All About Bitcoins: Pyramid Scheme or Here to Stay?

Introductions

Before I say anything, I'd like to state I'm mining bitcoins as I type this very sentence; yes, it's that easy. Now before your head starts jolting with notions of cash just passively streaming into your bank account, we should establish some groundwork.

First off: What are bitcoins? The Bitcoin network is a recently developed monetary system used for trading capital over the internet, and is based entirely on a virtual currency exchange model. Comprised of a nightmarish complex of equations at it's core, bitcoins(BTC) are a man-made digital tender created by combining mathematical ingenuity with the basics of a credit system; the goal of the design was a much safer and extremely anonymous internet currency.

A Brief Summary of Bitcoin Mechanics

Created by Satoshi Nakamoto (note: a possible alias), Bitcoin is a system of finite, pre-made "coins" which come in locked blocks of a 50 count. Each individual bitcoin transaction (from one person to another) creates a proof which must be checked multiple times to authenticate the exchange. Each block is created when multiple proofs from different transactions come together to form a unique cryptographic hash; this hash must then be cracked by miners for the block of 50 coins to be successfully unlocked, and thus dispersed into the market pool. The problem for each block must be cracked by completing a proof of work through constant trial and error of number strings (all done with CPU/GPU through mining programs). Each tied into the transactions of different users and works as an authenticating agent. The processing ability needed to search for a successful string to unlock a block can come from anyone with a computer. However, how fast a block is cracked is dependent on the power of the CPU (newer being better) or as of fairly recently, the architecture and power of a GPU. thus bringing forth a coalition of different people who choose to help search for the key to unlocking the coded blocks, and releasre more coins; these people are dubbed, miners. to search for a string of numbers which will allow Coveted for their simplicity and almost full anonymity, bitcoins are a finite supplied, user-driven, fully digital currency which can be exchanged in a given BTC market for goods, rental fees, or basically anything.

The Past, Present and Future

The Bitcoin market has been blossoming since it's debut roughly two years ago. Some say the network is a pyramid scheme, with the creator(s) waiting for coin values to peak before cashing in and exchanging hordes of preordained coins. Other analysts and community members tout the numerous benefits of using the currency and claim the bitcoin system will remain alive for some time. The hope is that bitcoins will become popularized as a new type of stable main stream currency for internet trading. The future of bitcoins is still speculative and mostly unsure of itself. One thing is clear though, whether arguing in favor of bitcoins or against them, each side packs plenty of legitimate evidence to support their claims.

Aside from the unique premise under which it's designed, bitcoin's positive outlook and growing consumer interest comes from the extreme flexibility it offers. Some unique characteristics of btc include: instant global exchanges, digital sale of any goods, stock market-like trading sectors, fluctuating value and the security of having effectively anonymous transactions. The tracking of BTC transactions are only subject to a few high-level, advanced methodologies; however, when coupled with other measures of protection the anonymity of bitcoin is only truly rivaled by physical cash exchanges. The culmination of benefits from using bitcoins has cemented a heart of loyal followers in the system. The base of regular users who form the market's heart have already bought in to the system, boosting it's worth to extremely high values and essentially contracting the large investors to carry out their financial plans. The heavy investment of the BTC communities' time and capital can be seen as strong evidence boosting the notion of a lasting bitcoin market which will not be dying soon(at least not in large chunks).

Among the benefactors of bitcoin are the many first time, independently owned and web-based businesses which have found success in sales by using the system's small footprint. In addition to acting as a virtual replacement for cash, a pseudo-stock market exists for BTC to be traded at a fluctuating rate for real money (transferable right into your personal bank account). The varying conversion value of coins boosting total worth of a business coupled with a completely digital marketing plan, can alleviate start up costs and remedy expensive maintenance needs. The other major group to benefit from BTC are the initial miners who were able to start from scratch and use existing computers or equipment they owned to work up a bulging wallet of coins; after a year of waiting the virtual nothings became worth over $20.00 USD each. The rate which blocks are solved is adjustable, and before mining became so popular it was far easier to get coins with limited resourced. Some of those who were smart (or lucky) to invest in heavy mining efforts have come out with ten of thousands of US dollars or more in pure profit.

As bitcoins rise in popularity on the web each passing month, many wonder if the system will hold itself up or if the whole thing was just a pyramid scheme for the creator to cash out on. Despite speculation, in the end I still see BTC existing as either, a rarely used underground currency, or a moderately successful alternative to classic payment methods. I imagine bitcoins will never take over the internet market. There's simply too many variables for average users to comprehend for BTC to become the standard, and international governments hate the legal problems caused by the high anonymity of the currency.

More on Trading

Besides using them like currency, bitcoins can be traded like stock through an exchange company for actual cash (think NYSE + paypal). Originally, bitcoins were almost exclusively known and traded by underground web lurkers who got into the game early; those who capitalized on the system now exist as the primary coin holders or sold their coins off and are enjoying some serious profit. Over the past two years (and even more recently) the market has been steadily increasing in popularity, it now boasts a drastically greater amount of web resources, accepting markets, trading companies, and overall user base. Sweeping the hearts of many internet frequenters who are strapped for cash, the simple method of acquiring BTC allowed anyone with a computer to start the "mining" process. Mining for bitcoins involves using the power of a CPU (central processing unit), or more recently, one or more GPUs(Graphics processing unit) to calculate a specific string of numbers, which in the simplest terms, cracks an equation and awards the miner 50 coins and resultingly more bitcoins into the market (further specifics can be found in my bitcoin explanation and mining start up article to be released soon after this post). In the end, the process of finding correct codes (hash values) with the GPU/CPUs of miners is repeated over and over, successful miners are rewarded, thus fueling the economy to grow and grow.

