Understanding Bitcoins

A few months ago, New York Time Magazine had a feature article on four trends that are disrupting (hopefully for the better), the world of money. Here’s a link to the article and I really recommend it. In case you can’t (coz you only have enough time to read this short blog piece), the four trends described were:

  • Bitcoins– It’s main feature; according to the NYT piece being- it allows for an anonymity of exchange and a creation of value.),
  • Kickstarter– It calls upon money’s other characteristic: its deeply social nature. It’s impossible to make an anonymous donation to Kickstarter.). I personally love Kickstarter, the founding principle, and have used it often to fund various fun causes. I hope one day to use it to raise money myself for a cause that I can share with others.
  • Even– The founders consider it as a new kind of financial company.  It’s motivation is to help people stress less about their money by saving the extra they earn when they earn a little above average.
  • And lastly, my personal favorite because it’s so unique, so necessary, and so creative is a software engine that is enabling a form of nonfinancial exchange: literally a kidney chain”

The last three were easy concepts to understand but even after reading the long piece on Bitcoin, I didn’t really understand how it worked. At a dinner a few days later, I checked with a relative who works in the finance industry on wall street and I still felt I didn’t understand enough to explain it to someone else (which in someways shows the shallowness of wall street executives and why we keep getting into financial trouble all around the world!).

Hence, I thought it might be a good topic to research and blog about (even though it has nothing to do with sustainability per se). Here’s what I found.

How it works According to this site, “Once you have installed a Bitcoin wallet on your computer or mobile phone, it will generate your first Bitcoin address and you can create more whenever you need one. You can disclose your addresses to your friends so that they can pay you or vice versa. In fact, this is pretty similar to how email works, except that Bitcoin addresses should only be used once.” On searching online, I found this really short (less than 2 mins) video on how it works. It is associated with a commercial website but never the less is very simple in its explanation. In addition, this official FAQ is pretty interesting and comprehensive.

The other key concepts are-

a. The block chain, which is a shared public ledger on which the entire Bitcoin network relies. All confirmed transactions are included in the block chain. The integrity and the chronological order of the block chain are enforced with cryptography.

b. Private key– Bitcoin wallets keep a secret piece of data called a private key, sort of a signature that also prevents the transaction from being altered by anybody once it has been issued. And lastly,

c. Mining -which is a distributed consensus system that is used to confirm waiting transactions by including them in the block chain. It enforces a chronological order in the block chain, protects the neutrality of the network, and allows different computers to agree on the state of the system.

Uniqueness of Bitcoin:

  • Bitcoin has no use value, only exchange value, and because it is has no worth in use other than what others are willing to pay for it, it is always in a bubble.
  • It is “a currency not backed by any state”.
  • It’s digital, so doesn’t have physical production or storage issues and it’s hard to melt down a Bitcoin and pass it off as two Bitcoins, thus requiring less government intervention against misuse.
  • it can only be created according to a special algorithm that ultimately limits the total number of Bitcoins to 21 million and guarantees that payments are anonymous and irreversible.
  • Because it’s only based on an algorithm, it’s uniqueness is already being challenged by creators of even fancier algorithms such as litecoin, primecoin etc.
  • One of the drawbacks is that they may possibly help to facilitate illegal activities and tax evasion.

Source: forbes.com

We live in an ever changing world, especially when it comes to service offerings using the power of technology. As citizens of the world who are interested in making positive changes by implementing sustainable solutions, we need to be ever aware and ever inquisitive even with regards to the non-green changes around us. Hope this article and the four financial concepts introduced here helped do just that-pique your interest to learn even more.

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