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Both the tech and finance worlds lit up when virtual currency Bitcoin soared in value to over $200 per Bitcoin on April 9, only to plummet to $105 by the 10th. Its volatile few days have sparked innumerable discussions on Bitcoin’s power to influence established economies, its movement from a geek-only entity to a mainstream interest, and its future as a viable currency. But beyond these ruminations, it’s important to keep the technology behind Bitcoin in mind.
Bitcoin was deployed in 2009 by an anonymous developer known pseudonymously as Satoshi Nakamoto who built a finite supply of Bitcoins into the code - 21 million to be exact. Bitcoin’s code was designed to release Bitcoins over time, which means that, while they are continuously being released out into the virtual universe, their supply has been established at a predetermined rate. An investigation by NPR in 2011 - when Bitcoin was relatively unknown to anyone outside of geekdom — described how to obtain Bitcoins: would-be owners must solve a coding puzzle and in so doing gain access to a random number of Bitcoins. Once you have Bitcoins, you can then visit Mt. Gox, which handles the majority of global Bitcoin exchange. Through this process, users become Bitcoin “miners” — using code knowledge to find existing Bitcoins and buy and sell them.
While Bitcoins’ existence and usage is entirely virtual, the issue of their economic viability gets more complicated when they are taken offline. An increasing number of physical transactions are being done each day — part of the reason for Bitcoin’s sudden ascent into the public spotlight in early April — in which hard local currencies are exchanged for Bitcoins. And the 2011 NPR podcast led the two journalists authoring it to seek out a flesh-and-blood owner of Bitcoins to exchange U.S. dollars for Bitcoins on the spot. Pushing this complication further is the recent invention of The Bitcoin Machine: a relative of the ATM that changes U.S. dollars into Bitcoins. The device, however, still requires users to have a Bitcoin account, which means its use is limited to those with enough programming savvy to mine some of Nakamoto’s originals. This transference of value from the digital world to the physical one and vice versa is what has financial experts and tech analysts in a tizzy. And as they learn more about Bitcoin, seemingly unanswerable questions arise: If you can buy real things with Bitcoins, and through exchange its value fluctuates, can it threaten actual banks? Can a virtual currency impact a physical one?
The starkly opposing answers to this last question bear noting. Some regard Bitcoin as a threat to governments and banks because it is global, accessible through a central exchange, is being accepted at more and more brick-and-mortar businesses in exchange for services and goods, and can be transferred instantaneously. Other argue that the currency’s finite supply makes it a ‘digital collectible’ according to Forbes’ Louis Woodhill; yet others see Bitcoin a platform for software development itself as users mine the code to become part of the Bitcoin community. With such volatile trading value, Bitcoin naysayers do well to emphasize the currency’s vulnerability to DDoS attacks (a vulnerability shared by other online services): part of the sudden decline in value can be attributed to a temporary outage at Mt. Gox. Even the uniqueness of Bitcoin is being compromised: Reports of a similar service called Ripple run by a company called OpenCoin describe it as even more decentralized than Bitcoin and therefore more ideal as a global currency.
Despite all of these qualms and questions about Bitcoin, its four-year climb to the forefront of the finance and tech scenes is remarkable. The sharp decline in its value does not spell the end of the currency, either: its loyal albeit limited following will see to that. When the last original Bitcoin is mined (estimated date: sometime in 2140) the currency, if it hasn’t caught on, will be exactly what Woodhill describes, a collectible. Which, like many other collectibles, will have a value as high as the market will bear. Given the fact that its current users are prestige-hungry and affluent, we’re guessing it will be a high one.
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