|By Michael De Groote; Michael De Groote Deseret News|
"When I learned about Bitcoins I thought it was like electronic gold," he says.
Unlike dollars, which are backed by the U.S. government, or Euros, which are backed by the
After Bitcoins were invented in
As Bitcoins have become more prominent, they have attracted the attention of regulators who are worried about the currency being used for illicit transactions. Earlier this month, the
In March, the
In some ways Bitcoins are like using PayPal to buy something on the Internet. In other ways they are like airline frequent flyer miles. They are like bags of virtual cash. They are like using a credit card. The analogies fly when experts try to explain what Bitcoins are.
Bitcoin is like that, except it is a pure "fiat" money — its value comes entirely from what its users think it is worth.
McIntyre says there are several ways people are using Bitcoins.
First, he says, people are using them as a speculative financial instrument — like investing in British Pounds or the Euro. People buy them, hoping the value will go up.
He says another use is popular with the "tinfoil-hat-wearing,
Because Bitcoins do not identify their users, they are practically anonymous. A record of the transaction is kept, but who is paying that amount to who is hidden by the coins' encryption. This means, McIntyre says, Bitcoins are great for people who have privacy concerns.
This is the area that has governments concerned, since Bitcoins could be sent by terrorists or drug dealers. Forbes recently used Bitcoins to successfully purchase drugs online from the now defunct
McIntyre, however, sees the positive uses of a private currency. He says people in oppressive countries could use it to transfer money or hide it from the government.
But, in normal life, Bitcoins are not yet convenient to use, McIntyre says. Transferring Bitcoins can take about a day.
No central authority
The biggest problem Bitcoin backers had to solve was an issue that had long made virtual money virtually worthless: Virtual money is just too easy to copy, says Brito.
He says the difference between cash and virtual money is similar to the difference between a book and a Microsoft Word document. The book can only be given to one person. A Word document can be copied and sent to multiple people.
In the same way, a person could take a virtual amount of money and send it to multiple people.
Normally this sort of problem is solved by a third party. The third party — such as PayPal, Visa,
But central authorities are easy to influence, pressure and regulate by governments. For example, the controversial Wikileaks had its funds frozen by PayPal — stopping donations.
Bitcoins' creator, the mysterious "
Instead of a central authority creating and maintaining a ledger, Bitcoins' ledger, called a "block chain," could be maintained by anyone. To stop hackers, the records of transactions could only be added to the ledger after complex mathematical puzzles were solved by multiple users. The method makes it impossible for even a group of hackers to mess with the records.
As an incentive to get people to work on the ledger block chain, people can be rewarded with Bitcoins.
So multiple levels of encryption and mathematical puzzles and incentives and dividing responsibility take the place of a central authority and make Bitcoins secure.
"Paper money can be counterfeited," Brito says. "PayPal could be breached. … But with Bitcoins it is cryptographic in nature and to break into it you would have to break the code and it is not clear that that is possible with today's technology."
This isn't to say that individual Bitcoins couldn't be stolen. The money is kept in virtual wallets on computers, and if somebody hacks into it, they may be able to steal the key numbers that identify the money. And then, if it is taken, it is gone.
Brito contrasts this with payment systems with central authorities like credit cards or PayPal. "Basically they offer consumers insurance," he says. "With a credit card you can have your transaction reversed. There is fraud protection. With Bitcoin, it is final like cash."
Many people are buying up Bitcoins in hopes that its value climbs relative to the dollar. The more Bitcoins are used, the more legitimate they become, the more they could be worth. Right now, however, general use of the money is in the future — but here and there businesses are beginning to accept Bitcoins as payment.
Hurley says he recently was explaining Bitcoin to a friend.
"Are you crazy?" the friend told him. "Who will trust it? Who is Bitcoin? Who am I trusting?"
Hurley says that is like asking "Who is email?"
Hurley has invested about
Brito at Mercatus Center owns 3 Bitcoins.
"I think that it was good that right after we bought it that it went down," he says. "That is a good lesson for a kid. Not everything goes up. It is impossible to predict the direction of everything."
Wolan says he is not worried about the price right now because he is in for the long haul.
"My bet on Bitcoin is basically a bet on the idea," Wolan says. "I still believe in the idea. Now whether it will work is an empirical question I can't answer."
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