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Monday, January 6, 2014

What is Bitcoin? The virtual currency built on math, hope and hype

Bitcoin is a currency forged through hardcore mathematics and buoyed by promises of financial liberation from banks.  Its climb has been very thrilling.

Many are embracing bitcoin as a viable means of exchange and a valuable investment and it is rapidly increasing.   Since it is free from meddling by central banks and what some view as untrustworthy financial systems.

Satoshi Nakamoto, a pseudonymous programmer, developed the Bitcoin system.  It was released a white paper in 2008 while in early 2009, the network launched uses peer-to-peer software to transfer bitcoins.

Bitcoin is a purely digital currency; basically a secret number that is transmitted from one party to another using public key cryptography.  The people running high-end computers that verify the transactions are called “miners”, they are awarded newly minted bitcoins for their efforts.

One reason why this so called bitcoin is so attractive is that its distance from the established financial system and lack of regulation.  Compare to those virtual currency projects that failed in the past years, bitcoin has so far defied predictions it would meet the same fate.

Bitcoin “seems to resonate quite deeply” with people who don’t trust banks, even if the rosy predictions of its potential are baseless in standard economic theory, said Dick Bryan, a professor with the Department of Political Economy at the University of Sydney.

No one can create an accurate economic model for Bitcoin, and everyone who thinks they can give an explanation is posturing,” Bryan said.

Bitcoin’s early supporters have been very happy since if you bought the virtual currency in early 2011 at US$1 each instead of a new pair of $600 snakeskin cowboy boots, you’d be up roughly $600,000, depending on fluctuating exchange rates.

According to the first report on Bitcoin released Dec. 5, Bank of America Merrill Lynch predicted a value of $1,300 per bitcoin if it becomes a force in e-commerce and money transfers.

It’s easy to be overwhelmed by the numbers.  And when proponents promote Bitcoin from a clever system for transferring value to a potential replacement for government-issued currency, it seems that it has no limit.

“Buy bitcoins now. Take 5 percent of your net worth, and put it into Bitcoin,” said Steve Kirsch[cq], CEO of OneID, a startup that provides encryption services to protect people’s data, at the Future of Money and Technology conference in San Francisco in early December.

“You won’t be sorry,” Kirsch said. “I think for the next few years, any time you buy bitcoins and hold onto them, and then sell it, you’ll make substantial amounts of money. You’ll be so happy.”

Bitcoin is sometimes being confused to a Ponzi scheme.  This is a type of scam where money from new investments is used to pay off a few early investors with the rest skimmed until the scheme goes bust.  But Bitcoin is clearly not a Ponzi scheme, the frenzied get-in-now enthusiasm of late belies the fact that it is a very new and immature software experiment.

Consequently, Bitcoin’s buzz is offset by suspicion, doubt and, occasionally, contempt.

“I’ve always had the view that Bitcoin is a very beta project,” said Evan Schmidt, who runs, a mocking blog. “It seems a lot of people are basically saying ‘Get some bitcoins, hold onto them forever and you’ll be rich’.”

He launched in mid-2011 after becoming fascinated by the community around Bitcoin — libertarians, scammers, developers, hackers, early-adopters — as well as its embrace by the Silk Road online drugs market.

“There were a lot of weird things that were going on,” Schmidt said.

Buttcoin immortalizes Bitcoin supporters at their most hyperbolic moments, with heavy doses of sarcasm. The blog gets more than 15,000 hits a month, said Schmidt, who said he’s fine with Bitcoin as a speculative play but doubtful of it as a currency.

Bitcoin could have a positive effect for e-commerce.  Similar to a cash deal, once a bitcoin is sent, the transaction can’t be reversed unless the receiver gives it back.   That’s good for merchants, who may end up responsible if someone uses another person’s credit card to pay for goods and the money is reclaimed in what’s known as a “chargeback.”

Moreover, consumers don’t have to submit personal information when sending bitcoins, reducing opportunities for identity theft.

For vendors of illegal goods, Bitcoin is close to perfect. “I think it is one of the best innovations coming from the modern computing era,” said a former Silk Road methamphetamine and heroin dealer, via instant message. The dealer, who confirmed his role in Silk Road, has a strong background in technology and said he’d place Bitcoin high on the list of the most important creations in the last few hundred years.