By Reed Stevenson
Techies are trumpeting a so-called virtual currency called Bitcoin that behaves in some ways like traditional currencies. Financial experts are debating its regulatory pitfalls and volatility, highlighted by a tumble in valuation this month that brought the digital money to the world’s attention.
Meanwhile, many of us still don’t understand what Bitcoin is. Bloomberg.com answers the question in its Tech Deals blog.
What is Bitcoin?
It’s similar to the US dollar, the euro or the Mexican peso — except that it isn’t controlled by any country; you can’t hold one; and you can’t buy many things with it right now. Some tech-savvy companies — notably blogging-tool maker WordPress — are starting to accept payments in Bitcoin.
While some enthusiasts have issued bills and coins that serve as physical proxies for the currency, Bitcoin was designed to be purely digital. You can’t go to an ATM and take out a Bitcoin, or put one in a cash register. Bitcoins live in online wallets, which are accessed via a computer. It’s more like an MP3 than a CD.
Who created Bitcoin?
The identity of those responsible for inventing Bitcoin remains a mystery. A programmer or group of programmers going by the name of Satoshi Nakamoto published the original specifications for it. While Bitcoin has been around since 2009, it started as an obscure project that computer hobbyists experimented with.
How do you find Bitcoins?
There are currently just over 11 million Bitcoins, and there is a total of 21 million to be unearthed by the year 2140. In theory, anyone with a computer could “mine” Bitcoins through an automated mathematical process. You can unlock more of them if you discover a hidden series of letters and numbers that matches up with the Bitcoin security keys specified by Nakamoto.
Programmers have written software, which can run in the background on PCs, to rapidly check possible combinations of letters and numbers one by one in the hopes of stumbling on an unclaimed Bitcoin. If you’re planning to get rich by running one of these types of programs on your MacBook, don’t bet on it. All of the easy ones have been found. Now, high-powered computer systems are needed.
The format, where it becomes more difficult and expensive in terms of computing power to discover Bitcoins over time, was designed to keep the currency’s growth rate — or inflation — steady and predictable.
Is it true they have been used to buy drugs and other illegal items?
Bitcoin transactions are not easily traceable. That means holders can trade them or use them to purchase things online anonymously. As a result, Bitcoin has been used on Internet black markets such as Silk Road to buy illicit items including drugs. Iranians have used Bitcoins to get around financial restrictions imposed by the US, and there’s a thriving online market where drugs are traded online.
What is a Bitcoin worth?
Bitcoins now have a market value of about $1.04bn based on supply and exchange rates, according to Bitcoincharts.
There’s no control over how people value Bitcoin against their own currencies. That, and a recent self-feeding cycle of public curiosity, explain how the value of Bitcoin in dollar terms has soared to more than $200 from mere cents at its inception. In the past week, the value has slumped to as low as $84 from as high as $266, according to Tokyo-based Mt. Gox, the largest Bitcoin exchange.
Why is it so volatile?
It stems mainly from the lack of liquidity and a central monetary authority to make sure supply and demand are balanced. That, plus the absence of any large exchanges where buyers and sellers can find each other, makes Bitcoin vulnerable to manipulation or speculation.
Where do I buy some?
There are several upstart websites that act as Bitcoin exchanges, such as BTC-e and Tradehill. Mt. Gox has halted trading periodically since April 11, citing difficulties with serving the high trading demand and cyberattacks on its system. The temporary closing also happened to come shortly after the crash in Bitcoin’s value.
WP-Bloomberg
