In a conversation I had with a student of mine last week, he asked me, quite offhandedly, if I had heard of Bitcoin. I thought it rang a bell.
I replied with a casual, “yeah, I think I’ve heard about that.”
He elaborated a bit further, explaining how it’s become an accepted currency around the Internet. That sparked my interest.
A few days later, I lie in bed trying to fall asleep while Conan O’Brien makes weird faces and Andy Richter chimes in with jokes that are only sometimes funny. I’m tired, but I suddenly remember the above conversation, so I reach over for my iPad and begin Googling.
As it turns out, Bitcoin has been around since 2008. I felt weird to be so out-of-the-loop since the Internet ages like a dog with the same fictionalized Progeria as Robin Williams in Jack. (Sidenote: This means if you’re still relying on joke stems like “said no one ever” or “that awkward moment” to be funny, the Internet has aged you out. It’s time to start plagiarizing a new meme. )
The further I dug into this on a Thursday night, the more intrigued I became, and I’ll tell you why.
What is Bitcoin?
Essentially, this a what all Libertarians have been clamoring about since they heard about Ron Paul, decriminalizing drugs, and auditing the Federal Reserve. To summarize the video, Bitcoin is a digital currency. It derives from a P2P (Peer to Peer) source code. Have you ever downloaded music from a torrent site? Limewire? Kazaa? Napster? Remember how the interface looked while you were downloading Paradise by the Dashboard Light and someone was simultaneously leeching Bye Bye Bye off of you? Bitcoin works in a similar fashion.
It all started back in 2009 when Satoshi Nakamoto, a pseudonym according to Wikipedia, released the first set of Bitcoins. Great, so we just go out there and grab them? Find them? What? The video mentioned “mining.” What the hell is Bitcoin mining? From what I can gather is that, as mentioned in the video, your computer must run an application that will literally search, or mine, for digital groups of coins (they come in groups of 25 or 50). Once these coins are found, the person whose computer found those coins will now keep them in a digital wallet. These same miners are the same people who verify transactions between peers (hence the peer-to-peer).
This all seems too damn good to be true, just too easy to earn “money”. So why am I still typing, and why are you still reading? Well, because it’s more sophisticated than that.
What is “Mining?”
In the beginning, a computer similar to the one I am currently typing on had the ability to quickly and efficiently run an application that would find Bitcoins. To do this, the application would have to solve an increasingly difficult series of algorithms. As explained in the video, this wasn’t a big deal in Bitcoin’s infancy. However, we’re four years removed from the genesis. Bitcoin miners have implemented the use of powerful graphic processing chips to increase mining efficiency. The chips were quicker at solving the algorithms. Once those became obsolete, miners turned to a chip called ASIC. It’s apparently (thus far) the best way to mine for Bitcoins. People have even interconnected machines dedicated solely to Bitcoin mining called Bitcoin mining rigs or “farms”.
The caveat is that there is a set limit to the total amount of Bitcoins being released. People will persistently mine for these Bitcoins, the coins will eventually be fully dispersed to the public in around 100 years, and a set limit will then be available to the public for trading (which is when its real market value will be established). While these coins are being released, however, they are also becoming harder and harder to obtain. So much so that the mining rigs (or farms) use up thousands of dollars in energy running the application to find the coins. In a world of imagined code, people are using real energy to extract a (seemingly) imaginary currency. You see where I’m getting with this? If not, let this guy explain:
So after each “block” is found, it just keeps getting harder and harder to find more Bitcoins. Think about it in terms of Gold. Gold is a precious metal that requires mining. We are far along enough in human history to know A. There’s a finite amount of gold available on this planet, and B. In 2013, there are myriad gold prospecting shows on TV, and all of them require a massive exhaustion of resources to find minuscule amounts of gold. On the flip side, the United States Federal Reserve keeps printing money. It keeps releasing money into the economy without any real deserved reason. What this will inevitably lead to (eventually) will be inflation in some form. This is where I got interested.
