Dollars. Euros. Yuan. Pounds. Yen. These are words sure to stir the blood of many a capitalist. Just look at http://www.youtube.com/watch?v=sor9GzivGbk. There's a new word that's been in the news in recent weeks and months, though, and that word is bitcoin. I wanted to address one of the breaking news stories in my blog, but first I felt like I should lay a little groundwork and explain what a bitcoin is and how it works.

 

To begin with, bitcoin is commonly called a virtual or a digital currency. What that means is that there is no physical, actual . . . thing that you can put in your pocket. There is no real coin to a bitcoin. It exists purely in cyberspace. In simple terms, when you have a bitcoin, what you have is some computer code. The bitcoin this code represents gets generated by the combined efforts of many users working together in a process called mining. In this context, mining actually refers to using the combined computing power of all these users to solve complex math problems. As the problems are solved, new bitcoins are generated and issued. The mining process is set up so that the more bitcoins there are, the slower they will be generated, and eventually there will be a maximum of 21 million.

 

You store your bitcoin through software called a wallet. The wallet encrypts and records your bitcoin balance, and you use it to acquire new bitcoins, or to pay for goods or services with bitcoins. You can buy new bitcoins through online exchanges, trading conventional currency, like dollars or euros, for bitcoins.

 

This is where bitcoins have less in common with more mainstream currencies. Any currency's value fluctuates. Just look at the price of a gallon of gas today compared to several years ago. A dollar will get you a dollar's worth of gas, whatever that amount happens to be on a given day. If you have a dollar, though, well, you have a dollar. In the United States, the dollar is legal tender, which means that by law, you have to accept dollars when presented to you as payment for a debt. In effect, the dollar bill has a value beyond the paper that it's printed on.

 

A bitcoin's value is more abstract. A bitcoin will get you a bitcoin's worth of gas, and how much that gas is varies, as with a dollar. It varies quite a lot, actually, because the value of bitcoins fluctuates quite rapidly. At the time that I'm writing this, a bitcoin is worth over 500 US dollars. This time last year a single bitcoin was worth about $40, and at one point at the end of last year one bitcoin was worth around $1200. Unlike a US dollar, euro, or pound, there is no government backing it. There's no official treasury department or central bank working to ensure its value.

 

This is one of the attractions of bitcoins. It doesn't rely on any government, and it is independent of any government. If the Glorious People's Republic of Jeffrey collapses, then all the jeffbucks that have been produced have no value anymore. May as well just use them to heat your house. But if you have bitcoins, then when the GPRJ collapses, well, you still have your bitcoins.

 

The fact that it doesn't rely on and is independent of government is one of the other big attractions of bitcoin. There is a degree of anonymity involved in using them, and as they go outside traditional banking systems, they are harder to track and regulate. This has made them very attractive to people engaging in less than legal activities. There are websites out there that specialize in selling illegal drugs in exchange for bitcoins.