Bitcoin is an open source peer-to-peer (P2P) electronic cash system that's completely decentralised, with no central server, trusted authorities or middle men. The availability of bitcoins can't be manipulated by governments or financial institutions.
Bitcoin is the first truly decentralised currency and has paved the way for hundreds more to compete together in Cipherspace over the coming years. This is one of the key factors in the transition of global society into the post-nation-state economy talked about in books like The Sovereign Individual and which is coming to be known by agorists as The Second Realm.
If you have a bitcoin, what that means is that there is an agreement among its users that the world owes a certain amount of labor to you. The value of the bitcoin approximately depends on the size of the network, and essentially gives you a 1 / 21000000 share in the value that can come out of this network and its ability to facilitate trade. When gold was the dominant currency, it seemed that it represented physical value while bitcoin is a looking glass that shows us what money really is: social value.
Bitcoin is the first online currency to solve the so-called “double spending” problem without resorting to a third-party intermediary. The key is distributing the database of transactions across a peer-to-peer network. This allows a record to be kept of all transfers, so the same cash can’t be spent twice–because it’s distributed (a lot like BitTorrent), there’s no central authority. This makes digital bitcoins like cash dollars or euros: Hand them over directly to a payee, and you don’t have them anymore, all without the help of a third party.
A couple of good introductions to bitcoin are this one by Bitcoin Weekly and this one by Bitcoin Bytes.
Over the last few months Bitcoin has been receiving a lot more attention from the mainstream media and is in fact starting to become a mainstream service in many ways. This has been causing the price to rise a lot which in turn has been leading to a lot of heated debate on both the positive and negative side. Organic Design fully supports Bitcoin and the entire cryptocurrency movement, and has therefore been receiving some negative feedback from those who feel that Bitcoin is not a solution, is not "sound money", is "just another fiat currency" or is a bubble that will crash at any time. I'll address each of these issues in this section, and conclude with the positive side; why Bitcoin is so important and so deserving of full support.
Bitcoin certainly doesn't fit the classic definition of "sound money" and does fit most definitions of a fiat currency (a currency that's not backed by anything). However this is a new age, and in many ways the old rules and definitions don't apply here. The main reason that fiat currencies are considered to be a problem and need to be backed by something tangible is that the issuing authority cannot be trusted, and corruption inevitably seeps in and leads to inflation and deflation in order to control the people and benefit the few who control the issuing authority.
It is believed that by backing the money with a commodity of intrinsic value such as gold or silver will prevent this problem, but the reality is that gold and silver can also be heavily manipulated by those in power. In fact gold and sivler are being manipulated to the most extreme degree ever known right now in order to help prevent the US dollar from collapsing, that's why we're seeing both extremely low prices as well as an unprecedented demand at the same time.
But in the case of Bitcoin, there is no need to resort to this form of protection from the fraudulent issuing authority because there is no central authority in control of issuance. So yes Bitcoin can be considered a fiat currency, but it does not suffer from the problem that many other fiat currencies suffer from. Decentralisation is the real solution to the problem, backing the currency with commodities of value is not a complete solution because it doesn't address the core of the problem which is that centralised systems are prone to corruption.
It should also be noted that the most successful monetary systems we've ever had have been fiat systems, not gold-backed systems. Systems like Major Douglas' Social Credit which are backed by labour and resource have been implemented in many places and always lead to abundance. Unfortunately these systems are always short-lived because they're too much of a threat to the status quo, they're shut down even if a world war is required to do it, such as was the case with Germany which financed its entire operations from 1935 to 1945 without gold, and without debt.
Bitcoins unstable price prevents it from being considered as sound money. The way Bitcoin is intended to be used in the sense of a currency is as a medium of exchange, users hold their wealth in the currencies or commodities of their choice, and then when they want to pay someone else, they can convert the required amount of currency to Bitcoin and pay the recipient anonymously and privately with full confidence that they'll receive their value in an unforgeable and irreversible way, regardless of whether they're trustworthy or where in the world they're located. The receiving party can then immediately convert their payment to the currency or commodity of their choice if they're unwilling to expose themselves to the volatile nature of the Bitcoin price making that volatility totally irrelevant for everyday use.
Trading with others around the world with total privacy and security is an extremely valuable service in an age where practically everything you do is being monitored, and most especially things of a financial nature since there may be taxes due on them. Many people have recognised that a monetary system free from authoritarian scrutiny is a very valuable service, and this fact combined with the limited supply of Bitcoins creates an increasing demand for them. The more businesses and services that build up on top of the basic Bitcoin functionality, the larger the Bitcoin economy grows and the more valuable the coins become.
A Bitcoin can be seen not only as a medium of exchange, but also as a share in the Bitcoin economy. As stated above, the actual value of the coins makes no difference to the way Bitcoins are used in day to day payments between peers, but the increasing value does add the extra incentive for users to save their coins since they know that their value will appreciate over time. This leads some to believe that this saving incentive is a problem because it leads to less and less Bitcoins in circulation, but since the coins are effectively infinitely divisible, the amount of Bitcoins available in circulation doesn't affect the ability for trade to continue, it just effects its exchange rate with real-world commodities and currencies.
