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“”WHOA BITCOIN. ECONOMIC TOOL DESIGNED BY ENGINEERS COLLAPSE??? HULK SHOCKED
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 central government or management, 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 on their computers to do all the necessary work. Every time someone successfully "finishes" a work package (which becomes more difficult every time anyone finishes one), 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 interesting 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 central bank backing 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 (or at least refrains from just poking fun at it) 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 making 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. 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.
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 ("mined") 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 unacceptable for point-of-sale use.
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 financial systems 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 them 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.
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 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 changed back into a more popular currency at each end — as the Visa/Mastercard/PayPal oligopoly's willingness to block recipients they, the US Government or US fundamentalists don't like, starts to become a practical problem.
One Bitcoin exchange, Bitcoin-Central, has achieved bank status in France. Their aim is to supply an alternative to PayPal. Their central bank backing on balances only applies to accounts in euros rather than in bitcoins.
 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.
 The moral
Well, there's several. 1. In a gold rush, the money's in selling shovels. 2. Cash only.
- Bitcoin forums, glorious home of the revolution
- Buttcoin.org, criticism by vicious statists who hate freedom
- "The Rise and Fall of Bitcoin", Wired.
- Bitcoin currency statistics
- Something Awful's Bitcoin thread
- ↑ http://twitter.com/#!/securityhulk/status/126380860864864257
- ↑ 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!
- ↑ Bits and bob ("Babbage", The Economist, 2011-06-13); print version
- ↑ http://www.quora.com/Bitcoin/Is-the-cryptocurrency-Bitcoin-a-good-idea?srid=pxt
- ↑ http://krugman.blogs.nytimes.com/2011/09/07/golden-cyberfetters/
- ↑ http://www.ecb.europa.eu/pub/pdf/other/virtualcurrencyschemes201210en.pdf
- ↑ http://blog.bitinstant.com/blog/2012/10/30/the-ecb-report-on-bitcoin-and-virtual-currencies.html
- ↑ http://forum.bitcoin.org/?topic=3066.0
- ↑ The Underground Website Where You Can Buy Any Drug Imaginable (Adrian Chen, Gawker, 2011-06-01)
- ↑ 
- ↑ http://www.howtoacceptbitcoin.com/2013/03/eliminate-bitcoin-volatility-risk-with.html
- ↑ https://news.ycombinator.com/item?id=3787375
- ↑ 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.
- ↑ Including one Darwin Award applicant who poured a bucket of liquid nitrogen on the floor next to his rig to cool it. Somehow he didn't asphyxiate.
- ↑ http://www.bloomberg.com/news/2013-04-12/virtual-bitcoin-mining-is-a-real-world-environmental-disaster.html
- ↑ Inside the Mega-Hack of Bitcoin: the Full Story (Jason Mick, Daily Tech, 2011-06-19)
- ↑ "No database backups ... Everyone had root."
- ↑ http://www.theverge.com/2012/8/27/3271637/bitcoin-savings-trust-pyramid-scheme-shuts-down
- ↑ http://www.dailytech.com/Pirateat40+Makes+Off+56M+USD+in+BitCoins+From+Pyramid+Scheme/article25538.htm
- ↑ http://venturebeat.com/2011/06/17/bitcoin-trojan-steal/
- ↑ http://www.metafilter.com/126699/In-mathematics-we-trust#4904316
- ↑ http://falkvinge.net/2011/05/29/why-im-putting-all-my-savings-into-bitcoin/
- ↑ http://falkvinge.net/2011/06/04/bitcoins-four-hurdles-part-one-usability/
- ↑ http://falkvinge.net/2011/06/06/bitcoins-four-hurdles-part-two-transactions/
- ↑ http://falkvinge.net/2011/06/08/bitcoins-four-hurdles-part-three-escrow/
- ↑ http://falkvinge.net/2011/06/10/bitcoins-four-hurdles-part-four-exchanges/
- ↑ http://falkvinge.net/2012/11/20/europarliament-scolds-visa-mastercard-paypal-for-killing-wikileaks-donations-initiates-regulation/
- ↑ http://www.bbc.co.uk/news/technology-20641465
- ↑ http://www.rawstory.com/rs/2013/04/23/ron-paul-slams-stability-of-u-s-dollar-and-bitcoin-in-pro-gold-rant/
- ↑ FAQ – Economy on the "official" Bitcoin Wiki.
- ↑ http://www.technollama.co.uk/a-look-at-the-bitcoin-network-transaction-history