Everyone seems to have heard about bitcoins. Yet very few seem to know how it works. And whilst I had a reasonably good understanding of it, I was surprised at how little I actually knew when I started to research the subject for this article.
It seems like my latest self discovery is that a video speaks a million words. So let's start by having a look at "What is Bitcoin?"
A great resource to learn all you ever wanted to know about bitcoins, is as is most things in life, the original source.
http://bitcoin.org/en/
And the FAQ section will very quickly answer most if not all of the questions and doubts you ever had.
http://bitcoin.org/en/faq
The best way to really learn about bitcoins is to do what Freia did. Buy bitcoins. And you'll very quickly realize that you don't even have to buy 1 bitcoin. You can buy 1/100th of a bitcoin if you so desire.
This blog would be incomplete without my thoughts on the future of bitcoins. Freia seems to be a firm believer that bitcoins is the future. And for once, I disagree with her. I think that several things will happen. The first as has already begun is that there will be several similar offerings. Digital currencies, each of which will differentiate themselves in minor ways.
The reason I think that bitcoins will not last for a significant period is the following.
1. Bitcoins are not protected
Whilst the open source community and the bitcoin fraternity claims the protection is based on the military grade cryptography, the unfortunate fact of life is that even military grade cryptography has been hacked. The problem with bitcoins being hacked is that there is no recourse. No one owns bitcoin and so there's no central authority or bank that can address the loss. Think of it as a safe deposit vault that is very safe, except that if it does get broken into, no bank is there to take responsibility or compensate you.
2. Bitcoins are not traceable
The very system that provides the system with its anonymity also provides it its flaw. In a normal banking transaction, we have a trail of which payments were made to who and when. Here, once the bitcoin is gone, its gone forever. There';s very little you can do, if the receiver decides not to honor their commitment. No credit card company you can call to stop payment.
3. No one owns bitcoin
Once again the primary advantage is also its disadvantage. The dollar is a strong currency, because the US has a vested interest in ensuring that it remains a strong currency. And hence the Federal Reserve will take actions to ensure it remains stable and valuable. The absence will expose the bitcoin to the risk of volatility. A recent drop in over 20% in a short period demonstrates this risk in the real world.
4. Bitcoin mining is unpredictable
The basis of the value of bitcoins is on the basis that the digital mining of bitcoins is predictable and becomes increasingly difficult over time.This assumption could be shown to be wrong if someone, somewhere is able to innovate a devise and / or an algorithm that is able to accelerate the process by a factor of 10, 100 or even 1,00,000. This will then generate an excess of currency concentrated in the hands of a few individuals which will make the currency extremely shaky if not worthless.
5. Regulatory Risk
The most real short term risk is probably regulatory in nature. Society works on the basis of businesses and individuals paying taxes. The bitcoin methodology actually bypasses this on many levels. It thus becomes but a matter of time before Government starts regulating bitcoin transactions, if not completely making it illegal. In either case it becomes a underground currency best used for illegal activities and not the ubiquitous digital currency its being positioned as.
As in most things, there's a good chance that I may be wrong. And since I like bitcoins and Freia has an investment in it, I hope I am.
It seems like my latest self discovery is that a video speaks a million words. So let's start by having a look at "What is Bitcoin?"
A great resource to learn all you ever wanted to know about bitcoins, is as is most things in life, the original source.
http://bitcoin.org/en/
And the FAQ section will very quickly answer most if not all of the questions and doubts you ever had.
http://bitcoin.org/en/faq
The best way to really learn about bitcoins is to do what Freia did. Buy bitcoins. And you'll very quickly realize that you don't even have to buy 1 bitcoin. You can buy 1/100th of a bitcoin if you so desire.
This blog would be incomplete without my thoughts on the future of bitcoins. Freia seems to be a firm believer that bitcoins is the future. And for once, I disagree with her. I think that several things will happen. The first as has already begun is that there will be several similar offerings. Digital currencies, each of which will differentiate themselves in minor ways.
The reason I think that bitcoins will not last for a significant period is the following.
1. Bitcoins are not protected
Whilst the open source community and the bitcoin fraternity claims the protection is based on the military grade cryptography, the unfortunate fact of life is that even military grade cryptography has been hacked. The problem with bitcoins being hacked is that there is no recourse. No one owns bitcoin and so there's no central authority or bank that can address the loss. Think of it as a safe deposit vault that is very safe, except that if it does get broken into, no bank is there to take responsibility or compensate you.
2. Bitcoins are not traceable
The very system that provides the system with its anonymity also provides it its flaw. In a normal banking transaction, we have a trail of which payments were made to who and when. Here, once the bitcoin is gone, its gone forever. There';s very little you can do, if the receiver decides not to honor their commitment. No credit card company you can call to stop payment.
3. No one owns bitcoin
Once again the primary advantage is also its disadvantage. The dollar is a strong currency, because the US has a vested interest in ensuring that it remains a strong currency. And hence the Federal Reserve will take actions to ensure it remains stable and valuable. The absence will expose the bitcoin to the risk of volatility. A recent drop in over 20% in a short period demonstrates this risk in the real world.
4. Bitcoin mining is unpredictable
The basis of the value of bitcoins is on the basis that the digital mining of bitcoins is predictable and becomes increasingly difficult over time.This assumption could be shown to be wrong if someone, somewhere is able to innovate a devise and / or an algorithm that is able to accelerate the process by a factor of 10, 100 or even 1,00,000. This will then generate an excess of currency concentrated in the hands of a few individuals which will make the currency extremely shaky if not worthless.
5. Regulatory Risk
The most real short term risk is probably regulatory in nature. Society works on the basis of businesses and individuals paying taxes. The bitcoin methodology actually bypasses this on many levels. It thus becomes but a matter of time before Government starts regulating bitcoin transactions, if not completely making it illegal. In either case it becomes a underground currency best used for illegal activities and not the ubiquitous digital currency its being positioned as.
As in most things, there's a good chance that I may be wrong. And since I like bitcoins and Freia has an investment in it, I hope I am.
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