Sat Dec 11 13:03:18 PST 2010

encrypting a better tomorrow

The word of the day is Bitcoin.

Bitcoin is a cryptographic, anonymous, person to person electronic currency. Think of the e-cash from Cryptonomicon, only without the central authority, which had to reside in a jurisdiction friendly to obscure cryptographic hacks primarily used by criminals. I first found out about it last month, in a press hit that eventually reached the Irish Times.

The bitcoin site is only too happy to tell you how it works at length, but in case you're not a crypto nerd, here's the short version. A bitcoin is a chunk of data, that, due to some math, is completely unique, and impossible to copy. Since this data is now scarce, it has value, and can be used like money. In old electronic cash systems, since you couldn't copy any one bitcoin or e-dollar or whatever, you had to have a central authority which would maintain a list of valid tokens, and would occasionally add new ones, to prevent deflation.

The unique feature of bitcoin is that, since there's no central authority, they can't issue new bitcoins. Instead, there are a fixed number of bitcoins, 21 million, and there will never be any more, which makes nerds tremendously excited, since the kind of people who are interested in electronic cash systems tend to also be gold standard nutbags. Additionally, each bitcoin takes a tremendous amount of CPU time to generate, so the market is more or less self correcting. When a single bitcoin becomes more valuable, then it's more profitable to run computers to generate additional bitcoins, which then drives the price back down.

At the time of writing, one dollar is worth 4.68 bitcoin, or BTC. Since there will only ever be 21 million BTC, and there's 8 trillion USD, the natural assumption is that the natural price of BTC is much, much higher than its current level. Supporting this is the historical graph of the BTC-USD exchange rate, which is currently in the process of screaming skywards. This results in the BTC speculators making piles of cash money.


The United States Government is not terribly enamored of completely unregulated currency exchanges, indeed, exchanges that are specifically designed to be impossible to regulate, using a currency that cannot be tracked. While there is little the government can do directly against bitcoin, they can attack where it meets the real world. A couple high-profile federal prosecutions targeting businesses that accept bitcoin as a payment option would result all businesses, everywhere, abandoning BTC, at which point its value asymptotically approaches zero. This results in the BTC speculators losing everything.

The entire situation quite reminds me of the Second Life banking bubble, where it was, very briefly, profitable to borrow money from a credit card and invest it into a "savings account" with a 15% interest rate. These banks were, of course ponzi schemes, and that money evaporated when Linden shut down the banks. Hilariously, several legitimate banks were forced to become less legit by market forces during the bubble, since the puny returns generated by real actual lending couldn't compete with the fake banks.

Bitcoin doesn't seem to have any banks yet, however. This is probably due to its status as a straight up currency, which makes it harder to hide behind the facade of "it's all just a game" that Second Life scammers used to great effect.

A bitcoin bank might be a profitable venture for a foreign national with a web host that doesn't ask too many questions, though. If you resist the urge to get greedy, and the government doesn't drop the hammer, then you might even grow into a respectable business, and if that isn't a great metaphor for the internet, I don't know what is.

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