|The dismal "science"|
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“”It's like a house on fire with freshly baked cookies inside.
Bitcoin is an Internet-based digital currency, that uses strong cryptography to make sure nobody is duplicating money. This allows it to work without relying on any government, corporation, or other centralized entity, which tends to appeal to libertarians, anarcho-capitalists, and technophiles.
The currency needs lots of computers to process and record transactions. The solution to this is "mining," in which Bitcoin users run software to do all the necessary work. Every time someone successfully "finishes" a work package, they receive Bitcoins in return. This provides an incentive to keep the currency running, but also attracts a lot of prospectors and speculators looking for easy money, and scammers who consider them suitably exploitable suckers.
The notable bit about Bitcoin is that it is entirely decentralised; there is no central bank backing. Previous virtual currencies, such as E-Gold, Flooz, Beenz, Lindens or WoW gold, have always had an organisation behind them. This lack of a monetary authority means that, were governments to try to do something about it, they would not have a central point of attack.
Bitcoins are entirely imaginary currency (i.e., they have no use-value), but not particularly more so than US dollars, and could be a general currency if 300 million people similarly behaved as though it was one, i.e., would do work in exchange for it. Its biggest problem as an exchange medium is that it is not widely accepted, and that trading is thus very thin indeed.
There is also the matter of built-in deflation. As more and more Bitcoins get mined, it requires more and more processing power to mine new ones. Also, if your wallet file is deleted, your Bitcoins are gone for good.
"Babbage" at The Economist takes it seriously and finds it quite interesting. Other economists have criticized the idea (to the point of calling it a scam), citing inherent design problems. Paul Krugman refrains from poking fun of it, but considers it a reimplementation of the gold standard, with the economic problems that implies. About 25% of the European Central Bank's report on "Virtual Currency Schemes" is about Bitcoin.
You can buy actual stuff with Bitcoins! Mostly internet services, geek toys, phone sex, illegal drugs and, of course, Bitcoin mining hardware. And actually useful things like beer. To allow payment with a high-volatility currency like Bitcoin, it is common for merchants to price their goods in fiat currency, but receive payment via Bitcoin converted at current market rates.
The trouble with reimplementing the gold standard in the 21st century is that financial attacks, just like cryptographic attacks, don't get less effective with time — if you apply attacks evolved in a hundred years of Red Queen's race against regulation, then remove the regulation, the subeconomy in question is utterly defenceless. As one quant on HackerNews outlined:
“”Bitcoin takes the monetary system back essentially a hundred years. We know how to beat that system. In fact, we know how to nuke it for profit. Bitcoin is volatile, inherently deflationary and has no lender of last resort. Cornering and squeezing would work well - they use mass in a finite trading space. Modern predatory algos like bandsaw (testing markets by raising and suddenly dropping prices), sharktooth (electronically front-running orders), and band-burst (creating self-perpetuating volatile equilibria in a leverage-sensitive trading space, e.g. an inherently deflationary one), would rapidly wreak havoc. There is also a part of me that figures regulators will turn a blind eye to Bitcoin shenanigans.
And we can now see this in practice.
So who's doing the maths? The answer is the most powerful distributed computing project in the world. While other distributed computing systems are investigating protein folding or sifting through radiotelescope data for signs of intelligent communication from the stars, Bitcoins are being generated by people running hashing algorithms to process transactions on a poorly-traded virtual currency.
The irony of all this is that once hardware and power costs are factored in, it's hard to make a profit off of Bitcoin mining. Many less-savvy Bitcoiners filch their power from someone else and don't factor in the equipment cost at all.
Bitcoin is also an environmental disaster, using 982 megawatt-hours a day literally wasted on computing hashes. That's about 31,000 homes or half a Large Hadron Collider, spent producing nothing of actual value. (Thus, Bitcoin runs on libertarians externalising their costs to others.) If only someone had come up with a distributed currency based on protein folding.
 The response time problem
At the other end of this mess is the customer: being a distributed computing project means that Bitcoin transactions are at the mercy of not only network latency (like credit or fund transfer transactions) but the time it takes for the transaction to be processed and stored around the network. In most cases, this takes approximately ten minutes — barely usable for network orders, but problematic for point-of-sale use. (The beer-selling example doesn't bother reconciling in real time, as the owner is treating the Bitcoin risk as a marketing expense.)
