Bitcoin is a New Form of Money
If you’re reading this I expect you’re aware of all the excitement surrounding Bitcoin. Of course it’s a new form of money, and that’s quite interesting. However I could issue my own money in paper form, and I suspect no-one would use it or accept it and certainly no-one would get excited.
Bitcoin is an Unusual Payment Computer System
The real reason for the excitement is that Bitcoin isn’t just the money, it’s also a payment computer system for the money.
This computer system has some very unusual properties. The properties are what I described under ‘Basics’ in the previous article: Bitcoin is public, anonymous, trustless and decentralized. The payment system has got these properties by some clever technical wizardry as we shall see below. Personally I’d never seen a computer system like this before Bitcoin, and I’ve been working with distributed systems for most of quite a long career.
Bitcoin Has No-One Running It or Resolving Disputes
In practical terms the properties mean that there’s no one trusted corporation or government or bank or court that runs Bitcoin or that we refer to to resolve disputes. There’s not even anyone who can change the way it works easily. The system operates globally, it has its own rules, everyone is incentivized to abide by the rules, and it just works.
So the Bitcoin creators did something complicated and technical and created money that does away with any form of central authority. At a very high level they created a way for competing human beings to cooperate via a set of rules coded in a computer system, rather than needing traditional laws and courts.
Creating money that doesn’t need governments is quite impressive. However, it’s also possible to extend the technology behind Bitcoin, usually called ‘the blockchain’, to other problems. Almost any place that human beings cooperate could theoretically be managed by one of these trustless computer systems.
A discussion of this is a little beyond the scope of this series of articles. I will however revisit it briefly in a later article.
Can Bitcoin Change the World?
You can perhaps now see why people, particularly computer geeks, have got excited about this.
Maybe we can build clever computer systems that get rid of traditional corporations, or even governments? Maybe this technology really can radically change the world? This is all a bit of a stretch, but people are genuinely thinking about it.
Why Does Bitcoin Have Any Value?
When I started looking at Bitcoin I have to say that one of the things that really confused me was how Bitcoin had any value at all. Related to that I couldn’t understand why anyone would buy or sell it, or why anyone would process the payments. As we shall see the payment processors are paid in Bitcoin.
That seems a stupid concern now it’s possible to trade one Bitcoin for thousands of US dollars.
Even at the start Bitcoin had some utility of course. As already mentioned it allows untraceable electronic payments, which are useful for criminals. It also has the promise of allowing payments all over the world with one type of money. However this is something of an illusion at the moment because there aren’t that many regular shops anywhere that will accept it, or employers who will pay you in it. You’re going to have to convert regular money to get some, or convert it back to use it for many things.
Ultimately the answer is that, as with real money, Bitcoin has value because enough people accept that it does. Bitcoin has some limited utility now and plenty of people believe that it will be very useful in the future.