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Bitcoins: The Digital Phenomenon

A Bitcoin is a unit of a decentralized digital currency that was created in 2009.  This digital currency is not backed by any “traditional” currency, and does not have to go through a third party vender.  These Bitcoins are traded actively online with many currencies, the forerunner of which is the American dollar (USD).  Bitcoins are actively traded online through sites like Mt.Gox and Silk Road, but many other sites are popping up.  I am helping design a site which will allow for bets to be made online with Bitcoins.  The value of Bitcoins comes from how many people are in the market and willing to place their own set value upon a Bitcoin.

This seems like money is being created out of nothing besides the value that society places upon it.  However that is not as obscure as one might think.  The American dollar used to be backed by the gold standard, however it is not anymore.  The USD’s value is directly backed by how much value the American people put in it.  Although the dollar’s market is much larger and much more stable than the Bitcoin market, so it would be much harder to crash, unlike the Mt.Gox crash that happened due to hackers and brought the site to it’s knees for a few days.  Also the dollar has many more checks and balances that I will not go into within this post.   Unfortunately Mt.Gox which is one of the first sites that sells Bitcoins started off as a hobby, so as it has grown it only makes sense that it’s security measures need to be upgraded.  Mt.Gox finds venders and buyers who have the same value for a bitcoin within .4 cents and offers them the chance to exchange currency.  As a side note, the recent upspike in Bitcoin usage in the UK tends to be blamed upon the Cyprus crisis, although others claim that it is just a natural spike due to the increased worth of a Bitcoin.  I find it interesting to note that the first Bitcoin ATM will be in Cyprus.

Bitcoins do have some issues such as Double Spending, which occurs when there is not a trusted third party to observe transaction as well as when there is no physical proof of ownership.  However I will not delve into these issues.  My main interest has to do with the black market website named the Silk Road.  Although this website is most often called the “Amazon.com of illegal drugs”, it is possible to buy almost anything on this black market website.  Even goats!  The network effect that is prevalent within this website besides the use of bitcoins and exchange of goods is the way in which one can become a “seller”.  This is done through an auction process to try and limit the amount of sellers that are illegitimate.  This seems to assume that the value of a seller account is above the true value of an account for an illegitimate seller.  However this might not be the case, but a seller would probably only have about 1 chance to sell illegitimately before being unveiled to the community at large.  Thus the draw to skew the process on Silk Road is minimal, but it could still be there.

Comments

6 Responses to “ Bitcoins: The Digital Phenomenon ”

  • Alef

    Couldn’t agree more. Bitcoins are really a revolutionary idea that was bound to be created sooner or later. Like you stated, they are mostly used for the illegal anonymous Tor network, but they have started having alternative uses for humanitarian causes. In Greece, the citizens are finding Bitcoins to be more reliable that their own currency, which is the reason you see the UK surge you mentioned above and the ATM being made there. They are also incredibly interesting because they are based purely on faith, which is how every other coin is valued. This means that Bitcoin is as legitimate a currency as any other country backed one, the only difference being that in case of a crisis, there is not government intervention to save the faith-based economy. The volunteer based network seems to be doing a good job at maintaining and servicing their networks. An example of altruistic self-regulating is how the Tor network has been known to self regulate and even expose criminals involved in cruel markets such as child pornography. This also exposes the false impression that Tor networks are completely anonymous, since the makers can trace the users, it is just much harder to be done.

  • yl582

    I actually looked into bitcoins awhile back, but something that was a little confusing to me was the rate at which bitcoins could be disseminated into circulation. Who exactly is in charge of “minting” bitcoins? I think that the organization charged with the safekeeping of the money ultimately does bear some responsibility. You can’t just create a theoretical currency without any party to take responsibility. Let’s say that someone does crack the algorithm for “minting” bitcoins, who holds them responsible? Governments exist in some function to stop runaway inflation or deflation of their currencies as they need to support the societies of their constituents. Who are the creators of bitcoins responsible to? I’m afraid as long as this question isn’t solved, then there is still a gaping issue with such a currency.

  • ns682@cornell.edu

    An extension to bit coins is the Ripple monetary system which is the brand new currency in the online market. It is currently a competitor to bit coins but they both can work together to expand this market. Unlike bit coins, Ripple does not require any mining or block chain and has no restrictions on number of transactions per second which makes it way faster. It is purely based on trust in social networks. Ripple also solves the double spend problem by eliminating block chains and establishing a pure decentralized way to send and exchange non ripple currencies over the network. Recently, I read in an article that someone bought a Porsche car using bit coins, which is quite unbelievable- http://www.carscoops.com/2013/04/man-buys-2007-porsche-cayman-s-for-300.html
    This digital currency phenomenon is truly revolutionary and it will be exciting to see how both these systems rule the market.

    -ns682

  • Garishta

    This is an amazing coverage of what bitcoins are and how they are useful. It is interesting to see the numerous advantages bitcoins have to offer. As rightly pointed out in your post, bitcoins are the first totally decentralized currency which means the system is much more credible and secure than any bank. The possibility of a bitcoin network fail is extremely small as it is made up of millions of computers connected together in a distributed manner so the system can fail only if the entire network crashes. While I was researching on bitcoins, I found another outstanding feature of bitcoins which is worth mentioning here. Bitcoins are virtually infinitely divisible which would become useful in transferring exact funds without rounding off. It also allows for transferring payments round the globe by just a simple click on your computers which is more secure than online banking that exists today. This is due to the secure cryptography technology adopted in contrast with the encryption methodology used by banks. Finally, I am glad you brought up the downside of bitcoins such that it is being used for drug trafficking by sites such as silk road, this use of the virtual currency is definitely disconcerting. However, the pluses associated with bitcoins and the public good outweighs its possible negative effects, which is why they are being adapted in a big way such that currently it is the most widely used alternative currency. I anticipate their use to expand multifold to a point where bitcoins will dominate all online transactions.

    -gm436

  • Matt

    I find it interesting that this article was posted just shortly before before Bitcoin’s stock crashed on Wednesday.

    http://www.businessinsider.com/bitcoin-plunges-2013-4

    Any form of currency is only valuable because of people’s belief that it will maintain its value. If Bitcoin’s stock continues to fall, it would be a significant blow to people who have invested in the product. People who are currently debating whether to accept Bitcoin as payment must certainly be taking this recent event into consideration.

    If Bitcoin fails, it may be a very long time before another large-scale alternative currency can be attempted. Since the value of currency is only as valuable as people’s belief that they can exchange it later, Bitcoin’s stock crash might dissuade people from using alternative currency in the near future.

    -mso32

  • erb78@cornell.edu

    yl582 – the whole idea of bitcoin is that it is a decentralized currency, with no corporation or government behind it. Verification and distribution is done using peer-to-peer cryptographic protocols built into the bitcoin software. Mining is done by computers in the bitcoin network, who hash the next block in the chain, and are rewarded with a small amount of bitcoins. A difficulty function is built into the mining protocol, to control the rate at which bitcoins are distributed. So minting is done by the network itself. Inflation and deflation control is built into the algorithms.If a flaw or improvement is found, a new bitcoin version can be released, using an open source development model. This system is not flawless (and neither is government controlled currency), but it has (arguably) worked so far.

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