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What is Bitcoin?
Bitcoin is a virtual currency (in a subset known as a cryptocurrency). Virtual, because it exists primarily online, and a currency, because it's supposed primary purpose is to purchase goods or services. Developed in a 2008 paper by Satoshi Nakamoto (who may or may not actually exist), the currency is unregulated and decentralized.

Bitcoin is unregulated, meaning that there is no central authority creating new bitcoins. However, it is partially regulated by the algorithm by which new Bitcoins are produced. With regular, national currencies, the federal government prints or mints more money in order to regulate inflation and deflation. By doing so, they can regulate the buying power of their currency to optimize international trade and the domestic economy. However, when government printing goes awry, hyperinflation can occur (or some sort of deflation that's bad for the economy, but I don't know the term for that). Government regulation allows for currencies to be more stable, having the same buying power day to day, but also puts the value of your buck in an entity's hand. Without an entity to control the production of new Bitcoins, it is unlikely that Bitcoin experiences runaway hyperinflation, but it is also less stable.

Bitcoin is decentralized, meaning that there is no single server that hosts the data. Instead, all transactions of Bitcoin are sent to everyone running a Bitcoin server and are permanently stored. Server data across all computers are compared and corrected for consistency, ensuring that all clients have the most up-to-date information.

As every transaction is stored, Bitcoins can be stored in wallets, whose value can be easily corroborated by tracing the transactions stored on the servers. These trails are created for each bitcoin (or part thereof), so one can trace the origin of the bitcoin, as well as every single wallet it passed through, on the way to your wallet.

Transactions are done using a public-key/private-key method, which ensures that only the owner of the wallet has access to the Bitcoins stored inside.

 

The Algorithm

The Bitcoin algorithm is based off cryptographical hashing, a way of encoding data that is easy to do one way but difficult to reverse. The most recent transactions are placed into a block and appended to the blockchain (the master chain of blocks), but each block also includes a hash, which, when solved, provides the one who broke the hash with a set amount of Bitcoin. The information that the block has been solved is then propagated through all of the clients so that everybody knows that the block is solved (or mined), so that nobody works on already-mined blocks.

A new block is added to the blockchain approximately once every ten minutes, and the difficulty of the hash is dynamically adjusted to be approximately six blocks solved per hour. The number of Bitcoins in each block is halved approximately once every four years, to prevent runaway inflation of the currency as more people begin mining.

 

Current Events

Although made as a currency, Bitcoin seems to have adopted the role of a commodity in the markets, and can be more comparable to gold, whose price is driven by speculators moreso than its actual usage value. Currently used as a currency on only a few major websites, and a few illegal ones, Bitcoin has not seen widespread usage in the marketplace. A single Bitcoin ATM exists in Vancouver, Canada, with a few more planned along the way.

However, as of today, Bitcoin prices have jumped 100%, from $400 to $800, possibly due to the US Congressional Senate hearing where they supported the legitimacy of Bitcoin for financial services.

Why does bitcoin have value?

The value of a thing is normally the utility derived from it. Bitcoin has value because it can be exchanged for things that have intrinsic value. Thus it is practically a form of currency, which is a representation of money. Why then is it seen as money?

My understanding of money is that it is a store of time expenditure. I think money can only be created through work i.e. manipulation of matter. I disagree with the notion that central banks create money. What central banks do is create currency. Currency that is not backed by money will eventually lead to inflation and become worthless. Going by this definition, bitcoin has value because work is involved in its creation. That work, called mining, involves finding a solution to an equation. The result of that work, called proof of work, results in the award of a bitcoin. That proof of work is another reason for its value. Each bitcoin is backed by a unique equation that is the result of work. Thus, each bitcoin has a unique number, kind of like the number on a currency note. Therefore, it cannot be counterfeited. A 3rd reason for its value is its resistance to inflation. There will only ever be 21 million bitcoins. I don’t think that upper limit is a good thing but that is outside the scope of this piece. A 4th reason is its decentralized nature which virtually eliminates transaction costs associated with the traditional monetary infrastructure that has banks charging fees on transactions. The savings on these fees are quite substantial. Bitcoin also enables transaction anonymity. This is a quality it shares with physical money and that privacy is much prized by many for myriad reasons including quite prominently, the philosophy which holds that governments' powers should be limited and information about people's activities should not be automatically accessible to government and its agents.

So, these are the reasons why bitcoin appears to be money.

It is used as currency because a currency is a medium of exchange. Fiat currencies have value because at worst, one can use them to pay for government services. Using the USD to illustrate, it has value because the largest economic actor in the world is the US government. It accepts the USD as payment for taxes and other services. Therefore US citizens hold it for primarily that reason. Everyone in the world wants to do business with the US and its citizens, so the rest of the world holds dollars so they can pay for goods and services produced in the US. Unlike fiat currencies, bitcoin does not have any such automatic demand. Unlike commodity currencies - gold, salt, cowries etc., it lacks intrinsic value because the equation underlying each one does not, so far as I know have any real world applications. Even if it does, usage of the equation cannot be restricted. And so, I wonder why bitcoin is viewed as money. Could it be that the world has evolved to a stage where symbolism is valued more than practicality? Because it appears to me the main attraction of bitcoin is what it symbolizes - novelty, technological innovation and philosophical actualization.

I do not understand why anyone would pay even $1 for a bitcoin. But then again, I do not understand why people pay huge sums for memorabilia, or for art or worst of all, wines that will not be drunk. There have been papers arguing that bitcoin itself is worthless but the concepts it actualized - distributed ledger, block chain, anonymity, peer to peer transactions are more valuable and important. I agree with this view because these are things that have practical application especially as the world continues being digitized. I concede that my inability to see the value of bitcoin may be due to a deficiency in my understanding. Otherwise, how can so many smart people spend so much money acquiring it? However, considering people can be stupid in following the crowd, such wide interest does not invalidate my opinion.

Iron Noder 2020, 1/30

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