from around $US100 in recent months to as much as $US1,000.
Yet despite bitcoins becoming associated with an apparent gold rush in the digital age or, alternatively, being evidence for the complete moral bankruptcy of humanity, very few of these excitable reports have bothered to explain a bitcoin to the uninitiated.
Bitcoins are a ‘cryptocurrency’
In many ways it is difficult to explain anything relating to money. As German philosopher and sociologist Georg Simmel recognised right at the beginning of the 20th century, money is in many ways a philosophical construction. So telling someone that bitcoins are a ‘cryptocurrency’, that is a digital medium of monetary exchange – which they are – is not very helpful. Similarly, describing bitcoins as ‘virtual’ – which they are – is not a revelation or a surprise. All money is virtual. Our use of debit or credit cards at the checkout, whether it is online or at our favourite independent retailers, only serves to reconfirm this observation every day.
So, what is bitcoin?
There are two features of bitcoins that set them apart from other currencies:
1. Bitcoins are produced as a result of the successful calculation of a solution to a mathematical problem
As the frequently asked questions (FAQ) for Bitcoins acknowledges, finding a bitcoin has a parallel with the winning of a raffle draw. The difference is that any successfully ‘mined’ bitcoin is part of the Bitcoin network – is unique, and, in itself, identifiable.
Mining bitcoins involves the downloading of free software that manages your computer and performs the necessary calculation in the background. The cost of mining a bitcoin is primarily based on the electricity that is consumed by the computer to successfully find a coin.
Once found the owner of the bitcoin remain largely anonymous. The pseudo-anonymous nature of ownership may initially appear to be a further unique feature of bitcoins. Yet, it is worth considering the degree to which any government can identify the location and ownership of all its currency currently in circulation – an impossible concept.
2. The lack of government control
Bitcoins are the invention of the pseudonymous Satoshi Nakamoto and undertaken independently of any authority or governmental influence. Given the important relationship that currently ties a nation’s economic success to its own sanctioned currency, the presence of bitcoins is a direct challenge to many foundations of current economic thinking.
The need for bitcoins
Extending this reasoning further, bitcoins arguably critique much of the rationale for the presence of the nation-state. This claim is overly dramatic and the threat is not as significant as some have claimed. The need for bitcoins to have a comparative value with other state-sponsored currencies means that its presence is more realistically considered as parasitic rather than revolutionary. The size of the bitcoin economy can be – generously – measure in the billions of US dollars (well maybe a couple of billion).
The US and other major world currencies are measured in hundreds of billions and trillions. This variation in scale makes the current threat academic rather than immediate. The truth of bitcoins is that they represent a beta-currency. A snapshot of what the application of technologies such as cryptography and ubiquitous networks can provide.
If national governments are fearful of bitcoins now, then they should be considering their response to the cryptocurrencies that will come after bitcoins (such as NameCoin and LiteCoin). These future currencies will be built on a significantly larger economic base, have a larger, more skilled and more accepting user base, potentially greater levels of commercial and have less of the stigma of association with illicit and illegal economies.
So bitcoins are…
- a cryptocurrency
- a virtual currency that is created by performing millions of calculations on a computer
- exchangeable with traditional currencies
- independent of governmental control
- a disruptive technology
- a potential threat to current national models of the economy
- still a relatively small economy
What do you think?
Are bitcoins a threat to our current monetary system or just an invention by geeks for geeks?
The risk level of the Bitcoin is around the same as putting your money on the horses at a race meeting. Only do it if you can afford to lose your stake money.
Mal
Interesting article, we’ve just been commissioned by a client to build a bit coin trading platform, it’s an exciting project but certainly an effort to ensure correct protocols are in place