Deciphering the Bitcoin Idea

Now that you've been informed on some of the basics, it's time to analyze the purpose of using btc. For many, the answer is simply to have access to the market, add some security to their purchases, small time sales, or investing for profit. Other advantages can be seen when it comes to easing the pains of international trade, a currency which needs no denomination exchange would quickly replace the much favored US Dollar (but that's already slowly happening I guess). In an age of exploitable technology the public is seeking out more identity protection ever day; and the news media doesn't downplay the problems. Today, it's not abnormal to find a news network reporting on the latest credit-thieving gangs of counterculture indulged computer whiz kids. The public is constantly alarmed of people "hacking" your accounts and masquerading around Amazon with Grandma's Mastercard; Queue bitcoins, the safe and anonymous way to avoid compromised financial information. The btc community would argue, what with such extensive security and numerous benefits, bitcoins are a super currency which should be the new web standard. With enough attention, the concept of btc would undoubtedly sprout legs and pave the road from web to reality, becoming a household name in every public sector. With the many working class Americans frightened by the exploitable holes of technology and driven to financial paranoia would quickly adopt and (possibly still in the future) propel the bitcoin to an explosive status as the elite method for all household purchases. However, the same properties of protection shielding civilians, would also reach the black markets of illegal trade on a global scale.

Problems and Legal Issues

As a method of trading virtually anything and bringing with it no easy way of identifying the transaction parties, the magic of the bitcoin is easily brought down from it's aura of positive intentions and manipulated to befit underhanded, illegal activities. Bitcoins leave no easy-to-follow trail and are extremely hard to trace, especially when coupled with other digital identity fog(proxies, spoofs, stolen wifi etc.); basically bitcoins have all the properties an illegal salesman covets. With the gift of extreme anonymity, essentially any civilian with some advanced knowledge of the internet and networking could become a threat to illegally buy or sell guns, drugs, and basically anything by trading btc.

The governments and lawmakers of many countries, especially the United States, are the ones taking notes on the unique possibilities of bitcoins and their potential for misuse. Those who voice caution against using bitcoins will regularly mention it's political instability among nations. The lack of regulation in the system raises too many eyebrows and heads off a list of major concerns preventing the internationally unanimous acceptance of bitcoins as a legitimate currency. The stimulation of a [once much weaker] now increasingly unmanageable gray area of web-based trading shines light on the downsides of bitcoins while shading the advantages, all of which desperately hurts the bitcoin's reputation. As of now bitcoins remain a disputed political issue, but are not opposed by US laws. However, if the negative uses of bitcoins ever accelerated out of measurable hands of the US, a campaign of negativity would erupt among politicians and surely end with controversy and lawful acts against trading. The main concern among different governments and mainly US legal officials is the notion of disturbing an already established market, which is growing daily. Forcing bitcoins to be illegal now would eliminate the investments of the thousands (possibly hundreds of thousands or more) of US citizens invested in the intangible capital worth millions of US dollars; panic would ensue and a global trade pandemic would skew wealth into unknown territory, possibly benefiting illegal activities. Thus life expresses it's unfairness, as a mechanism created with [seemingly] good intentions becomes an easily corruptible loophole and the major downfall of an innovative design

Conclusion and Opinions

I believe the perpetual, and unregulated use of bitcoins as a proponent of gray market business will cause the BTC to never fulfill it's potential. That said, I have faith in the internet to uphold it's seemingly personal trading chips. I do believe that however great or dwindled the success and popularity achieved is, bitcoins will never truly just disappear. Basically I see the bitcoin system having two possible outcomes; either the idea is successful and adopted by many people, or the idea loses interest after a while (possibly due to legal flak) and it becomes just a flailing concept which is exploited by those who need anonymity. I'd say the market is right about in the middle of the two roads right now, and only time will tell how bitcoins end up. I really hope more really creative and viral ideas, like a unique currency system, start to launch onto the internet from innovative people. Whether it's intended to be scheme people out of their money, or legitimately bring improved payment methodology to the web, one has to appreciate the ingenuity of such an original idea as bitcoin is. Billion dollar success or not, uncommon ideas always go appreciated by some portion of the population and I know I always love to see anything with an origin sitting firmly outside the walls of mediocrity.

Still interested in Bitcoins? Thinking about mining?

Watch for my next post which will have a comprehensive description of all the basics you need to start mining bitcoins:

"My Guide to Start Mining Bitcoins Now"

The guide should be posted on Tangelospizza.com before September 1st 2011.

Sources and Useful Links:

http://en.wikipedia.org/wiki/Bitcoin

https://en.bitcoin.it/wiki/Trade

http://bitcoincharts.com/markets/