You may remember me writing about it a few months ago, about the feds shutting down an online black market — Silk Road. Those who did business on the site bought their drugs and weapons through BitCoin.
BitCoin is a decentralized online currency that has been getting a lot of attention recently, mostly because of its rise in value. Invented in 2009, one BitCoin used to be worth a few cents. Around this time last year it was worth under $100. It peaked off around $1200 this past holiday season and is now about $900.
Another reason for the extra buzz is because of the arrest of Charlie Shrem, CEO of BitInstant BitCoin exchange, and Robert Faiella, an underground exchanger of BitCoin. These two have been charged with laundering money for those involved in Silk Road.
Because of this, BitCoin has acquired a shady reputation, despite many small businesses have recently been championing it as an alternative form of payment.
So what makes it different from traditional online banking — say PayPal or MasterCard? Many things. First off, there is no central ledger being housed in some air conditioned server farm someplace. The ledger of every single BitCoin transaction ever made is kept for public view in the network of BitCoin users. In fact, that is how presence of funds is verified (through a long daisy chain of verification, one transaction at a time, leading to the first BitCoin transaction ever).
The chain is made up of blocks, and these blocks are encrypted mathematical algorithms that are randomly generated by arbitrary users in the network. For every block that is ‘solved’, that user is rewarded with some BitCoin. This process is called mining BitCoin, and this is how new BitCoins are generated.
Of course, there are millions of users across the world using this technology. So the likelihood of actually mining coin is pretty slim.
BitCoin is also a liquid asset, like gold or cash. Once you spend it, it’s left your hands. There’s no 1-800 number you can call to report fraud, if such a situation occurs. Also, because it is like cash, BitCoin is nearly impossible to track. Of course, this is a double edged sword.
Also, BitCoin is very volatile. Within this past week, the worth of a single BitCoin has been undulating within a range of $120. This volatility makes it a horrible long term investment, at least for now.
Of course, so much has changed within the past few months, it’s hard to know for certain what’s in this new technology’s future. It’s inevitable that it will see regulation one day.
So, until then, have fun using it to do really really really ridiculously illegal things! Or not.