Is Bitcoin about to change the world?
The world’s leading bankers are talking about it as a rival for real money, but how does it work, where can you get it and is it the future?
Lets start with the basics: Bitcoin is a decentralised virtual currency, meaning neither does it exist in the physical world, nor does it have a central bank such as the Federal Reserve or the Bank of England.
There are a finite number of bitcoins in the world, with a limit of 21 million bitcoins, set to be reached around 2140.
Bitcoin was first presented in November 2008 in an academic paper shared with a cryptography mailing list. It caught the attention of that community but took years to take off as a niche transaction tool. The first Bitcoin boom and bust came in 2011, signalling that it had caught the attention of enough people for real money to get involved.
This is remarkable because there’s no fundamental reason why Bitcoin should have any value at all. The only reason people are willing to pay money for the currency is because other people are willing to as well. In this manner it’s no different to all other currencies… it just lacks the history.
It is helpful to think of bitcoin more as a commodity being mined rather than a traditional currency of which central banks can always create more. Unlike our existing currencies, Bitcoin is pegged to a finite resource.
This goes a long way to explaining its popularity: anyone can “mine” it, and while conceptual, this peg to a resource paradoxically makes it easier to wrap your head around than the mechanisms driven by our central banks. It is the void between the banks, the bankers and the general population that Bitcoin is filling.
What can I buy with Bitcoin?
Well, technically anything. At the moment very few mainstream retailers accept them, but this is changing quickly and there are already Bitcoin ATM’s in operation in The United States and Canada.
WordPress and WikiLeaks both accept bitcoin, and there are a number of sites that offer gift vouchers for established retailers such as Amazon. There are also websites selling electronic goods that exclusively accept bitcoin.
Oh, and you can buy a ticket into space.
When you set up your Bitcoin wallet, you will be given a unique address –-kind of like an email address, but much more cryptic - from which you can send and receive Bitcoin. Other Bitcoin users have their own address as well. Using your wallet, you can send specific Bitcoin amounts - including tiny fractions of a Bitcoin - from your address to another address.
So what of the future?
Many economists are saying that Bitcoin could become part of our future economy. This is quite a shift from October last year, when the European Central Bank said that Bitcoin was “characteristic of a Ponzi [pyramid] scheme”. Earlier this month the Chicago Federal Reserve commented that the currency was “a remarkable conceptual and technical achievement, which may well be used by existing financial institutions (which could issue their own bitcoins) or even by governments themselves”.
This might not sound that exciting, but for a central banker it’s like screaming “BITCOIIINNNN!” from the rooftops.
History does provide some lessons. While the Dutch were selling single tulip bulbs for 10 times a craftsman’s annual income, the British were panicking about their own economic crisis. The silver coinage that had been the basis of the national economy for centuries was rapidly becoming unfit for purpose: it was constrained in supply and too easy to forge. The economy was taking on the features of a modern capitalist state, and the currency simply couldn’t catch up.
Describing the problem Britain faced then, David Birch, a consultant specialising in electronic transactions, says: “We had a problem in matching the nature of the economy to the nature of the money we used.” Birch has been talking about electronic money for over two decades and is convinced that we find ourselves on the edge of the same shift that occurred 400 years ago.
There are plenty of tutorials out there for this, so I’m not going to go into detail here. But the basic steps are -
- Set up a Bitcoin “wallet,” which is where you’ll keep your Bitcoin. Think of your wallet as a Dropbox account, but instead of storing documents, it stores digital money. Blockchain and Coinbase are popular, trusted wallet options
- Buy some Bitcoin. There are a bunch of Bitcoin exchanges that you can use to buy Bitcoin. Pick one of these
- Now you can either hoard your Bitcoin and wait for the price to jump, or you can spend them. New vendors and other institutions are accepting Bitcoin payments every day. You can find most of them here
- This great TED talk: The future of branded currency
- This overview of Bitcoin on YouTube
- …and this overview of Bitcoin mining