January 23, 2015 by Charles Burnett
Bitcoin has been all over the news recently. Some claim that it is a Ponzi scheme run by hackers. Others claim it is an idealist libertarian currency that stands to free humanity from the shackles of a central bank.
With a technology as recent and complex as bitcoin, it’s easy to get lost in the hype. As is usually the case, the truth of what bitcoin is lies somewhere in between these extremes. This article serves to set the facts straight on what this new currency really is, and why it matters in the lives of the everyday individual.
What is bitcoin?
First, what is bitcoin? Simply put, bitcoin is a currency just like the U.S. dollar or a bar of gold. Like any currency, its value comes from what people are willing to trade for it. A bitcoin however is not a tangible thing — it exists only in the digital realm.
Despite this, the digital currency has been fashioned to work like cash does in the real world. One keeps bitcoins in a piece of software called a wallet. This is where you receive your money and spend it from.
Spending money is done in a similar way as sending an email. Each wallet has a unique address that identifies it. Consider this like an email address: only you have your email address. One inputs the destination address into their “wallet” and how much of their coin they want to send. This, in the most simple of terms is how bitcoin operates.
Myth #1: Bitcoin is a scam
While it is true that the identity of the original creator of bitcoin is not known for certain, though attributed, one can easily determine that the currency system itself is not a scam. The code for the entire bitcoin software is available to be read by anyone in the world at any time.
This is because its supporters adhere to a software philosophy known as “open source development” which puts forth that the code of software should be readily available to be read so that developers can learn from it and not duplicate existing work.
While the entire bitcoin codebase is not perfectly understood by outsiders, it has been gleaned by many prominent members of the programming community and deemed safe by those parties.
Myth #2: Bitcoin is completely anonymous
Also in the news, there have recently been multiple busts of online drug marketplaces. While notable in itself as a shift in how illegal substances are distributed, a key point has been that each of these websites has offered to accept bitcoin as a form of payment.
This in tandem with the anonymous nature of any black market has created the idea that bitcoin itself is completely anonymous in its transactions. While in certain ideal cases this is true, this is almost always not the case.
Every transaction is recorded in a part of the bitcoin software called the “blockchain.” You can think of the blockchain as an ever-growing receipt of every single bitcoin transaction that has ever occurred. This includes what address it came from, who it went too and how much has been sent.
If one can correlate your identity with an address, they could not only see every single transaction you have made with it, but also where that money was sent from the person you sent it to and beyond, up to the present moment.
Myth #3: Bitcoin will free society from the monetary policy of nations
It is incredibly hard to predict the future of any nation or its currency. Despite this, there are a few assumptions one could make that would hold true in almost all possible cases. For example: the U.S. dollar will probably remain a stable currency in the immediate future.
Bitcoin will not become the primary currency of some bizarro libertarian America that pops up overnight because Ron Paul finally went completely off his rocker. However, this is not to say that in some particularly pressing circumstances that bitcoin will not provide a haven for those in need.
For example, bitcoin became a haven for a large population of people in Cyprus when their bank considered using the money in their personal accounts to pay off their debt to the EU. This massive purchase of bitcoin was a big part of the reason the price of bitcoin took off in the first place.
So why does bitcoin matter then?
Fortunately, the future of bitcoin does not depend on the mercy of Internet drug lords or a nation defaulting on its debt. In fact, the reason that bitcoin continues to pervade more and more of legitimate online business is that it removes the middleman in online transactions.
When a business uses a service like PayPal to accept payment, the consequence of that is that PayPal takes a cut of the profit of every single sale that business does through it. This means that a business makes less money every time this type of sale occurs.
With bitcoin, there is no middle man. There is no PayPal to take a cut of the profit, there is only the buyer and the seller, much like your typical cash transaction.
It’s the simplicity of PayPal minus the cost. It’s being able to send money to a relative halfway around the world without giving a cut to Western Union.
The currency is liberating and good for business, not because it supports some sort of ideology, but rather because it as simple as click, type, send.