The Bitcoin Hype

Apparently video cards are a real life money tree that's got the locals clearing the shelves. They are likely following a wiki on what hardware to buy and what software to download to mine Bitcoin. I feel like I'm stuck between a real and virtual world, somewhere between actual coal mining and Farmville, when I'm talking about this. Frankly, all of this sounds and smells of some sort of get rich quick scheme centered around fighting with the cost of electricity to turn a profit. However, this is only a small part of what Bitcoin is all about.

I'm intrigued, and skeptical.

I've heard of Bitcoin and it's been in and out of the news for awhile now, but I really didn't know know what it is until now. As for others? Nobel Laureate in Economics, Robert Shiller says

that Bitcoin was a return to the dark ages because at present there is very little clarity surrounding the crypto currency.

Crypto currency you say? Who cares if you can buy something with it- how does it work? As it turns out, it's a solution to a computer science problem called the Byzantine Generals Problem.

We imagine that several divisions of the Byzantine army are camped outside an enemy city, each division commanded by its own general. The generals can communicate with one another only by messenger. After observing the enemy, they must decide upon a common plan of action. However, some of the generals may be traitors, trying to prevent the loyal generals from reaching agreement. The generals must have an algorithm to guarantee that

A. All loyal generals decide upon the same plan of action.

This is a pretty simple problem to understand, but a technical challenge when you get down into the nuts and bolts as explained by the creator of Bitcoin in his original paper. When it comes to something technical, to really understand it you have to start from the bottom up - something the majority of potential Bitcoin users will never have the option to do. It turns out, others have already started at the bottom for us. What an excellent rundown on Bitcoin. PKI (albeit convoluted as with typical implementations)- check. Distributed P2P network protocol- check. Some operational rules and some nifty features, both from a technical and user standpoint, that you don't get with existing currencies- check. It's basically a purely technical currency not managed by any state. This sort of explains the mining side of it. It's a way to give birth to a truly parent-less currency.We've got an interesting technical solution, that is well researched, and seems to be for the good of society. However, that doesn't rule out Bitcoin will cause the world to end. The Russian Central Bank has already warned against using Bitcoin. Bitcoin is disappearing left and right as it's used for illegal purposes and being vaporized by law enforcement all over the world.

In the US, the FBI shut down the Silk Road website which was offering illegal drugs for sale. Nearly $28.5 million was confiscated in the sting. In China, some bitcoin exchanges have disappeared overnight, and there are dozens of other stories of millions of lost bitcoins.

No backing central authority also means no guarantees or insurance for the time-being. Backup those private keys. Wait, Bitcoin users know what that is right?

As for the people spending money and electricity running pointless hashes to mine Bitcoin, a little research will show that going out and buying video cards is behind the curve. A market for custom ASIC hardware brings in rigs for the cost of a single video card which is also much better in terms of profit (basically computing power versus running cost). Or, maybe they are taking advantage of a vulnerability in mining and getting more than their fair share? In any event, even if they aren't doing it for profit it surely has learning potential.

So, Bitcoin is an interesting technical solution to a very real world use, while introducing some problems of its own. In any event, it's already disrupting how most people think of and use currency. It will be interesting to see how this plays out as it stabilizes and gains adoption. Oh yea, and how well it does against what will surely be a flooded market of crypto currencies. More importantly, what new uses will come of the technology behind Bitcoin?