January 16, 2014

Bitcoin 101: The Invisible, Uninsurable Currency of the Internet Is Still Kicking

Posted by Janna Leyde Category IconNews & Trends


Despite the mass amount of criticism, condescension, and sheer confusion that the crypto currency known as Bitcoin has withdrawn since its release in 2009, it has persisted swiftly both in headlines and the accounts of those who have bravely hedged on it. Some analysts call exchange “gold for nerds,” and in fact, it is very much like gold. And most importantly (and only importantly as some economists would state), people believe it has value. The government can neither make nor regulate it. And thanks to real e-tailers, like Overstock.com (more on that later), and real online dating websites, like OKCupid, people can purchase goods and services with it. Oh yeah, and Bitcoins are mined. Digitally, of course. In this blog, we’ll take a broad look at exactly what this odd developments means and how you can join the movement if you’re so inclined.

The Mining Process

The original Bitcoin developer (who goes by the pseudonym Santoshi Nakamoto and is most likely not even Asian) created 21 million bitcoins and buried them in the trenches of the internet, creating an incredibly lucrative binary Easter Egg hunt in the process. The process is ridiculously similar to gold mining, but instead of a pans and picks, miners use computer software to solve complex math problems to unlock coins. The more coins discovered, the more complex the math gets therefore bitcoins are created (mined) at a decreasing and predictable rate. This sliding scale of unlocking the currency will continue until the digital world has run dry of its 21 million bit coin.

Courtesy: Vice.com
Courtesy: Vice.com

If you’re looking to get some invisible, un-insurable internet monies, then bitcoinmining.com is the place to get started. The site recommends the proper hardware and software to mine and helps miners set a wallet (a safe, virtual place to keep coins). After getting these basics out of the way, you can finally join a pool where groups of miners work together to solve problems and coins are divvied out according to hashing power (computer math wizardry skills). In the unique world of mining, such things are required to complete a transaction — a proof of mathematical work and processing fees to cover operational costs. We know: this isn’t for everyone.

Does It Matter?

Sounds like a game for the techy peeps of the interwebs, right? Not so. According to Nicholas Colas, chief marketing strategist at ConvergEx Group, the growing number of miners is proving to be a lucrative demographic — a very enticing bunch to digital advertisers. These early adaptors are 25-40-something, tech-savvy males, who live on one US coast or the other and earn an above average income, according to an April 2013 Quantcast survey.

Co-founder and CEO of Gyft, a mobile gift card app, C.J. MacDonald, added a bitcoin purchasing option to his service six months ago. Since then, his digital gift card company, based out of San Francisco, has watched millions of dollars of sales roll in via digital currency. Bitcoins can also be used to purchase gift cards from Gyft’s 200 vendors. The most popular digital currency category to date is electronics (gift cards to Best Buy and Amazon); however MacDonald points out one guy who used his bitcoins to buy Crate and Barrel gift cards, which he cashed in to furnish his whole house. So there’s that, too.

In early August of 2013, the value of all Bitcoins in circulation exceeded $1.5 billion. And at this juncture, it’s actually easier to make a Bitcoin payment than a credit card or PayPal payment: all miners need is the wallet application, then enter the recipient’s address and the amount. Hit send, and the transaction completes. It’s speedier than texting, especially when many wallets can obtain addresses through touching two phones (NFC technology fuels peer-to-peer transactions) or by scanning a QR code.

Using Bitcoin to send or request payments
Bitcoin for Business

Aside from the misdirected endeavors toward digital money purchasing power — the recent Coinye Currency (Kanye West is not happy) or the super sketchy drug market on Silk Road — legit businesses are beginning to embrace bitcoin transactions. Social game maker Zynga has created BitPay, a Bitcoin payment processor, which is currently offered for select games such as Farmville 2 and Castleville. New York real estate firm CORE is now accepting Bitcoin payments for broker’s fees, and companies like Reddit and Virgin Galactic are also giving bitcoins a go.

But the biggest nod to the viability of this still-volatile currency is Overstock.com’s adoption of bitcoin. The company’s chairman and CEO, Patrick M. Bryne, claims he is doing it for both “business and philosophical reasons.” The business reasons? Overstock sees a larger market share value in appealing to the Bitcoin holders who currently have limited options: a way to foster customer loyalty and grow the overall market. That, and credit card transactions cost roughly 2 percent, as is the company’s net margin. Bringing in bitcoin brings more profitable sales. Philosophically, Bryne believes a limited government is a better business model for the nation.

Still, skeptics (obviously) abound. David Yermack of New York University’s Stern School of Business argues that the value of Bitcoin is too unstable to maintain any sort of significant presence in modern banking and commerce. The dollar price has quadrupled, then halved, and then increased by about half. He says that the swinging cryptocurrency holds only one of the three basic attributes of currency: Bitcoin may have a medium of exchange, but lacks both a unit of account and a store of value, which is a glaring difference between bitcoins and gold. Or as this guy from The Wall Street Journal says, “with gold you can make a watch.”

Still have lurking questions, like what happens to lost wallets or how is this legal? The FAQ Page on bitcoin.org will answer pretty much every question.