Bitcoins: A paradigm-shift technology?

goggleyes · Mar 26, 2011

Bitcoin

Is a 2 year old open source project, a new form of money that runs on a peer-to-peer network such that there is no centralized control of the system. Think of bitcoin as like the bit-torrent of money. You can send a bitcoin to anyone with a bitcoin account just by entering their account number into the bitcoin client and pressing send. Bitcoins are 'backed' by the value placed in them by bitcoin users. Right now one bitcoin exchanges for just under a dollar.

The supply of bitcoin is fixed and distributed across the network by people running the 'mining' feature of their bitcoin software. Basically you set the software to solving 'blocks', solve a block and you get 50 bitcoins. As the network becomes more powerful, the difficulty of these 'blocks' increases, so that more processing power is required to solve a block. The 'difficulty' to solve blocks is adjusted by the network to ensure that 50 new bitcoins are 'mined' every 10 minutes across the entire network. Anyone can go out and start mining for bitcoins, just install the open source bitcoin software. As of writing this however the processing power required to solve a block means you should use a fairly decent graphics card (GPU) as these work in a much better way for solving blocks than CPU's do.

Don't think that it's all about mining though, the main way to get bitcoins is to sell something for them, a product or a service, afterall, that's what they are for. The work needed to mine bitcoin is not where the value comes from, the value of them comes from their use in trade. These days some people invest significant amounts of money in mining, buying high end GPU's and running computers nonstop... it means there's a certain 'floor' in the price level of bitcoin, the higher the 'difficulty' of blocks on the network, the more solid the floor for bitcoins becomes. Note however that I don't mean bitcoin is backed by trade just in terms of mining, I mean trade in terms of everything that people trade bitcoins for.

One day, decades from now (assuming the internet lasts that long) all 21 million coins will have been produced. Then the reward for contributing infrastructure will all be in minuscule but cumulative 'transaction fees'. As of this writing there are about 5 and a half million bitcoins in existence.

Although there will never be more than 21 million bitcoins, a bitcoin has 8 decimal places of granularity, so effectively there can be a lot more bitcoin units than 21 million. We'll have to see how large the bitcoin economy grows.

More info here:
http://www.bitcoin.org/

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All of which brings me to my questions, what does this mean for the Global Economy on the whole? For instance with bitcoin it would be quite easy to avoid paying tax, as a social democrat and law abiding citizen I don't think not paying tax is a good idea (although I also don't agree with blowing the tax money on bailing out private capital or bombing people who live in countries that have resources that business interests in my country would like to control).

Anyway bitcoin is really just a form of digital cash, and yes it is easy to avoid taxes if you keep your dealings in cash and off the books, so it's not really a new problem.

Anyway what do you guys think, if anything, about this technology?

By the way you can get some free bitcoins here if you'd like to see how they work:
http://freebitcoins.appspot.com/

But if you think the idea is silly, please just send them to me instead: 14MJBf8SaxgZXii873277QjAy7Gyeb8tNv
:smt004

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