Blog Post

How BitCoin Wants to Make Money Even More Virtual

Stay on Top of Enterprise Technology Trends

Get updates impacting your industry from our GigaOm Research Community
Join the Community!

Over the past decade or so, there have been dozens of attempts to create a new kind of electronic currency that people could use for online transactions — there was CyberCash and DigiCash, and even smaller startups with bizarre names like Beenz and Flooz. None of them managed to gain much traction, but that hasn’t stopped a group of hackers from trying to launch a new “peer-to-peer” currency called Bitcoins. Although some of its supporters are optimistic about the potential for this new kind of open-source e-money, the venture is fighting a massive uphill battle: for one thing, Bitcoin may actually turn out to be illegal.

The project was started by programmer Satoshi Nakamoto in 2009. But it has picked up steam during the past several months, in part because of some publicity around the project. Bitcoin also benefited a bit from the controversy over PayPal (s ebay) cutting off the ability to send money to WikiLeaks, which for some raised red flags about one company’s ability to impede the transfer of money. One of Bitcoin’s features is that it is completely decentralized, and so is theoretically immune to censorship or restraint. It doesn’t require the use of a bank or payment-handling system like PayPal (which is blocking Bitcoin payments, coincidentally enough).

Bitcoin isn’t the only venture that is going after the e-currency pie: we’ve written before about Flattr, the micropayment startup founded by The Pirate Bay co-founder Peter Sunde, which is trying to create a “tip jar”-style payment system for content (the company recently launched a way to integrate payments with Twitter).

But Bitcoin is somewhat more ambitious than Flattr, or many of the other micropayment and e-currency experiments that have gone before it. Rather than simply create a kind of virtual points system in which the points can eventually be converted into “real” money — or used to buy goods, the way that frequent-flier points and other quasi-currencies (such as “Canadian Tire money”) can — the founders of Bitcoin want to create a completely separate and virtual monetary system. In other words, one that could theoretically replace the existing system if enough people decided to use it.

That’s the difficult part, of course. Why would anyone use a virtual currency that has no “real” value, and is based on a system run by a group of shadowy hackers? Some programmers have started to accept payment in Bitcoins, but that’s not really a great indicator of a robust monetary platform — in a sense, it’s just like people exchanging goods or services in a barter system, something that is a big part of what economists call the “underground” or shadow economy. Supporters (including the Electronic Frontier Foundation) promote the idea that Bitcoins are free from government interference and can’t be frozen or devalued by anyone.

The idea of virtual currency isn’t really that far-fetched in some ways. Money as we know it is already somewhat virtual, since the pieces of paper and bits of metal that we use to pay for things don’t have any actual value themselves — their only value is that they can be exchanged at stores for things that actually have value, like food. Their underlying worth is determined by the central banking system and the government, through a series of federal guarantees, the setting of interest rates and so on (money used to be backed by physical gold in Fort Knox, but that hasn’t been the case since the 1970s).

And what is Bitcoin’s value backed by? Well, that’s where things get complicated. The value of a Bitcoin is determined in part by supply and demand — the system is set up so that there are only a finite number of Bitcoins in existence, which prevents the problem of people just “printing” more Bitcoins the way crumbling governments have in places like Germany in the 1920s. Bitcoins are actually generated by the routine functions of a computer that is processing large mathematical problems (known as “Bitcoin mining”), so the supply is controlled, and will never exceed 21 million.

Even apart from convincing people that they should start accepting or using it as currency, however, the biggest problem Bitcoin could have is a legal one: if the U.S. government decides to treat it as a “private currency,” then it could be subjected to all kinds of strict regulation — such as the need to integrate with the taxation system, or provide for exchange into U.S. currency at certain rates — or it could simply be outlawed entirely.

Post and thumbnail photos courtesy of Flickr user Quazifoto

22 Responses to “How BitCoin Wants to Make Money Even More Virtual”

  1. totedati

    “or it could simply be outlawed entirely”
    in theory, yes, can be outlawed … but not in reality because is in any aspects a barter exchange of goods!

    the demand for bitcoins will be for real only when some real supplier of real goods or services like multinational corporate companies begin to issue bitcoins for free for his loyal customers and in the same time begin to accept bitcoins in exchange for his goods

    of if this bitcoins can be the only accepted currency to buy access to corporate private clubs, travel tikets and so on … for example to buy vote power only in exchange of bitcoins …

    but the real cool thing is that this one-root bicoins, this first generations of coins, 21 Mo and no more, let’s name it the gold bit-coins can be transformed in a multiroot bitcoins p2p sistem!!!!

    think about the imense power of a multiroot bitcoin sistem! power to print money is a atribute of real sovereignity! when you can make your money you are a real sovereing person! you make you rules and self obey to it not because of fear but because you think this is right, and the best setup … you are you master!

    bitcoins will unleash the full power of concept only when will begin to be multi-root

    when cocacola can make his corporate controled cocacola bitcoins diferent that of gold bitcoins which is controled by Satoshi Nakamoto rules
    when cocacola can give to their employees free bitcoins for good work and their loyality to company
    when cocacola can make IPO-s in exchange of cocacola bitcoins and owners of cocacola bitcoins can have real vote power in cocacola structure proportional of their amount of cocacola bitcoins
    when cocacola can guarantee a minimum exchange value of his cocacola bitcoins to real $ or € or gold bitcoins and so on
    and ofcourse if cocacola accept cocacola bitcoins in exchange of his real goods, cocacola bottles …

    but why cocacola corporate can be interested in a cocacola bitcoins money maker system entirely under his private control!?

    well, why someone on this planet want to be a real sovereign entity!? free of FED control? yea! who want that!?

    and cocacola bitcoins can be split also in more fine tuned cocacola privately controled bitcoins … can be an cocacola loyality tickets bitcoins with a diferent rule set of acces to generators, number of total coins, rules to get for free this bitcoins, and exchange value that of IPO vote pover cocacola bitcoins or general cocacola bitcoins that can be used to buy a cocacola bottle … all can be exchanged under privately owned corporate cocacola exchange market with various exchaning values

    and all this privately generated bitcoins fully compatible with a global bitcoin pool which can be generated by any person or economic entity

    but this global bitcoin is also most likely with traces of drugs and blood in it because in theory even a criminal, a drug dealer and a manufacturer of weapons can create and have access to such bitcoins

    so, most valuable bitcoins should be this privately issued cocacola or wikileaks bitcoins with more strict rules to acces this bitcoin pool, not that global “gold” bitcoins!

    is all about trusting the money maker and his rules … now we have no power to switch the trust button! by law we are forced to accept and trust the fed and his rules of making and spreading his money! IN EXCHANGE OF NOTHING! NO REAL GOODS OR SERVICES! i mean, when you want to buy something with you $ if you go to FED with you money you get nothing! if you want real goods you need to go to cocacola but cocacola do not issue $! so, cocacola is not a free and sovereign entity!

  2. coinberry

    Ultimately bitcoin will need exchanges where “real” currency is exchanged or redeemed. That is where the fees will be incurred. I applaud the efforts of this group in launching this service. I see a significant opportunity to create a currency that can span multiple web properties, unlike most closed points systems such as ebay Buck. This is akin to having a open prepaid card versus a closed loop card that can only be used at the issuing business.

  3. Silverbug

    It’s funny that you referring to German government in 20’s printing money and you don’t see billions of quantitative easing, which is pure monetization aka printing money by the FED. An btw. USA is not the center of the world. If they make Bitcoin illegal then there is the rest of the world, who can still use bitcoins. