Who Do You Trust?

The Rise of Bitcoin as an Online Currency

Special IssueDavid Oram — Published December 3, 2013

Created in 2009 by an anonymous developer under the pseudonym Satoshi Nakamoto, Bitcoin has experienced a wild ride in its short lifetime.

Its rise to stardom has included multiple valuation spikes and dips, links to the online black market Silk Road, FBI involvement, and being discussed as competition to fiat currency (currency not backed by anything, such as gold) and central banks.

Blocks of Bitcoin are created by a worldwide network of Bitcoin miners, simultaneously running a mining software in which they work together to solve a complex algorithm. The solution to this difficult mathematical problem is set to be solved at a predetermined rate, which currently produces 25 bitcoins (a block) every 10 minutes.

However, what makes Bitcoin unique is the inherently deflationary nature of this algorithm. The algorithm has a set half-life, which will continue to diminish the block reward until the algorithm is complete. In the end, a total of 21 million bitcoins will have been created.

To begin taking part in the worldwide Bitcoin economy, each user must first obtain a wallet. This will be the digital location in which all coins are stored and from which all transactions will originate. Once a wallet is obtained, users are free to begin accepting Bitcoin as payment for goods or services, purchase bitcoins via an exchange, or take part in a mining pool.

Currently, the economy of Bitcoin has a market cap of 12 million bitcoins, each valued at about $600 US Dollars each.

The value of all forms of currency is derived from the confidence individuals have in the issuer of that currency.

As confidence in governments and central banks continues to wane throughout the world, the opportunity for a decentralized and digital currency has never been greater. The reserve currency of the world, the US dollar, continues its quantitative easing program, in which it “prints” an additional $85 billion per month to invest in securities such as treasury bonds.

China, the largest debt holder of US dollars, is actually watching the value of its debt diminish with each round of easing, while at the same time having the US accuse them of currency manipulation.

The current state of the Euro is just as troublesome, as its debt crisis travels from the periphery countries of Greece, Portugal and Ireland to the larger likes of Spain, France and possibly Germany.

In this turbulent economic climate it becomes important to ask: who do you trust?

An open-sourced, mathematical software platform built for the digital generation, or the secretive central banks of the world that seem hell-bent on conserving their own wealth?

Humanity invented currency to facilitate commerce, and our digital world is perhaps better supported by a non-centralized currency model than one built upon borders that don’t exist online.