What the Hell is Bitcoin Anyway? All You Need to Know in 2 Minutes

Last June, Reason TV interviewed the Mercatus Center's Jerry Brito about the then-new phenomena that is Bitcoin, a virtual currency that is distributed via the internet.

With Bitcoin now going for over $100 per unit and amassing a value of over $1 billion worldwide, everyone has an opinion on the curious currency - whose creator is still unknown. The short interview above is a great place to get some basic facts. Go here for more details and links.

Reason on Bitcoin.

Comments

[Fist of Etiquette]

I needed to know in one minute. Now it's too late.

[Night Elf Mohawk]

Does it have anything to do with tulips?

[some guy]

Morning Edition today interviewed some "expert" about Bitcoin. The guy kind of described what Bitcoin was, admitted to speculating in Bitcoin recently, then claimed that Bitcoin would never become popular as a currency because it lacks transparency.

How can you get more transparent than the way Bitcoin operates? Because a central bank is not it.

[Jerry on the boat]

You were nine months early for the fad!

[[e-mail]]

Bitcoin is being throttled by Mt.Gox's incompetence at keeping a website running.

[Some call me Tim?]

Everything I need to know about BTC I learned from Tulpa. Any money that requires electricity and the acceptance of others is not for me.

[HazelMeade]

Can I pay my rent in bit coin? Can I make car payments in bit coin? Can I buy groceries in bit coin?

[Cytotoxic]

Not yet...

[Sigivald]

Will you be able to pay taxes with it?

Yeah. That will be kind of a problem.

That and it being deflationary, forever.

[robc]

Does your landlord accept bitcoin? Your bank? Your grocery store?

I cant answer your questions until you answer mine.

[A Secret Band of Robbers]

If you're a Cypriot or Argentinian, the answer may soon be yes.

[Some call me Tim?]

Can I do any of these things with gold?

[yonemoto]

you could probably make rent payments in gold.

[Auric Demonocles]

There was a lot of actual technical and usage information that I wanted to know that was not covered in these 2 minutes.

[HazelMeade]

This was very informative to me...

http://www.cs.umd.edu/~elaine/docs/bitcoin.pdf

[Auric Demonocles]

But I don't read 7.5 pages a minute!

[HazelMeade]

You can skip down to the section titled "structural problems and potential solutions".

[Death Rock and Skull]

Speaking of Bitcoin, has anybody been using Butt Bucks? They're are a rewards based system with the value driven by trade in one rare commodity.

[A Secret Band of Robbers]

People who complain the Bitcoin isn't backed by anything aren't learning the lesson. Every time a currency has a banking crisis or a market crash or a new socialist policy, Bitcoin will increase in value.

Most fiat currencies have been backed only by the full faith and credit of their corresponding governments.

Bitcoin is the first currency in the history of the world to be backed by government stupidity.

The problem may well be that a currency like that may be dangerously deflationary.

[HazelMeade]

Bitcoin is inherently deflationary due to the decay rate at which bit coins are being minted.

It's also vulnerable to certain types of cyber attack. What's likely to occur is that as the value of bitcois rises, someone will muster the effort to make a coordinated attack, and whether or not it suceeds it will cause a loss of confidence, followed by a sudden and total catestrophic collapse in value, followed by repudiation of the currency.

I really hope libertarians don't jump on this bandwagon. Bitcoin is going to discredit the whole idea of alernative currencies.

[Some call me Tim?]

If you would like a lesson on why being "inherently deflationary" is less of an issue than you think, I suggest you review late 19th century USA.

Prices fell and the economy boomed.

[robc]

It isnt "inherently deflationary" if you use the term correctly.

A currency that either increases slowly or doesnt increase is inherently "slow inflationary" or "non-inflationary".

Inflation/Deflation is monetary. Deflation occurs when the monetary supply decreases.

[HazelMeade]

But the problem is that even though the number of bitcoins is slowly increasing the size of the "bitcoin economy" increases faster. Even though it's mostly gambling, there are more transactions going on.

