Bitcoins, Block Chains and Crowds

After our discussion on crowdsourcing, block chains and Bitcoin, I decided to look into the virtual currency. At first, I didn’t know that much about Bitcoin and was confused about the concept. While the details can be technical, I hope this helps explain it a little more and serves as general overview for anyone interested in its history, uses or direction.

Background

In 2008, a man by the name (or pseudonym) of Satoshi Nakamoto posted a paper detailing a new “cryptocurrency” system. The system became available in 2009 and for about two years Nakamoto maintained contact with others online and monitored the software base but, “ by April 2011 had transferred responsibility for the code base and disappeared.” Speculation surrounds Nakamoto, including the idea that he is part of a larger group. These nameless pioneers “self-organized and financed the creation of an entire new industry, leading to the development of machines, including ASICs, that had orders of magnitude better performance than what Dell, Intel, NVidia, AMD or Xilinx could provide.” They harnessed the power of machines to form an entirely new form of an organization. A few individuals were able to revolutionize the way many do business and transfer money.

Since its creation, Bitcoin has occupied a volatile market. Prices soared in 2014 when users anticipated more widespread acceptance of Bitcoin. Prices fell though, when a Chinese website, Baidu.com, said it would not accept the digital currency. Prices also plummeted on the occasions of the Mt. Gox bankruptcy and when major exchanges were hacked.

Bitcoin has some similar properties to modern fiat currencies, like the US dollar, yet faces some obstacles. It is a “medium of exchange, a unit of account, a store of value, and a standard used for deferred payment.” In order for Bitcoin to work, it must be accepted in exchange for something else believed to have similar value. Bitcoin is not yet widely accepted. One drawback to Bitcoin is the computer costs. For example, it requires storage and security. Another perceived disadvantage to Bitcoin is it has been linked to illegal activity. A website called Silkroad deals in legal and black market goods as well as the transaction of Bitcoins. Still, other users have used Bitcoin successfully to travel, buy tickets to events, and purchase items from places like Overstock.com. Furthermore, certain companies are incentivized to accept Bitcoin because its costs are less than those charged by typical credit cards.

Block Chain

Other key aspects of Bitcoin include its Block Chain or public ledger with which the system validates transactions. The software code known as “the protocol” purportedly marks every transaction of Bitcoin. This allows computers to trace the authenticity of transactions and protect them with digital signatures.

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 Culture of the Crowd

The creators and users of Bitcoin have formed their own distinct group that spans the technology, banking and finance industries. Although there is no formal organization,  the Bitcoin network operates with advanced technology and algorithms employing mechanical precision. Michael Taylor explains the standardized process through which computers mine Bitcoins,

“Upon receiving notice of the block being posted to the network, other nodes will verify that the transaction is in order—for instance, not improperly creating or destroying bitcoin, or over-spending from an account—and then use the new block as the head block for blocks that they are trying to post to the block chain.”

Computers have eliminated errors and flaws in the transaction process. Bitcoin creation requires 100 subsequent blocks posted to the block chain after it, further confirming transactions. In this machine like cooperative, anonymity prevails because there is no uniqueness or distinguishing characteristics among its people. The block chain is public, but individuals do not need to know whom he or she is doing business with or who is on the other side of the computer screen. In fact there is no need for human contact or relationships between users.   Money may change hands, but only in the abstract sense because physical currency has no place here.

This type of machine has the advantage of scale and ability to traverse continents.   Within this system one might not know the others, but a variety of personalities are stakeholders. There are 6 types of people in this network:

1.high school and college students utilizing cheap electricity

2. gamers that subsidize their habit with Bitcoin

3. extreme hobbyists that create “mining rigs” of multiple machines

4. hackers with botnets

5. online collaboratives

6. companies that raise funding through Bitcoin.

There is first, second, and third generation mining that has led to hardware startups and the use of venture capital. This new, innovative culture revolves around advancements in technology and programming. Its freedom and lucrative possibilities have drawn participants into the fast paced culture. There may not be a written set of core values, but the members of Bitcoin share in the common belief in its future, as well as ideals based on its effectiveness and profitability. Rather than create an organization around a culture, like a company such as Zappos has done, the culture has developed from the people. One indication of this is the jargon that has stemmed from this community.

“The users self-organized and self-financed the hardware and software development, bore the risks and fiduciary issues, evaluated business plans, and braved the task of developing expensive chips on extremely low budgets. This is unheard of in modern times, where last-generation chip efforts are said to cost $100 million or more, and the # of ASIC starts drop yearly.”

