Thursday, June 2, 2011

Bitcoin breaks $10

(all graphs are from Mt. Gox)

After stalling around $9.50 for a few days, Bitcoins have finally broken through $10 on Mt. Gox, one of the major Bitcoin exchanges. And only a month and a half ago, they were under $1.

A tenfold jump in six weeks.

For the uninitiated, Bitcoins are a new digital "currency" that everyone has been talking about in recent months. I put "currency" in scare quotes because calling it a currency isn't the best way to describe it, and leads to confusion. It's better to think about it as a digital alternative to gold. Just like gold, bitcoins are scarce and can't just be "printed" whenever you want, like paper currency. Also just like gold, the bitcoin economy is decentralized and doesn't rely on a central bank, like with paper currencies or all previous digital currencies.

You're probably wondering now about how it actually works. Well that's a fifteen minute conversation that involves in-depth topics like cryptography. After plenty of research I'm still not sure I fully grasp it. But I'll take a shot at the 30-second version:

Everyone in the bitcoin network has files on their computer that contain records of transactions, signed and sealed with an official (cryptographic) stamp. Owning a bitcoin means that there are people out there who have records of a transfer of a bitcoin from someone else to you. So a bitcoin isn't just a file on your computer. They exist in records of transactions, held on other people's computers. That's why you can't just make more by making copies of files. And how do you verify that you're the person who received that transfer? Your identity is proved by your possession of a secret that you never tell anyone, called your private key. There's a cryptographic way of proving that you have this private key without divulging it.

If I've got anything wrong, please let me know. But that gives you an idea of the basics. That is how there can be a currency with no central bank. It's maintained by sharing transaction data between everyone on the network. Also, the mechanics mean that you can be anonymous even while exchanging money with people. All you need to identify yourself is your private key (and a corresponding public key). You never have to tie that to your actual identity.

That's probably enough for now. Later I might answer a few more questions like "What can I actually buy with bitcoins?" and "Will they keep going up?" For now, I'll give the short versions: a lot, and no. I'm pretty certain we're in a bubble and they'll probably be illegal within a year.

1 comment:

  1. If you're looking for the best Bitcoin exchange service, then you should know Coinbase.