Bitcoins: The Politics of A Virtual Currency

June 13, 2011Personal Financeby Raymond Tham

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Bitcoins: The Politics of A Virtual Currency

13 June 2011.

There’s a really easy way to find out if an issue or  topic is being widely talked about by the general public.

Go to Google, search the keywords, then gaze in wonder. Somehow Google is able to instantly generate millions of websites and news articles  containing the search term tyou were looking for.

Do we take this for granted? After all, search engines have been around since the invention of the Internet, and it’s easy to forget what technological miracles they really are; sifting through endless streams of data and returning accurate search results..

It is then fitting, that in researching the latest technological invention beginning to sweep the Internet, another technological marvel emerges as an easy and convenient tool whereby people learn what others are thinking and talking about.

Bitcoins have been described as “the digital currency of the future” – a new global phenomenon that threatens to challenge all preconceived notions of currency and currency exchange.

As the chart below illustrates, worldwide interest in Bitcoins has started to grow almost exponentially in the past few of months. Generated by Google Insights, the chart tracks the number of times the term “bitcoins” was used as a search term in the past year.

 

But What Are Bitcoins?

According to founder Satoshi Nakamoto, Bitcoins are “a purely peer-to-peer version of electronic cash (that) would allow online payments to be sent directly from one party to another without going through a financial institution.”

Not much is known about Nakamoto apart from the fact that the name is a pseudonym, he/she is most probably Japanese, and he/she ended his/her involvement in the Bitcoin project in late 2010.

Much like its founder, Bitcoins thrive on anonymity. Transactions made in Bitcoins are virtually untraceable, with no central authority or intermediary systems to control or prevent the flow of Bitcoins. Rather, Bitcoins rely on a public key cryptography to limit the supply of Bitcoins and ensure the legitimacy of any transactions.

Thomas Lowenthal of Arstechnica.com, explains the appeal of Bitcoins and how it could potentially be a valid form of currency.

The problem with purely digital currencies is that of double-spending. Economists in the audience will note that digital products like a movie or a text file are non-rivalrous. If you have a copy of my pseudo-trip-rock band's new MP3 album, there's still just as much MP3 to go around for everyone else who wants one. That's not a problem for files, but it is a problem with currency, since the whole point is that there's a limited supply. If you use a dollar at the grocery store today, you can't go out and spend that same dollar at a bar tomorrow.

The usual solution to the double-spending problem is a trusted intermediary. PayPal makes sure that you can't spend the same dollars twice by deducting them from your account before they get added to someone else's account. Visa, MasterCard, and every other bank and payment processor do the same. However, this centralized approach is the one that enigmatic creator Satoshi Nakamoto specifically tried to avoid in the original Bitcoin design. The idea was to use cryptography to create verifiable transaction records without the need to trust anyone but your own calculations.

The Bitcoin solution uses cryptography and an open transaction register. Whenever you spend a Bitcoin, you cryptographically sign a statement saying that you have transferred the coin to a new owner and you identify the new owner by their public crypto key. Whenever they need to spend the coin, the new owner uses his private key to sign it over to some further owner. As soon as a transaction takes place, the recipient (who has a very strong incentive to ensure that you don't spend the coin twice) publishes the transaction to the global Bitcoin network. Now every Bitcoin user has incontrovertible evidence that the coin has been spent, and users won't accept that coin from anyone but the new owner.”

Just how many Bitcoins are in circulation, and what is their value?