Bitcoin virtual currency may be the worst of both worlds
By Mathew Ingram Jun. 15, 2011, 3:45pm PT
After being celebrated by some as the future of money in a digital age, the virtual “peer-to-peer crypto currency” known as Bitcoin has taken some serious hits in the past week or so. Among other things, it has been criticized as a scam — based on economic assumptions that are described as “laughable” — and has come under fire from the U.S. Senate for the ease with which drug dealers and other subversive elements can make use of it. And if all that wasn’t bad enough, a user now says he has lost the equivalent of almost half a million dollars in a Bitcoin theft. The virtual currency could be the worst of both worlds: easy to steal and impossible to trace.
To recap, Bitcoin is an attempt to create a distributed, open-source form of virtual currencythat relies not on gold bars in Fort Knox or the monetary policy of a central bank for its value, but on a computerized ecosystem. The project was started by programmer Satoshi Nakamoto (although that may or may not be his real name) in 2009. The Economistdescribed the process quite well in a recent post, as did Stephen Chapman at ZDNet, and there is more information on a wiki devoted to the concept. There’s also a fascinating discussion of the criticisms about Bitcoin in a thread on Hacker News.
In a nutshell, Bitcoin generates currency at a predictable rate (which reduces the chances of an inflationary spiral like those that have occurred in countries with traditional currencies) through a computer-intensive mathematical process known as “Bitcoin mining.” However, since the currency only exists as ones and zeroes in a computer program — not unlike most of the money we use via credit cards, etc. — it can also be stolen by hackers, as one user hasclaimed that his Bitcoin bank account was.