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.
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.
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.
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.
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
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?