Is it a bubble?
The Bitcoin value will continue to increase rapidly while it is extending into new markets, but its growth will slow down as its share in these markets reaches a point of equilibrium with the other competing technologies and financial instruments in those markets. Currently it's value is around $700 which equates to a total market capital of about ten billion dollars, but has not yet begun to really take off in many markets that it is very well suited to such as banking and escrow services, smart contracts and other high-level financial instruments. There are also other technologies outside the financial arena which Bitcoin has given rise to which are likely to help grow the network such as private communications and distributed user authentication. Even fairly conservative analysis yields a very high likelihood that a few more years down the track the Bitcoin economy will be in the trillion dollar scale, which puts the individual coin value into the tens or even hundreds of thousands of dollars.
However, there is also a risk because there are definitely a number of things that could go wrong causing the system to fail and loose all its value very quickly. For example, a flaw in the code being discovered and exploited, the mining operations being bribed or taken over, it could be made illegal etc. I personally believe that since these things have all been tried extensively and it's survived all attacks so far, the chances are good that it will thrive for at least a few more years yet, but I could be wrong. My advice to anyone heavily invested in it is to sell a portion of your Bitcoins and buy silver (why not gold?) and/or land with the money - a portion that equates to a good overall return on your investment, but still leaves you with a reasonable stake in the Bitcoin economy.
Why is Bitcoin important?
Bitcoin is far more than just a new secure medium of exchange, I believe it really is a paradigm shift for the whole net of a similar scale to what the invention of the web-browser was. Bitcoin isn't perfect, the mining aspect is very resource intensive and is a weak point since its very centralised, and the block-chain is becoming unmanageably large, but it's opened up a whole new field of potential in the net and is an important milestone for freedom and privacy.
Many new applications are now beginning to take form, some of them like Ripple are currencies which solve some of the problems Bitcoin is seen as having. Others offer completely new features such as Namecoin which uses the Bitcoin code to make a replacement to the domain name system that's free from centralised authority, or Keyhotee which allows users to authenticate themselves to other websites without needing to trust any other site or authority with their personal information or passwords, or Twister a decentralised version of Twitter. Our own project Bitgroup is based on the technology and aims to be a social network and group-ware application that doesn't require any central server to operate.
For us at Organic Design the Bitcoin technology makes the whole vision possible. The Organic Design vision is built upon the ability for groups to work and trade together in private trust groups which together form the platform network. The problem that prevented us from moving forward with our vision was that we couldn't figure out how to implement many of the low-level details involved in trading and authentication in a peer-to-peer network. Bitcoin has solved these problems and made our project and many others possible in the process. Following is a comment from our 7 June 2010 news item which is when we first heard about Bitcoin.
“Bitcoin may last for years and become a popular global currency, or it could be just a flash in the pan, but either way I think this is an important sign of the times to come. This is one of the first truly decentralised currencies and has paved the way for hundreds more to compete together in the new arena of Cipherspace over the coming years. This is one of the key factors in the transition of global society into the post-nation-state economy talked about in The Sovereign Individual.”
After you've installed the bitcoin applicaton on you computer and run it, you'll see a simple application window with six tabs across the top which ara each explained as follows:
Ovreview: this is the default tab and gives you a basic summary of your confirmed and unconfirmed (by other nodes in the network) balance, and a list of the last few recent transactions.
Send coins: this allows you to send bitcoins to any number of recipients. For each recipient you enter an amount to send them, and their bitcoin address with an optional name for you to remember the address by. You can also select the address from your "address book" which is a list of all the addresses you've given a name to. There's an "Add Recipient" button at the bottom for adding more recipients to send to at the same time.
Receive coins: this a list of your bitcoin addresses that other people can send coins to. The sender is anonymous, so you can use these named receiving addresses to kepp track of where your coins have come from by telling each contact a specific address to send to. You can create as many receiving addresses as you like using the "New Address" button at the bottom.
Transactions: this tab is a simple list showing all your transactions with you can filter by amount sent or received, and by period. Each item in the list shows the date/time of the transaction, your local name for the address the transaction was received with or sent to, and the amount in bitcoins.
Address Book: this is a list of the addresses you've created for sending bitcoins to and the local name you've chosen for each address. You can edit or delete each address by right-clicking on it, and you can add new addresses with the "New Address" button at the bottom (which is the same as useing the "Add Recipient" button in the "Send Coins" tab.
Export: this a button that brings up a file-save window to export the data shown in the currently selected tab. This button can't be used if the "Overview" tab is selected since it only works for the table-data in the other four tabs.
When the application is started for the first time (or after a few days or more of disuse) there is a long delay while your instance of the application synchronises its local data with the current state of the network. This is very computationally intensive and can take many hours. Your displayed balance may be incorrect until its fully synchronised, but you can still send coins from out of the currently confirmed coin-balance. You can never spend any coins you don't have because the locally out-of-date information only applies to incoming transactions, because all outgoing transactions are done locally.
