What Exactly Is A Bitcoin? – Live Wire

[Lite Beer]

Phuket Tech: What exactly is a Bitcoin? – Live Wire
Phuket Gazette -

In the past couple of weeks, three of my friends in Phuket – all of whom are reasonably savvy with their investments – have asked me about Bitcoin. There’s a lot of misinformation floating around, so I figured it’d be worthwhile to bring you all up to speed on the topic.

I’ll get into the technical details momentarily, but the main things you need to know about Bitcoin are: although Bitcoins are completely electronic, they’re more than a little bit like cash; Bitcoin transactions are completely untraceable to individuals; and the value of a Bitcoin is set by the open market, not by any government.

If that sounds like a truly remarkable development, it is. A hundred years ago you could take a Maria Theresa Dollar or Pound Sterling – silver coins of known quality and easily measured weight – to the far corners of the earth and receive fair exchange.

Now, we have paper currencies backed by the "full faith and credit" of the issuing nation, with values that frequently fluctuate day-to-day, influenced not only by open trade, but also by governmental intervention. And if you want to transfer more than a little bit of money, it takes a wheelbarrow or a bank account, and an intermediary bank or two or three, with all the ensuing paper trails.

Not so with Bitcoin. By employing some cryptographic magic and extreme redundancy, there’s no central bank for Bitcoins, no list of Bitcoin holders, nothing that can trace a person to a specific transaction. If that sounds like an ideal setup for money launderers, drug dealers, or fugitive ex-Prime Ministers, well, you’re on your way to understanding the brilliance of Bitcoins.

Back in the day (four years ago), Bitcoins came to prominence as the preferred way of transferring money on a web site called Silk Road – and the majority of financial transactions on Silk Road involved drugs. But the future of Bitcoins now seems to be considerably less sordid.

Why all the interest in Bitcoins, all of a sudden? Consider that the value of one, single Bitcoin, grew from US$5 at the beginning of 2012 to about $13 at the end of 2012. Since then, in just three months, the value of a single Bitcoin has skyrocketed to more than $150. While there are many reasons for the increase, Bitcoin saw its largest boosts around the time the banking crisis in Cyprus hit the newspapers. Many people speculate that Europeans who are afraid of getting Cypriot-style "haircuts" on their bank accounts are more willing to bet on non-traditional vehicles for saving money.

The ones who jumped to Bitcoins early this year have been rewarded with a 10-fold increase in the value of their bets. Er, purchases.

At its heart, a Bitcoin is a number, not unlike a serial number on a banknote. In order to use the Bitcoin, you have to log in to a program – either a program that runs on your computer, called a wallet, or an online service – with your account number and password. To transfer money, you tell the program or online service which account you want to transfer the Bitcoins to, and how much. In some respects it’s like a normal online bank transfer, but in other respects it’s completely different.

The biggest difference? Bitcoin doesn’t have any central clearing house – there’s no big bank looming in the background. Nobody has a list of account numbers and owners. There is, however, an ongoing list of transfers: which accounts transferred how much to which other accounts. That list of transfers is stored in hundreds of different locations, by hundreds of different computers.

The technical details of how the transfers are implemented – how "ownership" of a Bitcoin gets transferred, and how people are prevented from transferring the same Bitcoin twice – involves public key cryptography and some very fancy computing techniques, but the bottom line is that it’s entirely anonymous.

No central lists of account numbers.

Also, no email addresses. The only username and password you need are to access your own Bitcoins – the Bitcoin network doesn’t keep track of them.

There’s a time delay on the transactions. Typically it takes 10 minutes for Bitcoin transfers to take effect. The reasons are complex, but they’re associated with tracking down "double spends" – people who try to spend the same Bitcoin twice, either intentionally or inadvertently. Since there’s no central repository of accounts and balances, the delay is basically the price you pay for having a whole bunch of computers simultaneously verifying the transactions. If you’re accustomed to bank wire transfers taking an hour, or a day or a week, to complete, ten minutes doesn’t seem like much of a penalty. And the Bitcoin verification runs 24 hours a day, 7 days a week, on hundreds of computers.

When you ask somebody to send you money, you have to give them a public key (somewhat analogous to an "account number"). The Bitcoin software actually encourages you to generate a new account number for each transaction.

