Haha!

People use them to buy drugs online by mail, that's pretty much the only thing I've heard of that they've actually had any success in.

It's needlessly complicated, I'm so sorry for this:

What if you wanted a currency that could be used online but you didn't trust any central authority or groups of authorities at all? Also what if you didn't just believe hyperinflation was bad, but any inflation or stagnation at all was the worst thing. These are the founding theses of bitcoin.

It's an open-source piece of software that creates a set number of bitcoins (21 million), these can be freely traded to any 32 digit alphanumeric address and only ever taken out if you have the private key for that address. The cryptography is good enough that if a private key is lost, no one will ever be able to retrieve the bitcoins in that address. With no central authority, the only way to agree if you actually have any bitcoins is if 51% or more of the users agree you have that. That agreement is through a file called the blockchain and a process called mining.

The blockchain is a record of every single transaction made in the history of bitcoins. This is currently an 8GB file, and it grows by at least 2GB a year but if bitcoin became more popular it could grow by up to 20GB per year. The blockchain is expanded through a process called mining. Every time you trade bitcoins, the record of your desired transaction is spread through the software, and when a new block is added to the blockchain, all transactions the person who added that block had reserved are added to the blockchain and verified as a transaction that occurred. The mining process is, by necessity, a very difficult makework calculation that changes difficulty automatically based on total mining network processing power so that a new block is only added every 10 minutes. The mining process uses a lot of computing power, and therefore electricity, currently 0,000 in electricity cost a day. To reward people for using electricity, the person whose computer solved the last math problem is rewarded with 25 bitcoins plus any transaction fees from the transactions processed in that 10 minute round.

The fact that mining only rewards you if your computer solved the problem means that for most people, they won't have any kind of steady reliable reward for mining. What that has resulted in, is mining pools. A pool is everyone joins up in a group to mine for the pool operator, who rewards people for mining for him based on their share of the pool and takes a small cut for himself for running the pool. This has resulted in 3 central pools who between them control 90% of the mining network, and remember, 51% of the mining network is all you need to take control of the network. This has resulted in a minimum transaction fee being added, and at current bitcoin/dollar prices, the minimum transaction fee is a bitcoin equivalent of for every single bitcoin trade.

The mining process only adding new blocks every 10 minutes, a maximum block size, and transactions only being verified by being added to the blockchain in a new block has issues as well. First, the maximum theoretical number of trades per block is about 4000, which would average out to 7 per second, for something supposedly worldwide and the currency of the future. Secondly, it means that if you wanted to do a trade in bitcoins, it usually takes 5 minutes or more to go through, and no one can trust that you actually sent it until it does go through. If you don't put a transaction fee in, you have to wait for it to go through by someone other than those pool operators who only accept transactions with a minimum transaction fee. That means it might go through in 10 minutes, it might go through in 5 days.

Once you have bitcoins, getting them into dollars is difficult due to money laundering laws. Banks and exchanges are, by law, required to do some work to make sure that there isn't money laundering going on, and recently a bunch of services that did so were shut down. The main one was the recent shutdown of US trading for MTGOX. MTGOX is the number 1 bitcoin exchange website, and they lied on documents about the purpose of their business then when warned, they tried to get around the law by using a set of subsidiaries. Also, MTGOX stands for Magic: The Gathering: Online eXchange. It started as an exchange for online Magic the Gathering cards, not an online exchange for real Magic: the Gathering cards. Then last week, Liberty Reserve was shut down for money laundering as well. More or less, if you are in the US, you can only really get bitcoin to dollars by trading in person.

The anonymous nature of the trades means it is mostly used for illegal goods.

No chargebacks are possible, if you get scammed, your bitcoins are gone forever. If you lose your e-wallet password, your bitcoins are gone forever, etc.


I'm so sorry for typing this all. What has my life become?

Has anyone gotten rich off of bitcoins as in trading their coins for real money?

5 because I'm still not sure what a bitcoin is.

Oh my god. Operating systems and Adobe products weren't enough, they had to go and make an open source CURRENCY??

A currency where you trust open source programmers more than governments. And - if I'm reading this right - the whole thing is based on permanent deflation????

and thank you for typing all that. I just learned more about Bitcoins than any wiki I tried reading.

Wow, amazing comment.

Yeah, it's an attempt at an open source currency. And yes, it's based on very heavy permanent deflation. There's a maximum number of bitcoins that can possibly be created, which is 21 million. The number created each year drops until the last new bitcoin gets created in 2200 or so. Also any bitcoins ever lost are lost forever, and of the 12 million created so far, 8 million have never moved, and are presumed lost.

Because it's open source, the security of the network can't use standard security protocols which make 00 additional investment in security cost more than 00 to break. You only have to barely beat the not-you processing power of the network to theoretically be able to take it over. And that is by design a part of it with no theoretical solution available. The network must always be secured by an amount of processing power that costs more than it is worth it to purchase for taking the network over.

The mining process has no possible way to do useful work, so that 0,000 per day in electricity costs that the bitcoin network uses will always be wasted.

If you really want to bash your head against a wall, there's many, many, many alternative cryptocurrencies. There's Litecoin which is meant to be silver to bitcoin's gold, then Feathercoin which is meant to be an equivalent of copper, then so on, so forth. Only one alternative has inflation built in, Freicoin, but it does it through demurrage, take a percentage of every single wallet every 10 minutes, then splits it 25% to the next mined block, and 75% to the person who developed the protocol. Ayn Rand would be so proud.

Thank you fermun for the explanation. Take my 5 Starcoins. I'd originally thought the bitcoin operation was just a Ponzi scheme for Libertarian conspiracy kooks but it seems to be much more elaborate. I liked how (up until recently at least) the alleged value of the bitcoins fluctuated wildly day to day. What would an economy based on this actually look like? My guess is it would make Bartertown look idyllic.

That was great. Thank you, fermun!

Yes a currency that has a self imposed to how much of it will exist, that's definitely sounds normal.

Finally, something worse than PayPal!

That was a great post, thank you. Stars.

aka. Dunning-Krugerrands, Buttcoins, Autism Kroners, Douchemarks, Ron Paul Fun Bux. It's basically MMO gold pieces, without the MMO, and the value jumps so wildly that it's mostly used as babby's first penny stock.

It's actually an elegant bit of code, but it's a proof-of-concept for a non-counterfeitable digital currency that was never meant to function as a completed project, much less as a virtual commodity for anarcho-capitalists.

"Anyone who puts their rent money or life savings into an experiment of this type is a fool, and deserves the financial ruin they will inevitably reap from this or some other risky enterprise."
- literally the last sentence in the 2nd Bitcoin Whitepaper