Bitcoin

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Bitcoin is a decentralized electronic currency system that is utilized through peer-to-peer networking. The network uses electronic signatures and other cryptographic proofs in order to conduct trades. Bitcoin has no centralized bank to make more bitcoin, so inflation and other devaluing of the currency would seemingly not be plausible. However the exchange rate between bitcoin and conventional currencies have fluctuated a large amount due to the amount of bitcoin held by speculators and a fear of government regulation and the lack of liquidity in the market for exchanging bitcoin for various conventional currency.

The bitcoin system was defined in a 2008 paper and then implemented in a set of open-source software issued in 2009. All bitcoin transfers are recorded in a public ledger that uses cryptography to insure its autheticity and to prevent tampering. This ledger will grow very long as more bitcoin transactions occur, so the ledger is divided into block with the blocks linked together to form a block-chain. A large number of mathematical calculations are needed to maintain the block chain, so the bitcoin protocol provides a financial payment (in bitcoin) to the people who update the block-chain. The process of updating the block-chain in exchange for a set amount of bitcoin is called "bitcoin mining."

As with cash transactions, a bitcoin transaction is final and irrevocable. Although bitcoin transactions are linked to specific accounts, those accounts do not have to be identified with the real names of their owners. So, bitcoin provides its users with more privacy than comes with using credit cards or electronic bank transfers. In addition, the transaction costs for bitcoin transfers is much lower than the typical transaction cost of credit card purchases.

Uses

Bitcoin is heavily supported by libertarians as an alternative form of currency against the U.S. Dollar, which, after President Nixon's executive order essentially eliminating the gold standard in 1971, has become less valuable and has less trust put into it. There are several bitcoin exchanges on the internet, which one could use to exchange currency or something else of value (i.e. gold or silver) and receive Bitcoins, or by letting one's computer's resources be used by a Bitcoin network, and receiving an amount of Bitcoins for that service (essentially "mining" Bitcoin). Several online stores currently accept Bitcoin, and even some real-life outlets accept the currency, such as an Italian restaurant in New York City.

Bitcoin has also been used to conduct criminal activity by people seeking to evade the monitoring of large all-cash transactions. One academic study found that in 2012, 4.5% to 9% of all transactions of all bitcoin exchanges in the world were for drug trades on the drug market, Silk Road.[1] After the FBI raided Silk Road, the price of bitcoin fell dramatically.

Seth Meyers noted on his Late Night program, "Wikipedia is now accepting donations using the online currency Bitcoin. So now you can support information you're not sure is true with currency you're not sure is money."[2]

References

  1. Christin, Nicolas. "Traveling the Silk Road: A Measurement Analysis of a Large Anonymous Online Marketplace", Carnegie Mellon INI/CyLab, pp. 8. Retrieved on August 25, 2014. 
  2. http://www.thespec.com/living-story/4733681-tuesdayfile/ Retrieved August 8, 2014

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