Bitcoin, What is it and Why You should Care

Apr 11, 2013 | Mobile & Web | Tech News

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?

Article End
  1. Oct 11, 2015 at 10:48 am

    Tushar says:

    Ideally the concept is to rmovee the mess that has been created with factional reserve banking. Right now so much power is in the hands of the central banks. This power gives them the ability to control the amount of currency that is in circulation. In essence money is created out of thin air with no weight to it like the gold standard created. Money is built on trust in the value of that currency, which is very scary. You can even see in recent times how this type of system has created massive problems and will only get worse as time goes on. The only way I personally feel that currency can be fixed since we left the gold standard is to create a new currency with a relative value unit assigned to it. The relative value can be tied to something tangible. To supply a certain good or service it requires certain resources. Those resources being natural, human and others. For example it takes a specific amount of resources to produce a car. Machines, equipment, people working on it, natural resources like metal, plastics and time. These factors can be used to produce a RV for that car. Unfortunately I think there is so much money in circulation, that it would be near impossible to go back to the gold standard as there may not be enough gold available in circulation to match out the currency to. Why not create a balance of the commons of ALL available tangible resources and not just gold?The concepts I like of BitCoin are the fact that there is no central authority for currency. What you produce is what you own. You actually own that currency that you have produced using your resources and it has value based on the fact that others had to go through the same create that currency as you did. The idea of using CPU cycles is very geeky and not sustainable. The idea though that you have this resource and by using that resource you are producing something that holds value amongst those doing the same type of work place the value and trust in that currency. So when you go to work based on your education, work experience, skills, time spend doing your job, the actual work being done and even the value your employer feels you are worth to them can all be used as factors. That value of currency that you produce has no value that is set by factional reserve banking and the amount of currency in circulation. It is based on a true tangible asset like the gold standard used to be.Just my two cents.

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