So if you get money from one person, and send some of the received money to another person, new "account numbers" in each direction make it basically impossible to trace where the money came from or went to.

The system’s entirely open. If you want, you can see the transactions going by in real time: just go to blockchain.info.

If you want to keep your Bitcoin transactions private, there are two vulnerable points: the point where you buy Bitcoins using some other currency, and the point where you sell them. If you just use Bitcoins to pay for your purchases (one person recently sold his house with Bitcoins; another sold a Porsche), there’s no traceable record.

Every law enforcement agency on earth recognizes the threat that the Bitcoin system entails. They’re leaning hard – sometimes with sanctions, sometimes with legislation – on the Bitcoin clearing houses to provide information about transactions. The largest Bitcoin clearing house, a Japanese firm called Mt Gox, warns that if you try to access your account using the Tor network or public proxy servers (two common means of disguising your location), they may suspend your account and force you to submit Anti-Money-Laundering documents.

The first widely recognized Bitcoin transaction involved two pizzas, for which the buyer paid 10,000 Bitcoins. Right now there are approximately 11 million Bitcoins in circulation, with an approximate value of $1.6 billion, in circulation. Oops, I just checked preev.com. The value of a Bitcoin just went over $160, so there’s almost $1.8 billion in circulation.

Bitcoins have a fascinating history. The originator(s) of the concept, who went by the handle "Satoshi Nakamoto," has never been identified. I say "went" because he appeared out of the blue in 2008, published a few papers, never made a public
appearance, and stopped answering emails in December 2010 – although I found one post purporting to be from him, dated April 2011. If you know the story of Laozi and the Tao Te Ching, you know Nakamoto’s story. The importance of Bitcoins (as in the Tao Te Ching, for that matter) isn’t in the person(s) who created it. The creation itself holds the answers to many pressing problems.

There’s a mechanism in place for generating new Bitcoins: the computers that keep track of the transactions are basically rewarded, very slowly, by being granted new Bitcoins. By the year 2140 there will be about 21 million Bitcoins in circulation – and that’s it, there won’t be any more new ones. If you want to learn more about Bitcoins, take a look at the Bitcoin FAQ (bitcoin.org/en/how-it-works).

Bitcoins have a tumultuous history, as of late. A software problem last month caused many people to lose confidence in the project, and the value of the Bitcoin dropped 27%. Just last week there was a sustained attack on the Mt Gox website, apparently in another attempt to undermine confidence in the concept. An online Bitcoin wallet service called Instawallet was hacked, with an undisclosed amount of Bitcoins stolen.

Rumors are flying that organized crime elements are trying to knock down the price of Bitcoins, so the bad guys can pick them up.

Here’s the question everyone asks me: "Would you buy Bitcoins right now?" My answer is a resounding "Hell no." It’s a great concept – appealing on many levels – but the recent spate of attention and run-up of price gives me nosebleeds. You may be able to make enough to retire off of Bitcoins in the next year. Or you may lose 90% of your gamble . . . er, investment. It would take a stronger stomach than mine to ride this one out.

Source: http://www.phuketgazette.net/phuket_news/2013/Phuket-Tech-What-exactly-is-a-Bitcoin-Live-Wire-20804.html

-- Phuket Gazette 2013-04-17

[davejones]

The only people who buy them are speculators that are hoping to get rich. I can't see how it would ever work as a real currency, as it's way too volatile.

I also disagree with your analysis that Europeans would prefer to put their money in bitcoins rather than European banks. They may get a haircut with Euro banks, but they could get a skinhead cut with bitcoins. I think you probably read this is the press and believed it. In fact, it was just speculators hyping up the price so that they could sell at a huge profit. Their plan worked perfectly.

[pault17]

Thank you very much for this information.

[belg]

bitcon...the next bubble ...

people are greedy and they are counting on this... what "internet" currency is suddenly worth 10x - 100x worth

not a bubble ?

good luck

[ukrules]

I 'invested' $10k and made $50k profit out of Bitcoin this year. I sold all my bitoins into the market for $60k.

There was a market crash and things have been very volatile recently, I'm out of it for now until things settle down a bit.

[OxfordWill]

The only people who buy them are speculators that are hoping to get rich. I can't see how it would ever work as a real currency, as it's way too volatile.

