The Great Bitcoin Experiment

I learned about bitcoins in a great article by Joshua Davis in the New Yorker. Invented in 2009 by a mysterious figure going by the pseudonym Satoshi Nakamoto, bitcoins are a form of cybercurrency. They are given away (for free) in periodic lotteries; by 2040, 21 million bitcoins will have been released.

At first, as you can imagine, there wasn’t a lot of demand for bitcoins. I guess initially it was pretty easy to obtain bitcoins from the lotteries. Then interest started to grow. People dedicated computer systems to these lotteries, hoping to score a large number of bitcoins. These people are called “miners,” and it sounds like these days it is hard to get your hands on bitcoins via the lottery unless you are a miner. By 2010, the value of a bitcoin started to take off. Then, as you can see from this chart, wild fluctuations in value started. Those swings haven’t deterred everyone–it’s reported that the Winklevoss twins are holding onto over 11 million dollars worth of bitcoins, for example, and the attention this new form of currency is getting from the media seems to be growing weekly. Screen Shot 2013-05-11 at 3.00.13 PM

So what can you actually do with bitcoins? You can exchange them for dollars at one of the many exchanges that has popped up. One just started in Union Square–you can check it out on Mondays afternoons, starting about 4 PM. But simply hoarding bitcoins and occasionally exchanging them seems alittle boring. You can also use bitcoins to purchase drugs or other contraband in online forums like Silk Road, since bitcoins aren’t tied to your identity the way credit cards are and transactions are  untraceable. Not a drug user? For the more boring among us, there are some legit businesses that take bitcoins. WordPress, OkCupid, and Reddit accept them. And if you live in New York, you can settle your bartab at EVR with bitcoins. I’ve never tried Foodler (they don’t have many options in my neighborhood compared to seamless.com or GrubHub), but they take bitcoins. Evidently, one of the benefits of accepting bitcoins is that companies don’t have to pay credit card fees AND they don’t have to worry about charge-backs. Once a transaction is done, it’s done. Recently, Kashmir Hill, an intrepid Forbes reporter based in San Francisco, even tried to live on bitcoins for a week. Apparently it can be done, but it is a major pain.

This is a setup for a pretty fascinating experiment. To a lot of people, the idea of a currency not controlled by the Fed is pretty exciting. No one can decide to print more bitcoins when times are tough–the number released is capped, and they are released on a schedule in order to prevent inflation. As I noted earlier, you don’t have to deal with credit card companies when you are using bitcoins–and if you are traveling abroad, you don’t have to worry about currency conversion fees. Some of the drawbacks are that bitcoin exchanges could potentially act as money laundering havens, it’s still a rarity for a business to take bitcoins as payment, and there is no safety net in place if somebody else gets their hands on your bitcoins. You also have to trust that “Satoshi Nakamoto” is trustworthy and his scheme for bitcoin release will go exactly as planned. So how long will bitcoins be around? Is this a trend that will fizzle out in the near future? Or will bitcoins take off as an alternative form of currency? I’m really curious to see how this will turn out! I’m thinking about getting some on one of the exchanges just for fun… or maybe I will try to convert one of my old computers into a bitcoin mining operation and become a bitcoin millionaire.