In the peculiarly morphing world of modern electronic transactions, one development stands out above the rest – the advent of bitcoin.  Bitcoin is a form of digital currency, created and held electronically.  No one controls it.  No one regulates it.  It doesn’t live in banks, and no one person can manipulate it.  It is the first example of a growing category of money known as cryptocurrency.

bitcoin-logo-3dBitcoins aren’t printed, like dollars or euros – they’re produced by lots of people running computers all around the world.  These folks, called “miners,” use software that solves mathematical problems to keep the bitcoin network running.  Consequently, a central bank cannot manipulate the supply of bitcoin, either raising the value by decreasing the supply or lowering the value by printing more bitcoin.

Instead bitcoin lives in a strange digital Tron world where bitcoin miners are rewarded by managing the record of all bitcoin transactions throughout the world in a certain time period and by applying an encryption to each page or “block” of the transaction ledger.  The encryption is called a “hash” and only a certain kind of hash will be accepted as the proof that the batch of bitcoin transactions is legitimate.  Hundreds or thousands of miners work at generating exactly the right kind of “hash” that will encrypt the ledger.  They work by applying a bit of software called a “nonce” to their hashing program.  The ledger will only accept a hash that starts with a certain number of zeros and, since the hash is a randomly generated set of numbers, no one knows for sure what the result of a “hashing” will be.  Thus, actually encrypting the ledger takes many trials with many nonces before the actual desired hash is produced.  The programmer who produces the correct hash for that book in the ledger is awarded 25 bitcoins, which they keep either in the Cloud, or in a “wallet” on their computer.

Whew!  Talk about getting off the grid.  So why would anybody except a true geek in a long-billed baseball hat with a penholder in every pocket of their cowboy shirt spend time collecting bitcoin?  It could be because bitcoin has several important features that set it apart from normal fiat or bank-produced currencies.

First of all, a central authority doesn’t control the bitcoin network.  Every computer that mines bitcoin and processes transactions is part of the network, and the computers all work together.  Supposedly that means that one agency, such as the Federal Reserve or the International Monetary Fund, can’t fool around and cause the system to crash.  If some part of the network goes down, the bitcoin keeps flowing.

Secondly, It’s easy to set up a bitcoin address. Conventional banks make you jump through hoops simply to open a bank account. And as most retailers who want to do electronic funds transactions know, setting up a merchant accounts is a bureaucratic nightmare.  With bitcoin, you can set up an address in seconds with no fees and no questions.Bitcoin is also anonymous enough that it satisfies most users need for privacy since accounts are not linked to names, addresses, or other personally identifying information. On the other hand, bitcoin stores details of every single transaction that ever happened in the network in the huge general ledger I mentioned.  The record is called the block chain. If you have a publicly used bitcoin address, anyone can tell how many bitcoins are stored at that address. They just don’t know that it’s yours.

Bitcoin transaction fees are miniscule.  A bank may charge a large fee for international transfers. Bitcoin doesn’t.  It’s also as fast as the internet.  Money can be sent anywhere anywhere and it arrives minutes later, as soon as the bitcoin network processes the payment.  There is one caveat: when your bitcoins are sent, there’s no getting them back, unless the recipient returns them to you. They’re gone forever.

It seems that bitcoin has become the crypto-anarchists way to rage against the machine.  Unfortunately, no one knows what will become of bitcoin. It is mostly unregulated, but that could change. Governments are casting a jaundiced eye toward the deep recesses of the bitcoin network and are becoming very concerned about the inability to tax bitcoin and their lack of control over the currency.  This may lead to some intervention in the future.  Stay tuned… 

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