I also disagree with your analysis that Europeans would prefer to put their money in bitcoins rather than European banks. They may get a haircut with Euro banks, but they could get a skinhead cut with bitcoins. I think you probably read this is the press and believed it. In fact, it was just speculators hyping up the price so that they could sell at a huge profit. Their plan worked perfectly.

Wrong. Real brick and mortar businesses trade using bitcoins.

bitcon...the next bubble ...

people are greedy and they are counting on this... what "internet" currency is suddenly worth 10x - 100x worth

not a bubble ?

good luck

Are you suggesting any form of currency that bubbles should be ignored? No, of course you're not.

Bottom line is, bitcoins make a lot of people uncomfortable, in the same way computers make a lot of people feel uncomfortable. This says nothing for or against their utility.

[Dap]

Absolutely well laid out. Thank you very much for the comprehensive explanation.

[Shiver]

There's a lot of things that confuse people about bitcoin. It's such a different way of thinking to what we've all been brought up with, and for the moment it's not so easy to get hold of some unless you do at least a 1/2 day study getting your head around it. The recent bubble is not the first, and doubtful will be the last. It needs a smooth transition into being a market large enough for popular adoption as a payment exchange protocol, but not loads of hype so everyone jumps on, sends it parabolic with the inevitable consequences.

If you have a bitcoin 'wallet' which is much like the wallet in your back pocket, and inside it you have 1 or many addresses (I like to use one address per transaction, then I can label them and reference what order it refers to or who I sent some to via my phone to a friend I've just had lunch and a beer (with if one of us don't have baht on us), as it saves a trip to the ATM. I protect my 'wallet' with multiple encryption methods and store a copy of it in several places, because every individual is their own bank, truly peer to peer.

What I see as unfortunate is that there are a number of online sites offering to take care of your wallet for you, which makes for a potential hack target, which will generate bad press and cause more downward pressure when the media get all over it and sensationalise it.

What I really like about it, is that it cuts out PayPal, Visa, Mastercard, the banks behind those, the central banks, government manipulation of the currency (well they could, but it would only make it stronger).

If you don't want to be a bitcoin speculator, but want to purchase something on the internet (can't see it getting that popular on the highstreet any more than PayPal is), then you could put say $100 in an exchange, and leave it there in USD (or many other currencies), and if bitcoin goes up or down it doesn't matter because your money is parked in a segregated account denominated in USD. So you find a site in a country that is not on the PayPal listed acceptable countries and there's a product you want, and they accept Bitcoin (because their government have put restrictions on their fiat money practices), then you buy an Item at $10, which would buy $10 of bitcoin, send it to the merchant, and the merchant can immediately change it back into USD, for a very very small fee, so you're not exposed to the market at all and don't give a damn about what it's value is compared to some other currency. If bitcoin crashes to the equivalent of 1 cent, or soars above the price of gold, it wouldn't affect you at all, because your faith is in the USD.

With the size of the market currently, and the media attention, the volatility went wild. I'm expecting another bubble to come along and more media frenzy (this is the second one I've lived through in the last 2 years).

I don't think ultimately Bitcoin will be the winner in the digital government free currency race, and hopefully there'll be some competing ones reach maturity also, and I don't see it as a threat to fiat (fiat it is it's own threat), but the idea of P2P + Value transfer I think will be here as long as there is an internet.

Maybe a bit of silver here, gold there, rice and water, a vegetable garden, and a small stake in Bitcoin (a couple of % of spare cash) won't make you the richest person in the world any time soon, but will provide some stability.

Edited April 18, 2013 by Shiver

[Amras]

Bitcoins have been fluctuating a lot lately.........massively. There was a time where they may have been out of the central banking system, but me thinks that they are trying to get their hands into it now and control it...just things I've heard.

[how241]

Absolutely well laid out. Thank you very much for the comprehensive explanation.

+1

[nahkit]

Can someone explain this part of Bitcoin to me please?

Lets suppose I got in early, when the Bitcoin was worth $10. I bought ten of them so it cost me $100.

The Bitcoin is now worth $160 and I decide to sell my 10 Bitcoins, so I get $1600.

Now I gave only gave them $100 so where do they get the other $1,500 from ($1,600 - $100) to pay me my money?

Edited April 18, 2013 by nahkit

[Shiver]

Can someone explain this part of Bitcoin to me please?

