If you haven’t heard of Bitcoin, don’t worry. You’re not alone. While it’s not likely to replace the cash at your local bank anytime soon, Bitcoin was developed as a potential alternative to traditional currencies like the dollar or euro. Instead of being tied to a fixed level, say by a central bank, Bitcoins (BTC) are assigned value by the free market. This is made possible because, unlike money, which is traditionally printed when it’s needed, the BTC is released in specific amounts on a certain schedule.
Then, in the same way that gold has to be mined to be used, a cryptographic puzzle has to be solved by a user, or actually a user’s computer, to “activate” the BTC. Only then can it actually be used and is its value assigned. The “mining” of BTC is reportedly getting more sophisticated. Nerds with money — and people with money who can buy the nerds — are buying up the processing power they need to obtain more BTC.
The financial benefits for Bitcoins are real. Bitcoins were originally worth only pennies in April of 2010, but by 2011 the exchange rate reached $29.57 for one Bitcoin. Some who invested in Bitcoins from the start become millionaires within a year. Plus, it’s completely transparent, yet completely secure — in theory anyway (there have been some hacks at the margins). It eliminates the need for banks and state backing, and the costs associated with them. Even its biggest problem, potential deflation, is a plus if never ending inflation freaks you out.
So, should we embrace or fear Bitcoins? What are the pros and cons of a “free market” currency? Can non-techies get in the Bitcoin game? Are you raking in the Bitcoins?
Matt DeBord, KPCC business reporter; writes the DeBord Report