There is no such thing as a bitcoin. When someone says “I own a bitcoin,” what they mean is “I know the code or codes that can authorize the transfer of up to one bitcoin.” If you buy a “loaded” physical token for 0.01 bitcoin on eBay, the token contains a code. Neither the token nor the code is “bitcoin,” but the code enables you to transfer amounts adding up to 0.01 bitcoin to other accounts.
Bitcoin’s foundation is a public transaction ledger called the blockchain. Every bitcoin transaction is recorded on the blockchain and anyone can inspect the transaction history going back to the creation of the first block of the chain. Because the blockchain is public, bitcoin transactions are not as anonymous as some people currently in prison had hoped. Every new account is anonymous, but that anonymity will probably be compromised by the first transfer of bitcoin into it because the bitcoins in the source account probably have a history–and there are companies whose business plan is to delve through the blockchain to link accounts to owners and sell the information.
Here’s how the blockchain works: people with codes that control bitcoin create transactions. Transactions can have one or more input accounts and one or more output accounts. Newly created transactions are sent to the cloud of computers running bitcoin protocol clients and added to a list of pending transactions. Anyone can download a bitcoin protocol client and run it on their computer, but running a full “node” takes a lot of disk storage space and Internet bandwidth.
Some of the computers running bitcoin protocol clients are “mining” bitcoin. To mine bitcoin, one selects transactions from the pending list and packs them together into a binary blob called a “block”. The block is then scanned to create a “hash” value. The last digit of a 16 digit credit card number is a hash value calculated from the first 15 digits. This is how web sites can automatically determine if you’ve mistyped a credit card number.
I’m not sure I get the whole thing. Somewhere in my IRA portfolio there are a few shares of a stock that trades in bitcoin futures, and it’s turned a modest profit for me, but that’s probably as far as I’ll go in dealing with the fiat-iest of fiat currencies.
It’s not at all clear to me how you pay for things with bitcoins, how you obtain them or how you store them. You can’t put them in a bank account – or can you? Can I use them to put a tank of gas in my truck? Can I buy guns with them?
Supposedly fortunes have been made by those smart enough to buy bitcoins when they sold for pennies apiece, or even a few dollars apiece. Now the value of a single bitcoin hovers between seven and eleven thousand dollars. If you had bought a thousand of them for a dollar each, you’d be virtually wealthy now – if you could find a buyer to take those bitcoins in exchange for a more tradable currency.
As a libertarian I love the idea of an untraceable currency that isn’t controlled by any government. As a child of the pre-Internet era, I can’t quite bring myself to engage fully with a currency that I just don’t understand.
Richard’s article answered a lot of my questions. But I still have more. I suppose I’ll keep looking for answers.