Imagine your computer as a wallet full of Bitcoins


WIRED:A strange and notional currency is creating a provocative and disruptive new economy

OCCASIONALLY THERE comes along a technology idea so strange that not only can I not tell whether it’s doomed or bound to succeed, I can’t even tell what either of those futures might look like.

One example was Linux. When I first saw it, I had real trouble imagining what would happen if it took off. But, at the same time, I couldn’t visualise how it could fail. How would it compete with Microsoft? How would anything compete with a perfectly usable, yet entirely free operating system?

I’m currently peering at an idea that is mystifying me in exactly that manner. It’s called Bitcoin.

Here’s the elevator pitch, as they call it: imagine a banking system, but distributed over thousands or hundreds of thousands of computers. The computers together hold a database of transactions, similar to the database clearing banks or credit card companies hold: X transferred something to Y, Y transferred the same thing to Z.

No one computer manages this database; they all run the same software, which collectively distributes the knowledge and procedures that make up this set of accounting books.

As well as this database, the computers also generate unique numbers, at a slow but adjustable rate. These unique numbers make up the only “things” that can be recorded in that transaction database. So when X is recorded as transferring a thing, it can only really transfer one of these numbers.

There aren’t many of these numbers around to begin with, because they’re so hard to create. You create them by doing the work of checking and recording the latest transactions in the database. If you do that, you get one or maybe more of the unique numbers as a byproduct.

Got that? Well, don’t worry if you didn’t, because here’s the real meat of the Bitcoins idea. Think of the unique number as coins, and of the shared database as a record of who has what coin. You can use the Bitcoin system to “pay” someone in these coins – I just record the transaction of my numbers to your computer in the global database. If the database shows that I had those Bitcoins originally, and the system successfully records the transfer, then I’ve effectively given my Bitcoins to you.

Well, great. But who would take a Bitcoin instead of real hard money? Well, it turns out that Bitcoins have some advantages to other payment systems. There’s no cost for transferring them. There’s no central government bank to inflate them away or devalue them (the Bitcoin system is designed to create 21 million Bitcoins and then stop). They’re practically anonymous, like cash, but potentially easy to use via the internet, like credit cards. You can endlessly subdivide them, so you can pay 0.00000001 of a Bitcoin as easy as 100 of them.

But surely a Bitcoin can’t really be worth anything? This is where this strange idea begins to become more concrete. The Bitcoin software exists. People are already trading Bitcoins. A few months ago, one Bitcoin was only worth a few US cents. At the time of writing, they’re about 25 cents, and edging toward 30. The total number of Bitcoins created have a value of over one million dollars.

It’s perhaps no surprise people are speculating with Bitcoins. Humans will happily trade almost anything, no matter how bizarre, from stamps and comics to computer game artefacts.

There’s poker games denominated in Bitcoins. There are companies that will take credit cards and turn them into Bitcoins for you, or convert your Bitcoins into gold. When I show people this Bitcoin economy, they ask: “Is this legal?” They ask: “Is it a con?” I imagine there are lawyers and economists struggling to answer both questions. I suspect you will be able to add lawmakers to that list shortly. And they’re just the first of many more questions this technology opens up.

Will the price of Bitcoins go up or collapse to zero? Are there attacks that smart coders or mathematicians could mount on the Bitcoin system that would let them rule the game? I bought $70 worth of Bitcoins to write this article. Was it ethical of me to write about it, given that “investment” in a bunch of numbers?

I keep looking at Bitcoin, and puzzling at the consequences. I can’t tell whether it will succeed or not. Honestly, having seen similar crypto-cash ideas in the past, I don’t rate its chances very highly. But I can’t even imagine what a failed Bitcoin system will end up as. Just a few amateurs exchanging Bitcoins among each other? A Bitcoin currency devaluation? A global government crackdown on all the computers running the Bitcoin software?

If Bitcoinage fails, will some other digital cash take its place? Will such anonymous cybercash be a boon to the digital economy, or just be made illegal because of the risks of criminals using it? Criminals use real cash too, but we haven’t banned that. Perhaps we simply couldn’t ban cash even if we wanted to.

Will we be unable to ban all crypto-cash like Bitcoin? Whatever Bitcoin’s future, I suspect we’re going to find out from it much about technology adoption, international regulation, and our own ability to adopt or control disruptive new ideas.