Also, it's possible for bitcoins to become "zombie" coins if their keys get lost or corrupted, so eventually coins will slowly leave circulation faster than they are replaced.

[Some call me Tim?]

How is this expected deflation a problem?

[yonemoto]

because without deflation, it's so hard to screw over the poor.

because without deflation, you don't force society to exponentially grow and consume all the resources on a limited planet.

because without deflation, you can't print money and throw it at rich bankers.

[Sigivald]

It will inevitably cause the same price effects as deflation by being static (once every last bitcoin is mined), as the economy continues [we hope and trust] to grow.

Thus we can fairly enough call it "deflationary" even though it's not monetary policy deflation.

This is not a fatal flaw in itself, but it is an issue and has effects.

[yonemoto]

robc, that's not really true. Deflation occurs when the growth of economic productivity outpaces the increase in total monetary supply.

Deflation is the derivative of the VALUE of currency, and value is, rougly, demand/supply.

[yonemoto]

no it's not. Because if the market needs are not being met, then someone else can spin off a rival digital currency.

[0x90]

Bitcoin, like any commodity, exists as an investment instrument, though unlike metals, it is effectively limited in supply not by its difficulty to obtain, but as inherent property of its nature (google "maximum number of b"). Which is to say, its deflationary tendency is bounded solely by the level of increase of value in the system.

What is being missed is that deflationary money is not necessarily more desirable than inflationary, because either represents a gamble, and gambling should be an activity that you pursue using money, not something you inherently do as a function simply of holding it.

The problem with government money is not its fiat nature, but rather its monopoly nature.

[Proprietist]

I like the concept of Bitcoin especially for its deflationary value (and wouldn't any gold-based system also be deflationary? There is a limited [and unknown] quantity of gold in the world and with all our technological advances, alchemy still seems impossible.) Between deflationary and inflationary competing currencies will arise a more stable equilibrium.

I predict Bitcoin will essentially replace (or back) money markets and savings accounts which will not provide the same long-term returns -- and especially not with an inflationary dollar that punishes savers. At some point, there might be something worth selling bitcoins in exchange for dollars to purchase.

To the degree that we already know the date at which new Bitcoins will cease issuance, Bitcoin will arguably be more stable than gold or any precious metal.

[Proprietist]

Note: I think that the problem with Bitcoin as it currently exists is the hesitation as to whether it will survive long-term as a savings vehicle in the face of potential instability (either internally via hacking or externally via government aggression.) People are waiting for more signs of legitimacy, even though it is clearly obvious that long-term savings in illegitimate inflationary fiat currency is idiotic.

[A Secret Band of Robbers]

As it stands, Bitcoin is appreciating far too quickly to be a viable currency, and unless it can be exchanged for goods, its value as a store of value is limited. There's a significant chance that you won't be able to buy anything at all with them in 10 years.

At least the Zimbabwe dollar was paper.

[Proprietist]

It's appreciating due solely to demand increasing on a limited supply (just like gold). For current holders of Bitcoins, that is a great thing, and everyone else sees the potential long term profits. This is the exact opposite effect of the Zimbabwe dollar, where the government started handing out trillion dollar bills because it can, even though the value fell off a cliff. Bitcoin value is skyrocketing, Zimbabwe dollar value crashed through the floorboards.

I don't think it needs to necessarily be exchangeable for goods although I can foresee sellers of goods also seeing value in being paid in a deflationary currency that will be worth more next week than today. Worst case scenario, someone will always be willing to buy at a higher price than they acquired it for if they have to sell sooner than desired. As long as fiat currency devaluation continues, deflationary alternatives will radically increase in value.

The only problem with Bitcoin is questions about legitimacy (whether the government will or can make any sort of crackdown) and stability (server problems, potential for hacking). I myself am hesitant to exchange for, say, $5000 in Bitcoins until I am more comfortable with its longterm potential.