Does Bitcoin Make Good Sense?

What is the hottest technology development of 2013? Most experts will point to the rise of bitcoin.

Bitcoin is on the rise as a digital currency used worldwide. It is a type of money controlled and stored entirely by computers spread across the Internet. More people and more businesses are starting to utilize it.

Unlike a plain US dollar or Euro, bitcoin is also a form of payment system sort of like Paypal or a credit card network.

You can hold on to it, spend it or trade it. It can be moved around cheaply and easily almost like sending an email.

Bitcoin allows you to create transactions without revealing your identity. Yet the system operates in plain public view.

Anyone can view these transactions which are recorded online. This transparency can drive a new trust in the economy. It even directed in the downfall of an illegal drug ring, discovered shuffling funds utilizing bitcoin and shut down by the US Government.

In many ways bitcoin is more than just a currency. It's a re-engineering of international finance. It can dissolve barriers between countries and frees currency from the control of federal governments. However it still relies on the US dollar for its value.

The technology behind this is interesting to say the least. Bitcoin is controlled by open source software. It operates according to the laws of mathematics, and by the people who collectively oversee this software. The software runs on thousands of machines worldwide, but it can be changed. Changes can only occur however when the major of those exceeding the software agree to it.

The bitcoin software system was built by computer programmers around five years ago and released onto the Internet. It was designed to run across a large network of machines called bitcoin miners. Anyone on earth could operate one of these machines.

This distributed software generated the new currency, creating a small number of bitcoins. Basically, bitcoins are just long digital addresses and balances, stored in an online ledger called the "blockchain." But the system design enabled the currency to slowly expand, and to encourage bitcoin miners to keep the system itself growing.

When the system creates new bitcoins it gives them to the miners. Miners keep track of all the bitcoin transactions and add them to the blockchain ledger. In exchange, they get the privilege of awarding them a few extra bitcoins. Right now, 25 bitcoins are paid out to the world's miners about six times per hour. Those rates can change over time.

Miners watch bitcoin trades through electronic keys. The keys work in conjunction with a complicated email address. If they do not add up a miner can reject the transaction.

Back in the day, you could do bitcoin mining on your home PC. But as the price of bitcoins has shot up, the mining game has morphed into a bit of a space-race. Professional players, custom-designed hardware, and rapidly expanding processing power have all jumped on board.

Today, all of the computers vying for those 25 bitcoins perform 5 quintillion mathematical calculations per second. To put it in perspective, that's about 150 times as many mathematical operations as the world's most powerful supercomputer.

And mining can be pretty risky. Companies that build these custom machines typically charge you for the hardware upfront, and every day you wait for delivery is a day when it becomes harder to mine bitcoins. That reduces the amount of money you can earn.

Why do these bitcoins have value? It's pretty simple. They've evolved into something that a lot of people want and they're in limited supply. Although the system continues to crank out bitcoins, this will stop when it reaches 21 million, which was designed to happen in about the year 2140.

Bitcoin has fascinated many in the tech community. However, if you follow the stock market, you know the value of a bitcoin can fluctuate veryly. It originally sold for $ 13 around the early part of 2013. Since then it has hit $ 900 and continues to move up and down wildly on a daily basis.

The real future of bitcoin depends much more than on the views of a few investors. In a recent interview on reddit, Cameron Winklevoss one of the twins involved in the Facebook lawsuit with Mark Zuckerberg and an avid bitcoin investor, predicated that one bitcoin could reach a value of $ 40,000. That is ten times what it is today.

A more realistic view suggests that speculators will eventually cause bitcoin to crash. It does not incorporate the ability to utilize its currency in the retail environment, apparently a must for long term success. Its wild fluctuations also make it a huge risk for investment purposes.

Still bitcoin pushes the boundaries of technology innovation. Much like Paypal in its infancy, the marketplace will have to decide if the risk associated with this type of digital currency and payment system makes for good long term business sense.

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Source by Marc Arbesman