How it works
In a p2p computer network there are no servers, the entire network is composed of users running instances of the application on their computers. Each running instance offers a small amount of processing and storage resource to the network so that it can deliver the services it was designed for such as redundant storage, anonymity or voice-over-IP applications.
In the case of a p2p currency system, some of the services the network is designed to offer are privacy, verification, authentication, currency creation and transfer of ownership. To ensure a reliable and tamper-proof system requires a lot of resource, and that amount is proportional to the amount of coins in the network. The network is able to pay the users for the resource they offer by making the coin-creation process part of the network protocol itself instead of being handled by a central trusted authority. This creates a natural and incorruptible link between the supply of currency in the network and the demand for it.
Even aside from the ability to exchange bitcoins for other currencies, it still makes a very useful tool for independent organisations and groups because it allows them to trade and settle accounts amongst themselves independently and privately. It effectively gives them a "bank" that has a trustworthy system of accounts that can't be tampered with and requires no corruptible central authority to operate. See the following links for more detailed information about how it works.
Bitcoin was born on January 3rd, 2009, at 6:15PM Greenwich Mean Time, which is when Satoshi Nakamoto mined the first 50 coins, known as the "genesis block."
The Bitcoin Wallet
The term "wallet" is actually a little bit misleading because the information representing coins and transactions are actually stored throughout the entire network, not in the wallets. The wallet actually stores private keys that give the wallet-holder the ability to spend coins in the network that are confirmed as being currently associated with one of your private keys. A bitcoin address that you show to other people in order for them to send you money is the public half of one of the private keys in your wallet.
This means that it's very important to back up your wallet and to remember the password you've locked it with, because if you lost access to your wallet you'd no longer have control over any of the coins in the network that are associated with your addresses. You must back up your wallet whenever you create a new address, but there's no need to back up your wallet every time you receive new coins, because these are not stored in your wallet. For example, you could have a bitcoin wallet on a computer that's never been connected to the network and be paid into that wallets address for years before you got around to connecting it and checking your balance.
Many people are concerned about this "21 million coin limit" for example this blog post about Why Bitcoin Will Fail as a Currency is based on this belief. But it's not actually a problem because Bitcoins are divisible into eight decimal places (and future versions of the protocol could easily be designed to divide it further if there becomes demand for that) so even if there were only a few Bitcoins in existence, the entire Bitcoin economy could still operate properly.
Inflation and Transaction Fees
By convention, the first transaction in a block is a special transaction that starts a new coin owned by the creator of the block. This adds an incentive for nodes to support the network, and provides a way to initially distribute coins into circulation, since there is no central authority to issue them. The steady addition of a constant of amount of new coins is analogous to gold miners expending resources to add gold to circulation. In our case, it is CPU time and electricity that is expended.
The incentive (for nodes to support the network) can also be funded with transaction fees. If the output value of a transaction is less than its input value, the difference is a transaction fee that is added to the incentive value of the block containing the transaction. Once a predetermined number of coins have entered circulation, the incentive can transition entirely to transaction fees and be completely inflation free.
Fiat Leak- realtime map showing fiat currencies moving in to the Bitcoin economy
BlockTrail- interesting info about addresses and the blockchain
Bitcoin exchange sites
Buying Bitcoins is more difficult than expected considering that there's so many people trying to buy them. The reason is because Bitcoins more closely resemble cash than they do credit. This is because the transactions are irreversible whereas credit cards, Paypal and many other electronic forms of credit can be reversed up to six months later. To make matters worse, PayPal and most credit card company's have reversed many Bitcoin transactions because they consider Bitcoin to be a fraudulent operation. So the bottom line is that buying Bitcoins needs to be done with a solid irreversible form of currency such as cash in person or posting a cheque. Following are some exchanges offering various means of buying and selling Bitcoins. I find the easiest method is to use a wire transfer from a bank account which many exchanges accept (even though wire transfers can actually be reversed, but it's quite a procedure).
Intersango- (based in London) allows international wire to deposit funds into EUR, GBP or PLY
Bitstamp- (based in Slovenia) allows international wire in USD and a few other currencies
Bitcoin-24.com- no BTC transfer fees, only $3.20 international wire fee, no ID for signup, based in Britain, accounts in Poland
MtGox- (based in Tokyo) extremely strict signup & verification procedures
BTC-e - (based in Russia) allows international wire in USD and a few other currencies, minimum US$5000 (also handles Namecoin, Litecoin and others)
BTC China- doesn't currently have wire transfer option, support liberty reserve and Chinese payment systems
IMCEX- a user-to-user Bitcoin, Namecoin and LibertyReserve exchange
BitInstant- Providing instant transfers for the bitcoin economy
Bitcoin could become a multipurpose network by adding additional information to coin blocks, for example Namecoin extends the network to provide a distributed DNS alternative. Similar things could be done to provide distributed authentication and a distributed ontology for shared knowledge and organisation.
The History of Gold and the Future of Bitcoin- "if the subjective theory of value means anything, 'unique cryptographic hash' is not inherently less valuable than 'shiny rock', even if it has no representation in physical space. Each has only the value that people give to it."