Lets suppose I got in early, when the Bitcoin was worth $10. I bought ten of them so it cost me $100.

The Bitcoin is now worth $160 and I decide to sell my 10 Bitcoins, so I get $1600.

Now I gave only gave them $100 so where do they get the other $1,500 from ($1,600 - $100) to pay me my money?

Rephrase the question:

Lets suppose I got in early, when the Microsoft was worth $10. I bought ten of them so it cost me $100.

The Microsoft is now worth $160 and I decide to sell my 10 Microsoft, so I get $1600.

Now I gave only gave them $100 so where do they get the other $1,500 from ($1,600 - $100) to pay me my money?

[dave111223]

Can someone explain this part of Bitcoin to me please?

Lets suppose I got in early, when the Bitcoin was worth $10. I bought ten of them so it cost me $100.

The Bitcoin is now worth $160 and I decide to sell my 10 Bitcoins, so I get $1600.

Now I gave only gave them $100 so where do they get the other $1,500 from ($1,600 - $100) to pay me my money?

Your question doesn't really make sense as your not buying/selling them to some mysterious "they" who just holds your cash while you hold their bitcoins.

You bought bitcoins from a real person, who took your real $100 and gave you 10 Bitcoins.

You later sold bitcoins to different real person, who gave you real $1600 for your 10 Bitcoins.

These 2 transactions are unrelated.

Edited April 18, 2013 by dave111223

[adam1]

Thanks for the informative post

[IsaanUSA]

Nothing in this whole thread about bitcoin mining. Can somebody explain what bitcoin mining is? I have seen some impressive racks of hardware and people claim to be making hundreds of dollars per month mining bitcoins.

[Halfaboy]

The first step is still not clear to me.

Can I go with 100$ to a bank and tell the cashier to change this to X bitcoins ?

Also not getting a single ‘bank statement’ makes it a bit weird for me. If I understand it correctly you may have a number of balances on various ‘user-id’s.

[Emeritus]

Nothing in this whole thread about bitcoin mining. Can somebody explain what bitcoin mining is? I have seen some impressive racks of hardware and people claim to be making hundreds of dollars per month mining bitcoins.

You mine a bitcoin by using a computer or many computers to solve a difficult problem:

http://www.businessinsider.com/how-to-mine-bitcoins-2013-3?op=1

I suspect that the mining pools mentioned in the above linked article use trojans or other malware to highjack the computers of unsuspecting people to help them mine bitcoins:

http://www.net-security.org/malware_news.php?id=2459

Another method mentioned in the first link in this post is to include a particular script on a web page and every time somebody goes to that page his computer is helping you to mine bitcoins. This works especially well of course if your web page is a porn site, a gambling site, a popular blog or forum. For all you know, while you are reading this your computer is helping someone mine a bitcoin.

Happy mining!

[Buckaroo]

Nothing in this whole thread about bitcoin mining. Can somebody explain what bitcoin mining is? I have seen some impressive racks of hardware and people claim to be making hundreds of dollars per month mining bitcoins.

You mine a bitcoin by using a computer or many computers to solve a difficult problem:

http://www.businessinsider.com/how-to-mine-bitcoins-2013-3?op=1

I suspect that the mining pools mentioned in the above linked article use trojans or other malware to highjack the computers of unsuspecting people to help them mine bitcoins:

http://www.net-security.org/malware_news.php?id=2459

Another method mentioned in the first link in this post is to include a particular script on a web page and every time somebody goes to that page his computer is helping you to mine bitcoins. This works especially well of course if your web page is a porn site, a gambling site, a popular blog or forum. For all you know, while you are reading this your computer is helping someone mine a bitcoin.

Happy mining!

Why would the mining pools mentioned in that article be loaded with malware, the pools mentioned have been going for a very long time, this would not be the case if they were malicious. A site that runs the script you mention for bitmining only does so whilst that page open, to me this is just a form of funding the website.

I am interested to know why you think that one kind of website, xxx, gambling, blog or forum would work any better than say if it were a news site or video streaming site?

[Joe Mamma]

Heard the govt's are planning a way to sabotage the bitcoin by reflecting solar flares at bitcoin terminals.

[Shiver]

The first step is still not clear to me.

