Bitcoin of the Realm

By Edward Cone  |  Posted Monday, August 01, 2011 17:08 PM

Coin Of The Digital Realm

by Tim Moran

Like many people in these days of electronic commerce, you probably have your paycheck digitally deposited into your bank account every week, or two weeks, or whenever you get paid. And those deposits come in dollars or yen or Euros or whatever currency you are compensated in.

I am going to bet, however, that you are not paid in Bitcoin.

Bitcoin is a "peer-to-peer currency. Peer-to-peer means that no central authority issues new money or tracks transactions. These tasks are managed collectively by the network." So says the FAQ on the Bitcoin.org site. (The concept is based on a paper by Satoshi Nakamoto, titled Bitcoin: A Peer-to-Peer Electronic Cash System, should you care to read it.)

The whole thing is rather mysterious to me, although, I must confess, I am among those who let the ATM balance my checkbook. As far as I can tell, it goes something like this: New coins are generated by a network node each time it finds the solution to a certain mathematical problem (i.e. creates a new block), which is difficult to perform and can demonstrate a proof of work. The reward for solving a block is automatically adjusted so that in the first four years of the Bitcoin network, 10,500,000 BTC will be created. The amount is halved every four years, so it will be 5,250,000 over years four to eight, 2,625,000 over years eight to 12 and so on. Thus the total number of coins will approach 21,000,000 BTC over time. Make sense? Not to me either, but they are estimating sometime around 2140 all possible Bitcoin will be produced. So don't worry--you have time to save up.

So what, if anything can you do with your BTC? Bitcoins have value because they are accepted as payment by many; there's even a list of Bitcoin-accepting sites. The idea, it seems, is for Bitcoin to become a "ubiquitous decentralized digital currency." Those who have, shall we say, bought into the Bitcoin idea early already have a large number of Bitcoin. Should the concept pan out, they took a risk that might one day pay off. The site explains, however, that "any Bitcoin generated will probably change hands dozens of time as a medium of exchange, so the profit made from the initial distribution will be insignificant compared to the total commerce enabled by Bitcoin."

I understand Bitcoin just about as much as I understand structured notes and derivatives. But if I can ever figure them out, I might be one of the early players, too, and by 2140 will have amassed a fortune. Look out, Trump.