Everything You Want to Know About Bitcoin, the Digital Currency Worth More Than the Dollar

80beatsBy Veronique GreenwoodJun 10, 2011 9:04 PM


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What's the News: The currency on the tech world's lips these days isn't the yen or the yuan. It's Bitcoin

, a digital form of money that's totally anonymous and currently valued at many times the worth of the dollar and the Euro. How does it work, what can you buy with it, and why is it making people mad? What's the Context:

  • The first thing to consider is that currency is just the physical manifestation of a promise. Money issued by governments has value because governments say it does, and its value fluctuates according to people's faith in the government. It used to be that money was worth something because of the agreed-upon value of its contents, like gold or silver, but modern currencies trade on trust rather than intrinsic value.

  • Digital currency can be made anonymous and independent of third parties like governments or banks. Its advocates, notably the hacker community, see this as a major benefit. It makes other people nervous, however, as it means that people can buy or sell illegal items without giving away their identities.

  • There have been various attempts to launch anonymous, secure digital currencies, but few have taken off like Bitcoin, which was developed [pdf] by a shadowy figure named (or pseudonymed, no one knows) Satoshi Nakamoto in 2008. Nakamoto released the Bitcoin software the next year, and since then, more than 6 million Bitcoins have been authenticated. Their worth currently exceeds $40 million.

How the Heck:

  • Currency has two important characteristics that can be hard to transfer in the digital realm: (1) it can only be spent once, and (2) the supply can't be infinite or particularly easy to obtain. The digital world is full of things that don't have either of these qualities---files can be emailed, copied, or downloaded as many times as desired. But if the same piece of money can be spent again and again, or if more can be obtained easily, it has no value.

  • The way Bitcoin deals with the first problem is asymmetric-key cryptography. When you download the Bitcoin software, you receive two keys, which allow you to transfer the coins securely to other parties in the system and receive them. Transactions are publicly announced, so everyone on the network knows that a given coin has been spent by the sender and will not accept it from them again.

  • Then, to generate new Bitcoins, users have set their computers to solve some difficult problems that help verify earlier transactions made with the currency, a kind of "I scratch your back, you scratch mine" system. When one finally solves it, he or she is issued Bitcoins, and the users shift their focus to the next batch of transactions. Getting them is not easy. And the number of Bitcoins issued per batch is getting smaller---once 21 million have been released, the supply will cease. (ArsTechnica provides a splendid technical description of the whole process.)

The Future Holds:

  • At the moment, the things you can buy with Bitcoins are a bit haphazard (firearms, alpaca socks, beef jerky). The selection of services tends to reflect the philosophical viewpoints behind such currency, as vendors who decide to accept them instead of government money generally have to believe that in the long run, Bitcoin will have more going for it than a government.

  • One Bitcoin-using vendor, Silk Road, an online market place of illegal drugs and various other goodies accessible only through the TOR anonymizing system, has attracted government wrath. According to US Senator Chuck Schumer, its anonymity makes it a way to launder money as well as sell or obtain significant amounts of drugs, and it must be shut down. However, the tech community has pointed out that Silk Road is probably not a large source of street drugs or launderer of money, at least at the moment. And how it could reasonably be shut down is another issue all together.

  • Beyond the question of accountability, there is the question of whether Bitcoin's sudden jump in value is real or ephemeral---in other words, if people will make a serious commitment to the currency or if we're seeing a Bitcoin bubble. Only time, really, will tell.

Image credit: Wikimedia Commons

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