Can I go with 100$ to a bank and tell the cashier to change this to X bitcoins ?

Also not getting a single ‘bank statement’ makes it a bit weird for me. If I understand it correctly you may have a number of balances on various ‘user-id’s.

The first step is to go out and research (eg. bitcoin.org) and with various other sites, youtube vids etc you can work out how to change money into BTC. There are at least 700,000 physical locations in USA where you can send physical cash in person. There are websites that tell you how to do it in UK too, other countries I'm not so sure as I don't speak the language. I do know there are at least 3 people in BKK who will face to face change Baht for BTC. I've often thought I should make a T-shirt saying "I trade BTC" with a QR code on my T-shirt, but 99% of people wouldn't understand what it meant.

As for Bank statement, you have x coins and that's it. How you manage your transactions is up to you, because a transaction would look like a group of characters 'xoijoijOJOIjoijOJOjjqawqwe' or something, so in your own wallet app you might like to write something next to each of those "Paid Bob 0,0000238 BTC for Lunch at the Red Lion Pub"

Mining is pretty much yesterdays game unless you're prepared to invest in a lot of hardware to mine coins. At the outset it was worth having your computer work to mine coins to create the initial base of parties to verify the transactions, but these days would take a lot of dedicated hardware to make an impact. The idea is that mining provided incentive to create coins to take a stake in the system. It's 4 years old now, so those that take part are there to earn money from confirming transactions as much as anything. For example, if you had a free application on your smartphone that 'mined' all night while it was being charged, you might make enough coin that you gained say 10 baht credit on your phone (if ignoring the cost of electricity to charge your phone), and a decent smartphone might contribute 10 G/hash to the network, and if you didn't want coin you could convert it to DTAC/12CALL credit at something like www.bahtcoin.com (at commercial conversion rates of course), That would be a tiny tiny contribution to the network, but with the distribution of contributors (what are smart phones these days, 30-40% of new phone sales?) with a billion old phones around the planet confirming trades, and you getting paid for confirming those trades, the ability of someone to target a single node in the network would be infinitesimally small, secure the network, and make your own transactions virtually free, and maybe a little bit of profit too, maybe,...but certainly stops you paying Western Union 7% or whatever they charge.

Mining coins, there's about 11,000,000 of them already, so already >50% of all coins that will ever exist have already been made, with the final coin theoretically being made by about the year 2140. This same activity of mining for coins is a bit like a lottery, but in that same block chain you would be processing transactions for other people, and getting small rewards for confirming that transactions are valid and not 'double spend' as they call it, ensuring the integrity of the network by participating, so you can still make a nickel or two here and there by being part of the collective, but the days of the gold rush are well gone, long before it ever hit the media in any meaningful way. People who took the risk (both financial and sweat) got some of the rewards.

That said, if you'd bought 100 coins last week at the worst (a little over $50) and sold them now (as of time of writing >$100 each), then you could have doubled your money, but that's speculation and more a day traders job. There seems to be a small upward bias right now (this can change in minutes/hours and is not advice), and if you were looking to get in, you could buy 10 coins now for eg. say $100, then later, if you think the market is over bought, and wait for it to drop to $90, sell and make 10%. This could happen in the space of 1 day, as internet time is very compressed compared to a week in politics or waiting for gold. Right now it looks to me that the markets aren't being manipulated as they're not big enough to attract interest of the big boys, but this could change. There are already bots trading the price (a couple of hundred that I could detect - and I'm not expert - just invested - albeit I got my investment out long ago and am on a free gamble).

If you believe Elliot wave or other theories, there could be a bounce to a good proportion of the last peak, then it could crumble to lower than the previous low. If that happens, then I think we'll have to wait several months or perhaps more than a year to see where it's going after that. It's too young yet to be putting serious money into it, but an interesting experiment just the same. If you really wanted to get into it then look at the daily volatility range and put some petty money in near the lows and if you get a fill then look to sell near the daily highs. If it works then you can repeat, but please don't put your life savings into it - it's nowhere near large enough to be regarded as a stable investment yet, any more than penny stocks.

Edited April 19, 2013 by Shiver

[BlackPuddingBertha]

Can someone explain this part of Bitcoin to me please?

Lets suppose I got in early, when the Bitcoin was worth $10. I bought ten of them so it cost me $100.

