Learning the right lessons from the online currency Bitcoinby David Birch / July 20, 2011 / Leave a comment
Published in August 2011 issue of Prospect Magazine
When a bunch of geeks messing around on the internet’s frontier get attention from the Economist and the New York Times, you have to take note. A new electronic money system called “Bitcoin” has been hailed by some as the first nail in the coffin for the world of fiat currencies managed by central banks. Others dismiss it as a Ponzi scheme.
Bitcoin is a decentralised, peer-to-peer means of exchange. You can buy a Bitcoin—which is just a string of numbers—on an online exchange; you can then send it (or a subdivision of it) to anyone else on the internet. The strings of numbers are made by complicated calculations (called “mining”) and have a built-in limit. Once all the bitcoins have been mined, no one can make any more. To give a bitcoin to me, you essentially tell everybody else that the bits now belong to me—or rather, my security key. The closest equivalent was the currency of the island of Yap in the South Pacific. The inhabitants used huge stones in place of money, but the stones themselves never went anywhere, people just remembered who they belonged to.