Currencies are a marvelous invention. Without them, every economic transaction would be a time-consuming barter. But the emergence of bitcoins — a new so-called virtual currency – and gold as legal tender make me wonder why people choose to believe in some currencies. Especially since the bitcoins could go away.
Until last week, I was among those who had never heard of bitcoins. But according to BusinessWeek, there’s $130 million worth of this weightless virtual currency and its value has spiked 6,000% so far in 2011. Compared to gold — it has gained 8% from $1,421 an ounce on Jan. 1 to $1,535 on June 17 – bitcoins are a great investment.
Among the winners at the bitcoin betting parlor is Salt Lake City, Utah-based timekeeping software entrepreneur Mike Caldwell. According to BusinessWeek, he bought $20,000 worth of bitcoins in Feb. 2009 “at less than a dollar per bitcoin.” By June 2011, he had sold his stash for $30 per bitcoin — if he bought his bitcoins at 20 cents per bitcoin, he exited his $20,000 investment with $3 million — an attractive compound annual growth rate of 7,497%.
But what exactly are bitcoins? They’re a peer-to-peer currency named after the file-sharing technology, Bittorrent. Rather than banks and governments issuing bitcoins, a network of bitcoin holders’ computers does the heavy lifting. Touted as untraceable, bitcoins are heaven on earth for libertarians and others who dream of a global economy outside the control of governments.
A mysterious programmer going by “Satoshi Nakamoto” started bitcoins in 2009 and after he disappeared in 2010, an Amherst, Mass.-based programmer, Gavin Andresen took over the project.
Andresen explained to BusinessWeek that bitcoins use a distributed intermediary to credit and debit accounts and prevent cheating. Individual transactions are encrypted, logged by a decentralized network running on thousands of home computers, and recorded in a public ledger.And unlike gold in most places, bitcoins are actually used in the real world — for example, you can use them to buy socks made from alpaca wool. There are seven simple steps:
Buy bitcoins. To do that, go to currency exchange site Mt.Gox and buy bitcoins — trading symbol BTC;
Download a desktop app from bitcoin.org, which stores your BTC and connects you to the decentralized bitcoin network;
Find the alpaca farms bitcoin address – it’s a string of characters;
Click the send coins button;
A miner certifies the purchase. Miners have computers that create new bitcoins – and the more processing power they control, the more bitcoins they create for themselves;
Once a miner’s computer has processed a transaction, the alpaca farm gets bitcoins; and
The alpaca farm sends your socks.
Finish reading at http://blogs.forbes.com/petercohan/2011/06/20/are-bitcoins-worth-their-weight-in-gold/