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Sunday, March 2, 2014

Bitcoin: The future is now

By Dr. Matthew B. Candelaria

One of the last barriers to a truly multinational, virtual economy is being removed. Up until now, all virtual economies were limited by one major impediment: they were still tied to the financial systems of the users. Where you lived and the currency you used created huge inequalities for people in countries with unstable currencies. Now, though, the virtual economy has its own currency. Bitcoin is becoming a more visible and more accepted currency, moving from the realm of Internet oddity to mainstream value.

Bitcoin history

Bitcoin was first described in 2009 as a digital currency that is created and monitored by a peer-to-peer network of trading computers. These computers work together to verify the number and status of bitcoins. They confirm transactions and wallets to ensure that bitcoins are accurately counted and transferred.

Why Bitcoin works

Bitcoin works because all currencies are virtual. Although we're used to having pieces of paper or metal to track currency, the true place where money exists is in the minds of the agents involved in a transaction. Both transactors have to believe in the value of the currency they are exchanging. Otherwise, an exchange can't work.

Bitcoin can work because it has created a system that transactors believe retains and protects the value of the currency. As long as people are able to come to an agreement about the value of the currency, it can be useful.

How Bitcoin works

The future of Bitcoin
Bitcoin devaluation was very high in early 2014
In Bitcoin, the confidence in the currency is provided not by the guarantee of a government, but by the security of its algorithms. This is provided by the intense cryptographic cooperation in which all participating users engage. They work together to secure the currency and ensure that every transaction is authorized and verified. An attempt to create or pass forged or illegitimate Bitcoins is detected by discrepancies in the records. If the computers don't all agree, the transaction isn't legitimate.

In addition, all transactions are kept in the public record, so that the computers all know which Bitcoins were used when and where and by whom.

How you get Bitcoins

There are two basic ways to get Bitcoins. You can buy them, or you can mine them. Buying Bitcoins is just like buying any other currency. You transfer money from one currency to another, based on the agreed-upon exchange rate. This can be done via a number of Bitcoin exchanges, such as Coinbase, which is what Pro Impressions used to purchase their first Bitcoin.

The other way is Bitcoin mining. Mining serves a twofold purpose. First, it confirms the transaction records, so that all computers can come to a consensus about the current state of Bitcoins. Second, it creates new Bitcoins. People who do the mining receive not only a transaction fee, but also a supply of new Bitcoins.

Bitcoin's remaining challenges

Bitcoin is saddled with a number of challenges. First, its ostensible identity as a cryptocurrency has attracted an illegal element that may serve to bring the entire system down. As one of its celebrities was arrested last month for money laundering and other charges, so could many of the other people involved in these types of exchanges, which will scare away both legitimate and illegitimate users. And then there's the question of whether Bitcoin will retain any value. As we noted above, Bitcoin is a pure fiat currency--there's nothing to back it up other than faith in its value. As a result, the currency can fluctuate wildly. Recently, it's seen growth, but when the Mt. Gox exchange announced it had to halt withdrawals, there was a run on the currency, causing it to drop rapidly from $831 a coin to $658 and ended the day in the area of $720. Any currency that can lose 20% of its value because a website goes down may seem like a bad investment.

Bitcoin's moment is now

Although Bitcoins have been around as an oddity for a long time, it seems that they are finally ready to make the leap into mainstream currency. One of the biggest signs of this transition is that several major online retailers now seem open to using them. WordPress was among the first household names to start accepting the currency, after PayPal blocked people in certain countries because of fraud and unstable currencies. Overstock.com is the largest retailer to begin accepting Bitcoins.

But what is really telling is how people outside of retail are now regarding Bitcoin as a viable currency. Recently, a Texas Senatorial candidate has declared he will accept Bitcoin contributions. The Sacramento Kings have recently started accepting Bitcoins, and even My Hills Dentist in Sydney has announced they would be willing to take Bitcoins.

If Bitcoin is ever going to become a practical system of exchange, it must do it now, and if you want to join the Bitcoin economy, your time is now, too. About 75% of Bitcoins will be mined by 2016. Now you need to make a decision. Are you going to support Bitcoins or hope that something better comes along?

About the author: Dr. Matthew B. Candelaria (PhD, U of Kansas 2006) is a freelance writer and futurist who writes frequently about issues of technology, including Internet security, cloud computing, learning content management systems, field service management systems, mobile computing, and other business computing problems and solutions.

Image license: Satoshi, US-PD