The Bitcoin is now worth $160 and I decide to sell my 10 Bitcoins, so I get $1600.

Now I gave only gave them $100 so where do they get the other $1,500 from ($1,600 - $100) to pay me my money?

Congratulations. You just found the bubble.

[BlackPuddingBertha]

If you don't want to be a bitcoin speculator, but want to purchase something on the internet (can't see it getting that popular on the highstreet any more than PayPal is), then you could put say $100 in an exchange, and leave it there in USD (or many other currencies), and if bitcoin goes up or down it doesn't matter because your money is parked in a segregated account denominated in USD.

And who guarantees that money against fraud, the collapse of the exchange or general digital incompetence?

[Shiver]

If you don't want to be a bitcoin speculator, but want to purchase something on the internet (can't see it getting that popular on the highstreet any more than PayPal is), then you could put say $100 in an exchange, and leave it there in USD (or many other currencies), and if bitcoin goes up or down it doesn't matter because your money is parked in a segregated account denominated in USD.

And who guarantees that money against fraud, the collapse of the exchange or general digital incompetence?

You do. If you're going to play in the game you have to take responsibility for your actions.

[BlackPuddingBertha]

And who guarantees that money against fraud, the collapse of the exchange or general digital incompetence?

You do. If you're going to play in the game you have to take responsibility for your actions.

Hmm. Sod that for a laugh.

I'll stick with old-fashioned banks that pay interest, obey the law (more or less) and have government-backed deposit protection, thanks.

[jcnbkk]

Can someone explain this part of Bitcoin to me please?

Lets suppose I got in early, when the Bitcoin was worth $10. I bought ten of them so it cost me $100.

The Bitcoin is now worth $160 and I decide to sell my 10 Bitcoins, so I get $1600.

Now I gave only gave them $100 so where do they get the other $1,500 from ($1,600 - $100) to pay me my money?

Your question doesn't really make sense as your not buying/selling them to some mysterious "they" who just holds your cash while you hold their bitcoins.

You bought bitcoins from a real person, who took your real $100 and gave you 10 Bitcoins.

You later sold bitcoins to different real person, who gave you real $1600 for your 10 Bitcoins.

These 2 transactions are unrelated.

So my question is - what determines the "value" of a bitcoin?

In Real Estate the definition is: Market value - the estimated amount for which an asset or liability should exchange on the valuation date between a willing buyer and a willing seller in an arm's length transaction, after proper marketing and where the parties had each acted knowledgeably, prudently and without compulsion.^[2].

A post above also used the example of a stock. In either case there is an underlying asset: the physical property or the company. Same for any other investment. Even currencies, the USD for instance backed by "the full faith and credit of" the US government, are backed by something. The strength of each government determines value compared to the others.

So what is the "asset" behind the "value" of a bit coin? If nothing it sounds more like a ponzi scheme.

And they'll be "printing more"?

Sounds like a coin without a country..

[samran]

Heard the govt's are planning a way to sabotage the bitcoin by reflecting solar flares at bitcoin terminals.

Don't be silly. Governments don't do things like that.

The UN Black helicopters run by the Rand Corporation and he evil bankers will come and blow it up.

[samran]

So let me get this bitcoin thing straight. A bit coin is:

- a medium of payment which requires a computer to buy and sell

- it takes 10 minutes to facilitate a trade

- to 'earn' a bit coin (other than having to buy one) rather than getting one of a product of our own labours (ie something we are good at, whether you are a butcher, baker or offshore driller) you have to again log on and compete against some algorithm which some MIT PhD has scammed anyway.

- you have no broader reference point as to the value of the bit coin, whether it is the underlying functioning of the economy of the government - or in this case - the non government.

Yep, a speculation tool for nerds, the stupid, or the easily led.

[dave111223]

Can someone explain this part of Bitcoin to me please?

Lets suppose I got in early, when the Bitcoin was worth $10. I bought ten of them so it cost me $100.

The Bitcoin is now worth $160 and I decide to sell my 10 Bitcoins, so I get $1600.

Now I gave only gave them $100 so where do they get the other $1,500 from ($1,600 - $100) to pay me my money?

Your question doesn't really make sense as your not buying/selling them to some mysterious "they" who just holds your cash while you hold their bitcoins.

