Everyone has a Bitcoin article. This one is mine.
The Bitcoin phenomenon runs the full gamut from “revolutionary breakthrough” to “greedy cesspool”. There’s something for everyone! It’s therefore not surprising that one would have nuanced and even conflicting opinions about it. This is an attempt to untangle mine, complete with links to the articles with which they’ve been formed. I’ll assume you've already been subjected to the mainstream media’s Bitcoin reporting and have at least a rough understanding of what’s going on.
The distributed ledger technology that makes Bitcoin possible is really cool. Whether or not Bitcoin has a future as a currency, this technology surely does. It allows a bunch of mutually untrusted parties to act as the bank and keep track of what accounts contain what coins. Its major drawback is of course that it requires a huge amount of computer power (and electricity) to keep it honest. That computer power is wasted by solving arbitrary hashing puzzles — a process called mining to evoke goldrush imagery. On the other hand, those arbitrary puzzles serve to secure the ledger, and that’s a valuable function. Framed like that, the power is hardly wasted.
How the Bitcoin protocol actually works
by Michael Nielsen
The Bitcoin currency is possibly the most unimaginative application for a distributed ledger. A ledger can hold anything. Namecoin is a new solution to DNS, PKI, and any number of other information-distribution problems. Proof Of Existence takes the place of a notary public, using the blockchain to verifiably timestamp documents. Colored Coins enables trading real assets. These are just a few implementations, but there are many more ideas. A lot of these implementations are piggybacking on Bitcoin’s blockchain, but they needn’t always be that way if they can incentivize mining on their own ledger.
Whatever happens to Bitcoin-the-currency, the technology is a useful addition to our economic tool shed. I just hope future iterations don’t invite so much speculative mania.
Is Bitcoin Going to Change the World?
by Richard Brown
The argument I’m most tired of hearing is that Bitcoin will bring low-cost commoditized financial services to everyone in the same way that the world wide web did for information. At best, Bitcoin might be suitable as a large, slow value store on which simpler payment systems are backed — a sort of ACH for banks of the future. However, quick and simple transactions for technological commoners is not where Bitcoin shines.
It’s clear that today’s banks don’t meet the needs of many marginalized people, but Bitcoin can barely be construed as an improvement and in many ways is a huge step backwards. For the HTTP of financial transactions, my favourite contender is Ripple.
Satoshi Nakamoto makes for a good story, but there are so many other wild stories surrounding Bitcoin. Read Gwern’s Blackmail account or Silk Road Analysis or really anything on the site and you’ll get an glimpse into an exciting paranoid underworld. Also check out the fascinating list of major bitcoin heists, thefts, hacks, scams, and losses. There are secretive early adopter millionaires, unregulated financial service providers, hopeful but inexperienced users, and a ten billion market cap. It’s an exciting place right now and I can’t wait for the movie to come out.
Everything to do with Bitcoin is hilariously amateur. I’ve spent a lot of time chasing my fascination through mining pools, wallet apps, message boards, and even automated arbitrage over four cryptocurrencies and eight exchanges (more on that another time). At every turn I have been astonished at the haphazard implementations and casual attitudes towards financial services. I imagine this is what a gold rush was like. For example: Btc-e is one of the top 10 exchanges and it has a troll box on the front page.
Never before have I witnessed so many people, informed to various degrees, debating so passionately about money and economics. It’s great.
A side effect of Bitcoin’s immaturity is that it is accessible on many levels to armchair economic hackers like myself. I can code a trading bot in a few evenings and it actually does fairly well! I can’t do that in real forex. Moreover, I can trade stress-free because the risks of trading are dwarfed by the risks in simply being in the market at all.
I can also read about the implementation of any financial instrument in the Bitcoin universe and probably understand it, whereas most of the practical nuts and bolts of the real financial universe are not even published on the Internet. Sure, I could read abstract theory, but in the Bitcoin universe I can read an analysis of actual money flow.
I encourage you to get some small amount of Bitcoin if you have the means. Don’t think of it as an investment. Think of it as the price of entry into this neat economic experiment. Better yet, don’t buy them on an exchange with your fiat currency. Be more imaginative:
You could find your local Bitcoin fanatic who started mining two years ago. They’ve got plenty, and they should understand that they need keep spending some in order to secure the viability of the currency in which their fortune is denominated. Negotiate with them, trade them for a dinner, or for helping them with their website, or whatever.
You could also find a more obscure crypto currency, and start mining it yourself. That’s what I did. It may not end up being worth anything, but the same can be said for Bitcoin, so who cares. You’ll still get to understand the mining process, and then you can spend them on an exchange like Bter to buy a different worthless crypto currency.
These Three Graphs Prove That Bitcoin Is a Speculative Bubble
by Jason Kuznicki
My advice is to just stop worrying too much about Bitcoin. It’s a new toy and we should be playing with it.