Why this is so damn cool
In the 21st Century, we take certain ideas for granted. In reference to this topic, we have taken the way currency works for granted. While reading The Unwinding this summer, there was a passage where Peter Thiel, current billionaire investor, reflected on his invention, PayPal. He believed that he could build a digital currency that would undermine the way the world’s financial system works. At the time, I had no idea what he was referring to. After finding out about Bitcoin, I finally do.
Pretend the plot of The Walking Dead actually happened. You awake to find a world usurped by a plague where society and the people living it no longer operate within the bounds in which it was previously held. Aside from the zombies, how do you survive? How do you get, for lack of a better term, stuff? How do you get shelter if you cannot build it yourself? How do you get food if you cannot farm it yourself? How do you get clean drinking water if you cannot filter it yourself? The answer is to exchange favors with somebody who does know how to do that. In essence, you’re back to a barter economy.
“Man, I’m about to literally die of thirst,” Rick said.
“Well, I can get you clean drinking water, but you need to provide me with protection,” Herschel replied, noticing the desperation in Rick’s voice and realizing he had demand/leverage on his side.
Fast forward 50 years. The world is safe and society is back in order. People realize that there can now be a placeholder for services rendered. Protection, healthcare, entertainment, and other assorted services can now be given a set price according to the market. And there we have a very condensed, very poor genesis for how an economy grows while creating or adapting a form of currency.
We have a well-established currency in 2013. But the optics of Bitcoin could be perceived as a de-revolitionary idea. It wants to go back to creating a currency that is based, singularly, on one’s own ability to work for it. There aren’t taxes imposed by a centralized government, and there isn’t the traditional oversight as one would see in a sovereign governance.
Paul Krugman is skeptical. In April of this year, he wrote about Bitcoin in his column for the New York Times:
Money is, as Paul Samuelson once declared, a “social contrivance,” not something that stands outside society. Even when people relied on gold and silver coins, what made those coins useful wasn’t the precious metals they contained, it was the expectation that other people would accept them as payment.
What Krugman is referring to is that the only reason a dollar is worth anything is because we actually accept it as a form of compensation for our work. And everybody does so in relative agreement. Bitcoin, as he believes, is a shady investment because it relies upon people accepting it as compensation. According to Forbes, these are the top ten places that accept Bitcoins as payment:
- The Pirate Bay
- The Internet Archive
While some of those entities seem questionable, one familiar name is flirting in the Bitcoin arena: Ebay. Even crazier, according to Bitcoin Charts, a Bitcoin is worth around $140 USD as of October 1. It’s important to note that this is still volatile. Mostly from what I’ve read, investors still see it as too risky. The highs are too high and the lows are too low. But heck, Apple was risky 25 years ago. Who the hell was Google but a search engine when I was in middle school? Crazier things have happened in our world.
Aside from the legitimate merchants that accept Bitcoins as payment, there is also something else that has trickled up: a black market. Capitalism is beautifully tragic in this way. It’s called Silk Road, and it’s an online marketplace for illegal goods. Among some of the items sold include heroin, LSD, and weed. A sister site, The Armory, sold weapons. It was shut down due to the lack of demand, but nonetheless, these are vendors that sell illegal (at least in the United States) items for Bitcoins. The currency can operate outside political lines. I can imagine this being a logistical nightmare for the United States court system in the same way Shield laws have to be interpreted in the age of the Internet. Cyberspace is an abstract idea that works pragmatically. It operates everywhere and nowhere.
For all this explanation, discussion, and analysis, I don’t know if it will ever work. I’m never going to invest (partially because schoolteachers and liquid assets mix like oil and water, which, for the record, doesn’t bother me, I knew what I was getting into when I declared a major). I would like to see this change the way our financial system works, though. I revel in the idea that some guy or gal, or a group of people, came up with an idea, coded it, and changed the way the financial system operates forever. They literally created a new economy from the sweat of the brow, from the proper synapses firing. It’s like the genius in the garage building a revolutionary idea cliche. It’s just cool. Plain and simple.
And with a quote, I’m out.
“If you build it, they will come.”