The users and creators of Bitcoin created this “process-centered business” with a “fresh perspective and “disregard [for] all the assumptions and traditions of the way business has always been done.” They have reengineered the rules of money by ignoring the rules of other powers (the central bank and government) and operating through demand, competition and modernization. Organizations dealing with money, financing and investing are trending towards new systems governed by technology, speed and convenience.  Bitcoin is an example of a more radical “reengineered” organization.  The customers and users themselves have powered its process with the creation of computation machines and algorithms. Fewer individuals are able to accomplish even more with the assistance of streamlined processes and smarter machines. The Bitcoin network eliminates middlemen and extraneous bureaucracies that are still present in large banks.

Staying Power?

One analyst describes Bitcoin’s positive features:

“Bitcoin is not a fad and it is unlikely a bubble. Bitcoin solves many important problems (security, no counterfeiting, no charge backs, low or zero transactions costs, micro transactions, no credit checks, no centralized institutions, etc.). Yet this does not guarantee that Bitcoin will succeed.”

There is still a lot of uncertainty precluding people from investing in Bitcoin. Still others do not even know about Bitcoin. According to a 2014 consumer survey, about 45% of respondents were still unaware of Bitcoin or any virtual currency. The majority of consumers are wary of digital currency. However, the 3% of respondents who had used virtual currency are certainly taking advantage of its benefits. One could have received a large payoff at one point, when a single Bitcoin was worth $1,200 in 2014.

Likelihood of use of Bitcoins or other virtual currencies

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2014 Consumer Survey: Consumer Attitudes on Bitcoin and Other Virtual Currencies- Commonwealth of Massachusetts Division of Banks

Bitcoin offers individuals an alternative for saving, sending and spending money. It still lacks specific features to grab hold of the greater public, but is moving in the right direction in line with a more digitalized world.   With the declining popularity of traditional methods of holding cash and performing money services, Bitcoin’s popularity may in fact increase. Some may be drawn to the organizational structure, innovative functions and culture of Bitcoin.

I, for one, have yet to invest in Bitcoin. Will you?

 

Taylor, Michael. “Bitcoin and the Age of Bespoke Silicon.” 2013 International Conference on Compilers, Architecture and Synthesis for Embedded Systems. 2013. 

Manrique, Cecilia G., and Gabriel Manrique. “Information and Communication Technologies in Public Administration.”  CRC Press, 8 Apr. 2015. 

“Articles – How Many People Really Own Bitcoins – and Why Does It Matter?” Bit Scan. 

https://www.csbs.org/regulatory/ep/Documents/Final%20Report-VirtualCurrencySurvey2014.pdf

 

 

 

6 comments

  1. Great post. I think you did a very good job of explaining Bitcoin. I think there are clearly many advantages to a digital currency like Bitcoin. With the Block Chain public ledger you do not need a regulatory body to monitor every single transaction. As you mentioned, Bitcoin allows you to cut out the middle men of the banks. Both of these facts lead to cost savings. I think that Bitcoin and digital currency is definitely on the rise as technology continues to improve. The biggest disadvantage I see is that most companies aren’t going to accept Bitcoin for payment so why even have it? I personally still would not trust putting any of my money into Bitcoin, but I think it could be a common thing in the future.

  2. Hey thanks for this post. You really included a lot of interesting information about Bitcoin. I never really thought about how many different types of people there are that benefit from bitcoin. It unfortunate, however, that Bitcoin flutuates so wildly in value. I think it fluctuates too much right now for me to put a significant amount of money in it. Although one thing that might help Bitcoin is the fact that a lot of people might consider a currency that goes up and down a lot to be better than a currency like the US dollar which just steadily goes down.

  3. It’s Sunday evening. I’m going to come back and read this one in depth when I am functioning at a higher level. Too much depth. Great work!

  4. Really liked this topic and post because you took complicated topics and broke it down very well!! I do think bitcoin will be around, especially given our problems with security nowadays, but I think that there will be something else that will come along and be more powerful and popular than bitcoin. I feel much more informed about this topic now, thanks again for posting!!!

  5. Wow that was exceptionally helpful. Before your post my knowledge about Bitcoin was limited to it being a currency used on Silk Road for transactions users would not like to be traced to. But the way you explained every segment of the digital currency and its market was well done! The way the world is heading towards a pure digital market provides huge opportunity for Bitcoin, in my opinion, and if they want it to take off they might want to consider splitting the value of a bitcoin a few times, as $1200 for one is a bit crazy (though I imagine things can be sold for, like, bit-cents?) Anyway the implications of Bitcoin’s new model are revolutionary, and it will be interesting to see how it will all play out.

  6. Wow! Kiara, thank you for taking a very complex topic and breaking it down in layman’s terms so that I can finally having a better grasp on the subject. The history lesson was not only helpful in understanding the stages, but a reminder of how one idea, one person or a group of people, or one white paper can change so much. We are certainly in the age of innovation and I appreciated your outlook on what might draw people to Bitcoin in the future.

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