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May 6, 2013

Are Bitcoins the Next Major Tech Breakthrough?

Posted by Rajashekara V. Maiya (View Profile | View All Posts) at 5:50 AM


What is Bitcoin? [Source: weusecoins http://www.youtube.com/watch?v=Um63OQz3bjo] 

Necessity is the mother of invention. Which is why I'm watching with great interest the growth in the popularity of the Bitcoin, a new digital currency.

Like much of what we deal with today - virtual friends on Facebook, virtual thank-you notes and party invitations on the Internet, and virtual construction projects via games like Sim City - the Bitcoin is a virtual currency. That is to say, these "coins" aren't stamped with a president's face and carried around in your pocket. It's an interesting concept. Long ago, it used to be that every paper dollar was backed up by a fixed amount of gold or silver in a depository like Fort Knox. So that even though the dollar was just a piece of paper with green ink on it, its value was pegged to a tangible, precious metal.

Today's currencies are based more on the confidence we have in the sovereign nation who issues its currency.But things can get complicated, especially in a slumping economy. Want to boost spending? Print more money.That way, the theory goes, more people will have more cash to buy things and stimulate the economy. Those on the other side of the argument point to the fact that the more paper money a government prints, the less each note is worth in relation to a precious metal.

Enter the Bitcoin. It's a currency that isn't under the control of the central bank of any government. Which means some bureaucrat sitting in some far-away office can't simply produce more of them because he thinks his nation should "loosen" its monetary policy. Think of the Bitcoin as a virtual gold bar.

But let's not get ahead or ourselves. Unlike gold or silver, which weigh a lot and are costly to store, a Bitcoin is a technological marvel in that it exists in cyberspace. They can be traded over fiber optic cables in nanoseconds and stored not in huge depositories like Fort Knox but rather on a secure hard drive. Also important is that there are a fixed number of them. A limited amount of anything can lead to speculation and profiteering.And because there's no central bank overseeing their production, who's to say that someone who develops an algorithm that can churn out more onto the market could wreak havoc? Other detractors would say that the weight and the difficulty and expense of gold and silver to store is what makes precious metals so much more desirable as a global currency. You can't create an algorithm that physically churns out tons of gold.

But let's assume for the moment that the Bitcoin is the first step in a longer journey towards the creation of a true virtual currency, widely accepted and safe to use. It would follow a classic adoption pattern seen with other technology breakthroughs including internet email. What was a terrific innovation and niche technology took decades to catch on in mainstream society. But now everyone uses it. It was free, reliable, and a lot faster than putting a stamp on a paper letter and waiting for a government postal service to deliver your message.

All breakthrough innovations can start off as niche curiosities with limited appeal. Twitter was dismissed as nothing but a cute toy to let people know what you had for breakfast that morning. Years later, in the Arab Spring, it was used to start a political revolution. The Bitcoin has nearly doubled in value over the past month and has attracted the attention of investors like the Winklevoss twins, two guys who know a thing or two about taking a niche innovation and applying it in a far-reaching way. In fact, the Bitcoin is not alone. Linden Dollars, QQ Coins and Facebook Credits are alternatives threatening to take away revenue opportunities from banks. Particularly Linden Dollars and QQ Coins - that are also traded in currency exchanges. In fact, when China believed the Yuan was threatened by QQ Coins, these were banned, only to be recalled when the ban backfired - bringing down the Yuan by double digits. To be sure, the Bitcoin might be setting up the next version of the tulip bulb, dot-com, or real estate bubble, destined to burst when the euphoria over the new technology subsides.

But remember one thing about exciting, new innovations that arise out of a dire necessity to do things better and more reliably: They usually end up succeeding.

Comments

Very well written. Bitcoins as a concept is complex to understand. This piece brings out the definition clearly.

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