You’ve probably seen some references to Bitcoins in the news lately, as their value has surged and then sunk and then stabilized rapidly. However, there is much more to know than that. First watch this 4 min video that talks about the fundamentals of Bitcoin:
Bitcoin Explained from Duncan Elms on Vimeo.
Now that you know a bit about Bitcoin, let’s think about its importance, beyond just thinking of it as just another commodity to speculate on financially.
Prior to 2009, there were two kinds of money, or more accurately, currency. First, there are commonly agreed upon valuable commodities like gold or silver, or even before that, beads and shells. In the Old West, for example, you could wander into a saloon and take a handful of gold dust and buy a drink. Throughout much of the 229+ years of US, the currency consisted of coins minted in either gold or silver, or they could be converted to real gold or silver if you presented the coins at a Federal Reserve bank.
The second stage of money started when government started creating what’s called fiat currencies. Instead of tangible valuables such as precious metal, it’s based on the confidence of a political entity such as a country’s government. For the US this period started in 1971 when the Gold Standard was abandoned. From that point forward, the US dollar is valuable not because you can convert it to some precious metal, but because the faith and credit of US government is beyond question.
Bitcoin really started a third stage of money and currency. Instead of precious metal, or the fiat of a government, Bitcoin relies on an algorithm to ensure its limited supply, and hence to uphold its value as you saw in the video.
What’s really interesting about Bitcoin is that it’s not created by a powerful organization, but instead is created by a mysterious anonymous set of mathematicians. So, in theory, any organization can create its own currency. Microsoft, Google, or Facebook, as an example, can create its own currency and encourage its users and 3rd party to adopt it as a currency of use on the web. In a way, these entities have already done something similar: They all sell gift cards to its own respective stores. And while Facebook and Google Play still value their gift cards in the local currency, Xbox Live has its own Points, which is not based on any real currency. And even before that, airline miles were a limited form of currency.
What’s different from Xbox Live Points and airline miles is that Bitcoin is not proprietary, not secret, but rather using a publicly available mathematical theorem. So rather than needing to trust Xbox or United Airlines about the value of a given point or mile, anyone can independently verify the Bitcoin supply (and thus scarcity) and validate the legitimacy of a Bitcoin. This allows multiple parties to more easily adopt the currency as there is common trust in the Bitcoin.
What makes Bitcoin interesting then, is not Bitcoin itself, but potential for other entities to issue their own competitive Bitcoins. Are there companies you know of, including your own, that may be in the position of creating a Bitcoin platform?