You bought bitcoins from a real person, who took your real $100 and gave you 10 Bitcoins.

You later sold bitcoins to different real person, who gave you real $1600 for your 10 Bitcoins.

These 2 transactions are unrelated.

So my question is - what determines the "value" of a bitcoin?

In Real Estate the definition is: Market value - the estimated amount for which an asset or liability should exchange on the valuation date between a willing buyer and a willing seller in an arm's length transaction, after proper marketing and where the parties had each acted knowledgeably, prudently and without compulsion.^[2].

A post above also used the example of a stock. In either case there is an underlying asset: the physical property or the company. Same for any other investment. Even currencies, the USD for instance backed by "the full faith and credit of" the US government, are backed by something. The strength of each government determines value compared to the others.

So what is the "asset" behind the "value" of a bit coin? If nothing it sounds more like a ponzi scheme.

And they'll be "printing more"?

Sounds like a coin without a country..

It is not backed by any physical asset. The value in bitcoins are determined purely as to what someone is willing to pay for a bitcoin. A "bitcoin" being a value written into a digital ledger distributed to everyone; in essence a digital and indisputable representation of the value that each person possesses.

Basically how much are you willing to pay to have a portion of the fixed value within that ledger allocated to you.

Not everything that has value is a physical asset or representation of a physical asset; for example ideas, concepts etc.. can have "value" but they have no asset associated with them.

At to their value: if i started selling bits of half chewed gum, and all of sudden people decide they were worth $100 each, then $1000. Then at that time the gum would be "worth" whatever those people are willing to pay.

So the more poignant question would be "Why do people think bitcoins are worth something; but my half chewed gum is worth nothing?"

For a number of reasons:

- I can keep chewing more gum in unlimited qualities forever; bitcoins have a fixed limit and cannot be created at will.

- My gum cannot be easily divided and it's debatable whether two halves of my gum will have the same value as one full piece of gum; two halves of a bitcoin will always be exactly equal to 1 bitcoin.

- My gum may deteriorate over time but bitcoins can never be destroyed

- Bitcoins can used to transfer value over any distance instant; my gum cannot do this.

On the plus side my chewed gum can be used to fill cracks in walls; bitcoins cannot be used for this, however people do not seem to value this attribute very highly.

If you are not able to understand this; it's tempting to simple label it as "scam"; when I think a more appreciate response would be "I don't understand it; so it's not for me"

Bitcoins are a new concept which could not have been possible before the existence of distributed computer networks (fairly recent human history). It may turn out that the concept contains some fundamental fatal flaw which has not been seen yet and may die and be limited to the history books. However that will not mean it was a "scam".

It certainly is a "coin without a country..", this is why people value it.

[dave111223]

So let me get this bitcoin thing straight. A bit coin is:

- a medium of payment which requires a computer to buy and sell

- it takes 10 minutes to facilitate a trade

- to 'earn' a bit coin (other than having to buy one) rather than getting one of a product of our own labours (ie something we are good at, whether you are a butcher, baker or offshore driller) you have to again log on and compete against some algorithm which some MIT PhD has scammed anyway.

- you have no broader reference point as to the value of the bit coin, whether it is the underlying functioning of the economy of the government - or in this case - the non government.

Yep, a speculation tool for nerds, the stupid, or the easily led.

Bitcoin transactions are instant, the 10 minutes you are referring to the time it takes to "confirm" transactions. Meaning that in day-to-day transactions with trusted parties you can consider your payment received right away. If you don't know the other party or the transaction is large then you would want to wait for several layers of confirmation (1 confirmation layer per 10 minutes).

To "earn" a bitcoin you do some work and get paid a bitcoin. To "earn" a dollar do you go to the mill create some rag-pulp, form it into paper, then go to the printing press and "earn" it? No.

What you are referring to is "mining", which is the process whereby new bitcoins are created are a fixed rate and distributed randomly to people running the software. Seeing as there is no centralized authority to print/distributor the money in the same way that fiat is distributed.

You are correct that there is no broader reference point to the value of bitcoins. Bitcoins are only worth whatever someone is willing to pay for bitcoin right this instant, however over time these spot values become a reference point themselves.

Edited April 19, 2013 by dave111223

[jmccarty]

I may have to get into the bitcoin manufacturing business. Looks like good money in it!