Buying Bitcoins

What is a bitcoin, and why are we hearing so much about it these days?

Essentially (and way over-simplified), a bitcoin is pretty much what it sounds like: it's "virtual" (bit) currency. That is to say, there is no real "coin," but there is a real value.

In a way, it reminds me of the sale and purchase of virtual property in Second Life, a massively multi-user universe in which players created whole other identities, occupations, towns, in essence, lives for their alternate selves, none of which had any genuine atoms, but existed in the cyberverse only.

However, because it took time and effort to acquire property and experience and make friends, and create this new identity, other who wished to enter the game, er, late in the game, would simply buy their way to possessions and achievements. Literally, buy these things, as in, a virtual home would go up for sale on eBay or some other vendor site, and people would - with genuine money, pay for it.

In this case, the stuff is real, the money is "bit."

While it's gained more notoriety recently, bitcoin has been around since about 2009. When buying and selling is done using bitcoin, there is no actual exchange of currency or even tokens. Rather, the buyer and seller both have identities on a ledger, where transactions are stored. This transaction log, or "blockchain," is a master list of all transactions, which identifies users level of coin.

But how can this be safe, or even meaningful? Ideally, the safety factor is the result of public-key cryptography, and the network where the actual data is stored is decentralized. So, as in the case of the internet itself - which has no "there" there; that is, the internet includes your computer when you're logged on, but does not include your computer when you aren't, and data is split up into packets which are sent their merry ways over ideally trackless pathways, to be reunited at their destination - bitcoin transaction data is spread out and split up, only becoming meaningful when it is demanded for a specific purpose.

The encryption also keeps the data from being useful to anyone who is not a legitimate user - who has, in other words, the "key" to translating gibberish into parsable information.

The operators of this network, known as "miners", are rewarded with transaction fees and newly minted bitcoins.

According to Wikipedia, however, "Bitcoin has been a subject of scrutiny due to ties with illicit activity. In 2013 the FBI shut down the Silk Road online black market and seized US$28.5 million worth of bitcoin. However, the United States is currently considered to be Bitcoin friendly compared to other governments. In China, new rules mean bitcoins cannot be exchanged for local currency,-and the European Banking Authority has warned that Bitcoin lacks consumer protections.Generating and storing keys offline mitigates such risk, however.

Commercial vendors who do accept Bitcoin for transactions do so because they are charged less per transaction than is typically charged by credit card processors. So operations such as Reddit and WordPress are willing to accept the virtual currency for services rendered. As of 23 December 2013 the number of Bitcoin network peers was about 172,000.

Bitcoins maintain their value, as do many other precious substances, by scarcity. While in the case of usable commodities, demand for the substance (like silver, for example, which is used to manufacture many things, including many parts of computers) alone can set a value on it, in other cases, the market is deliberately suppressed to keep a lower limit on the value of the currency. So, there are a limited number of "bitcoins" available on the ledgers. Bitcoins are earned by trading them for goods or services, or by actually trading them, and having newly minted coins made available to you as a "miner." Or maybe, "minDer" would be more accurate.

The dangers associated with bitcoins, while they have been both exaggerated and downplayed, are pretty much the same as for any form of trade: black markets (using bitcoins to buy illegal things, like child pornography and drugs), money laundering, and unauthorized mining (which is sort of the same thing as counterfeiting). 

However, as the recent hacking of Target's credit card data base has demonstrated, the idea of holding "virtual" money that is ostensibly more difficult to "steal" may become increasingly popular. Even as we begin to make more and more transactions using not your grandmother's plastic credit card, but by a cell phone that is both encoded and protected by a logon and a remote "kill" application, we will no doubt become more comfortable with the idea of exchanging payment via virtual ledgers.

As of today, bitcoins are legal in the US, if still carrying a whiff of shadiness along with them. By contrast, in the much more progressive Netherlands, you can purchase your latte grande at the neighborhood cafe using your bitcoin wallet.

Hey, Paypal took off slowly and has become one of the easiest - if not exactly cheap - ways to buy online. Can bitcoin really be that far behind?

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