The mathematics is robust, so many highly vocal internet libertarians think this is all that is needed, because they don't understand people, know very little about economics and apparently nothing of how reliable financial computing infrastructures are built — they tend to use mainframes in highly redundant configurations, not AWS virtual servers without backups — and generally show terrifying naïveté and incompetence. This then bites them in the arse when they discover that running a Magic: The Gathering card exchange site is insufficient experience to securely run a currency exchange, or discover they have no backups. Many were sufficiently naïve as to fall for, not just a Ponzi scheme, but a Ponzi scheme that had already been tried in EVE Online's in-game currency. You also have people who understand this level of computer science, but still keep their wallet.dat file in plain text on a Windows box, ready for reaping by malware. This is the sort of thing that gets Bitcoins called "Dunning-Krugerrands."
The decentralised nature attracts libertarian extremists (go read the Bitcoin forums for more wacko libertarianism than you ever thought possible). There are Bitcoin advocates who are not annoying Randroid fools, but the ones who are tend to drown out all others.
One of the otherwise-saner advocates is Rick Falkvinge, founder of the Swedish Pirate Party, who has put all his savings into Bitcoins. Though, he also details its problems. He is a big fan of Bitcoin not as a general currency, but as a pure medium of exchange, substituting for PayPal or credit cards and changing back into a more popular currency at each end — as the Visa/Mastercard/PayPal oligopoly's willingness to block recipients they, the American government or fundamentalists don't like, starts to become a practical problem.
There are also Bitcoin banks and a stock exchange, but most of this seems to revolve around doing things with Bitcoins (including Bitcoin mining companies), leading to accusations of cargo cult economics. And scams. Lots of scammers in the Bitcoin community, who are punished by the harshest method imaginable: getting a "scammer" tag on the BitcoinTalk.org forum.
One Bitcoin exchange, Bitcoin-Central, has achieved bank status in France. Their aim is to supply an alternative to PayPal, and their central bank backing on balances only applies to accounts in euros rather than in Bitcoins. On the other hand, other players in the Bitcoin field have had to suspend operations because US banks view companies involved with Bitcoin as too high risk to do business with, or have had to suspend US dollar withdrawals for undisclosed reasons.
 The scheme
In order to prop up the initial system, Bitcoin mining was designed to bribe early users with exponentially better rewards than latecomers could get for the same effort. This effectively makes Bitcoin a pump-and-dump scheme wherein these early adopters, who have more Bitcoins than anyone else ever will, hype it up so they can offload their Bitcoins onto fools who think they'll strike it rich as speculators, or whomever else will accept them as payment. Basically, this means the system runs on opportunism, especially among people who like the idea of decentralized techno-money. Although this setup is defended as an acceptable trade-off and/or a fair reward for propping up the system, this presumes that it will actually result in a widespread, reliable currency.
In the meantime, speculators and opportunists remain Bitcoin's main users: only 22% of existing Bitcoins are in circulation at all, there are a total of 75 active users/businesses with any kind of volume, the Mt. Gox exchange is responsible for 90% of all Bitcoin transactions ever, one (unidentified) user owns a quarter of all Bitcoins in existence, and one large owner is trying to hide their wealth accumulation by moving it around in thousands of smaller transactions. But go on, dive in and get rich.
 Other distributed cryptocurrencies
A number of copycat cryptocurrencies exist, only a few of which, such as Litecoin, are at all notable. A few of these have significant distinctions from Bitcoin, such as Namecoin which is part of a decentralized ".bit" DNS project, Freicoin which incorporates demurrage[wp] to discourage speculative hoarding, and Devcoin which was designed to pay as rewards to open source developers, but most of them are simple forks of the Bitcoin code, using "libcoin." Since the media attention on Bitcoin in early 2013, a glut of such "coins" has flooded the market, with increasingly silly names like BBQcoin, Memecoin, Junkcoin, Sexcoin, and Shitcoin.
Ripple is a proposed peer-to-peer alternative currency, similar to Bitcoin, only vaguer, with a similar encryption protocol to generate scarcity, and (currently) not fully implemented. It is developed by a business called OpenCoin, Inc. and is supposed to maintain its value by destroying some small percentage of its units whenever a transaction is made with it, thus making individual units of the currency scarcer over time. It is supposed to eventually be open source and distributed P2P; right now it is none of those things.
 The moral of the story
In a gold rush, the money's in selling shovels. Cash up front, please.
- Bitcoin forums, glorious home of the revolution
- Buttcoin.org, criticism by vicious statists who hate freedom
- Bitcoin currency statistics
- Bitcoin scammer database
- Something Awful's Bitcoin thread
- The Rise and Fall of Bitcoin, Wired.
