Bitcoins

All that news about the rupee crashing, the West printing money to bailout/restart their economies and the Euro in trouble due to its being the child of an economic but not political union makes you realize how easily your cash loses value because of incompetent or populist government policies. Not trusting the government is why the Internet came up with this virtual currency called the bitcoin. Yup, that’s currency as in the dollar, pound or rupee. Difference is that it was created by the Internet, not a nation.

And guess what? It is accepted at many stores world over; and also traded by individuals. Some even use it to buy properties! Of course, such high value trades are a minority, but it gives you an idea that the currency isn’t anywhere as obscure as you might have thought at first. Also, bitcoin accounts can’t be frozen by some government authority. Which, of course, is a double-edged sword.

So how do you get bitcoins? First you install the wallet software on your computer or smartphone. Then you can fill the wallet with bitcoins by using your bank account, credit card or other “regular” forms of payment.

Now if you can buy a currency using another currency, it implies there must be an associated exchange rate. And that exchange rate fluctuation is why bitcoins were in the financial news in recent times. In 2010, a unit of 1 bitcoin was worth a few cents, by mid-2011 it rose to around $30, then crashed to $2 by the end of 2011, skyrocketed to $260 in early 2013, and fell just below $100. Small fortunes were made and lost during these roller coaster rides.

But who creates bitcoins in the first place? And who decides when to create more of them? Well, there is no central authority. Instead, each user can choose to run a particular number crunching application on his system; and the one who does the most “work” is rewarded with newly “issued” bitcoins. The amount of work to be done varies: the network adjusts the workload to generate bitcoins at a steady, predetermined rate.

So couldn’t people create fake bitcoins? Nope, because they are verified by a digital signature. And the algorithm for verification is open source; so people (or at least programmers) can check for themselves that it can’t be hacked.

The downsides? Nobody has a backup of anyone’s bitcoins. The onus is on the owner to keep a copy to avoid loss if his hard disk crashes. Also, since it is not regulated, it can be used to pay for illegal things too…with no paper trail.

In case you’re wondering how people can trust such a decentralized currency, these lines from HowStuffWorks.com might answer your question:

“All currencies have value only because people believe that they have value.”