Friday, March 22, 2013

Bitcoin Elevator Description

"Bitcoin is a global person-to-person digital currency that works on the Internet.  It allows transfers of any amount from anyone, to anyone, at any time, near-instantly, with negligible fees, and no third-party (government or bank or corporation) control.  Bitcoin is like digital cash: transactions can not be reversed, as there is no central authority to adjudicate disputes.  The Bitcoin network has been working since 2009 and is just starting to get mainstream attention."

Q: If there's no government backing it, why does it have value?

A: Its inherent value is in its ability to store and transfer value from anywhere to anywhere with negligible fees and no borders.  (You can transfer funds now via international wire transfer, but the red tape can be exhausting, the exchange rates frustrating, and wire is just not suitable for smaller/personal transactions.)  While gold has some inherent value for industrial applications, 90%++ of its value comes from the fact that it's (a) scarce, (b) easily recognizable, (c) highly divisible, and (d) very transportable, all of which are important features of money.  Bitcoin has all of these features, but takes "very transportable" to a place never previously imagined.  If you think there's no inherent value in "usefulness", I'd invite you to ask your employer why they pay you.

It's worth noting that USD and other fiat currencies don't really have anything backing them, either.  The "gold standard" went away long ago, and the only inherent value left is the emotional value that we assign to it, which is our belief that it will probably still be worth most of its value tomorrow.  It's also important to note that because of the enforced scarcity of Bitcoin, Bitcoin will tend to hold value over time (like gold), instead of leeching value away over time (like fiat currencies, which can be printed at will.)

Q: What if the government shuts it down?

A: There's no central place to "shut it down".  The gov't would have about as much luck as the music industry did shutting down Bittorrent.  That being said, the US Govt has acknowledged virtual currencies and (so far) simply wants businesses that convert Bitcoin to USD and back to implement money laundering controls just like any other business that converts currencies.  If you're not moving more than $10k at a time, you probably don't care.

Q: How does it work?

A: The database of all Bitcoin transactions ever completed is shared by all of the participants of the Bitcoin network.  A group of people known as "Bitcoin miners" continuously audit the transactions and bundle them into "blocks" that are protected by cryptography so that Bitcoin transactions can't be reversed, and coins can't be spent twice on the network.  (Your Bitcoin always exists on the network, but the secret, private keys that allow you to unlock your coins and spend them are kept by you: either on your computer or phone, or backed up on a flash drive or piece of paper.  How safe your Bitcoin is varies directly with how well you protect those keys.)

Q: Is it safe?

A: Relative to what? Recent events in Cyprus show us that banks are not safe.  And even if they were, governments can step in and seize your money arbitrarily, and if done without cause, a lengthy court battle will be required to release your funds.  Even if they don't take your money outright, the government will leech away the value of those stored funds over time, via inflation.

Any funds you have in Bitcoin are controlled only by you, but the burden of securing those funds falls on you, too.  One should be especially cautious of leaving Bitcoin keys on a computer that's used for general browsing, or shared with family members or friends.  For the especially cautious, solutions exist for keeping your private keys entirely offline, where you have to "sneakernet" transactions from the offline computer to the online one in order to complete a payment.  As with all things, there's a tradeoff between security and usability.

Also, because Bitcoin only has a market value, if that market loses confidence in the value of Bitcoin its real value will go down.  It's a fairly new currency, and if you plan on using it as a long-term store of value, it should be considered (at this time) a high risk investment.

Q: What can I use it for?

A: While Bitcoin is still in its infancy, new point-of-sale merchants are springing up every day that accept Bitcoin.  Some online merchants already do, and services are available that will accept Bitcoin and buy on your behalf just about anything available online.

Q: If there is no central authority, then how does it work?

A: There's no central authority, but there's a central specification that anyone that wants to participate in the Bitcoin network Must follow.  Any transactions or blocks that do not follow the specification to the letter will be ignored by the rest of the network.

In order for that specification to change, almost all Bitcoin miners must agree to it and implement the change.  (The ones that don't may wind up with a "hard fork" blockchain of their own, but they'll quickly find that situation untenable.)

 (Are there any other questions I should add here?)

1 comment:

Tabatha sima said...

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