- Bitcoin’s skyrocketing value ushers in era of $1 million hacker heists, Ars Technica
- The Bitcoin Bubble and the Future of Currency, Medium
- The Gospel according to St. Satoshi (the original Bitcoin paper)
- Folding@Home (Use your computer for something actually relevant.)
- ↑ Bitcoin hits $1000
- ↑ You would be picturing the Randgasms right about now.
- ↑ The real litmus test for a currency, of course, is whether you can buy sex with it. Bitcoin passes for phone sex, so let's end the Fed!
- ↑ Technically, the more miners, the more processing power is required. If most miners are suddenly raptured in the apocalypse, however, the difficulty suddenly drops. So "more and more" is not always true - if Bitcoin deflates in the future, enough that miners quit mining, it suddenly becomes easier to mine, which seems like a nice negative feedback loop to prevent extreme collapse. (We stress the "seem" here; the very survival of Bitcoin depends on the increase of its userbase, so wanting deflation in this aspect is awfully contradictory.)
- ↑ Bits and bob (Babbage, The Economist, 2011-06-13); print version
- ↑ Beware when terms such as "Goldfinger attack" are devised in a non-joking manner. (Also see References.)
- ↑ Golden Cyberfetters, The New York Times
- ↑ http://www.ecb.europa.eu/pub/pdf/other/virtualcurrencyschemes201210en.pdf
- ↑ "Anything goes. Can roleplay."
- ↑ The Underground Website Where You Can Buy Any Drug Imaginable (Adrian Chen, Gawker, 2011-06-01); SilkRoad has since been busted and revived. (There are also lots of other marketplaces including Black Market Reloaded and Sheep Marketplace.)
- ↑ Anyone want to spare twenty grand?
- ↑ And a pool table!
- ↑ How to accept Bitcoin
- ↑ https://news.ycombinator.com/item?id=3787375
- ↑ Bitcoin's Vast Overvaluation Appears Caused by Price-fixing, Falkvinge
- ↑ Wikipedia's list of distributed computing projects lists Bitcoin at 312,000 teraflops equivalent as of November 2012; second place is Folding@Home at 8,588 teraflops as of February 2012. Bitcoin actually uses integer calculations, so that number's fudged, but it's still the largest by a ridiculous margin. Actual participant numbers are much smaller: a few thousand for Bitcoin, a few hundred thousand for Folding@Home.
- ↑ If you should find someone selling dozens of graphics cards for cheap, you might want to avoid purchasing — used Bitcoin gear probably won't live long.
- ↑ The Bitcoin Mining Accidents blog has disappeared, but you may enjoy the most famous tale from it, of heatstroke-induced brain damage from an overheating Bitcoin rig.
- ↑ Somehow he didn't asphyxiate.
- ↑ Virtual Bitcoin Mining is a Real-World Environmental Disaster, Bloomberg
- ↑ Inside the Mega-Hack of Bitcoin: the Full Story (Jason Mick, Daily Tech, 2011-06-19)
- ↑ "No database backups ... Everyone had root."
- ↑ Suspected multi-million dollar Bitcoin pyramid scheme shuts down, investors revolt, The Verge
- ↑ Bitcoin-stealing trojan spotted in the wild, VentureBeat
- ↑ In mathematics we trust
- ↑ Why I'm Putting All My Savings Into Bitcoin. Falkvinge
- ↑ Parts 1, 2, 3, and 4
- ↑ "The European Parliament considers it to be in the public interest to define objective rules describing the circumstances and procedures under which card payment schemes may unilaterally refuse acceptance."
- ↑ Ron Paul Slams Stability of US Dollar and Bitcoin in Pro-Gold Rant, The Raw Story
- ↑ Virtual cash exchange becomes bank, BBC
- ↑ Bitspend ceases trading due to frozen accounts
- ↑ Mt. Gox temporarily suspends USD withdrawals
- ↑ FAQ – Economy on the "official" Bitcoin Wiki.
- ↑ A look at the Bitcoin network transaction history
- ↑ https://github.com/libcoin/libcoin
- ↑ The Shitcoin term has already been in use by Bitcoin detractors to describe Bitcoin, and by cryptocurrency enthusiasts for coins with no potential and those which have already failed. In October 2013 someone did the obvious and introduced a Shitcoin for real.
- ↑ Official site
- ↑ Introduction to Ripple for Bitcoiners
- ↑ Exposing the Ripple Scam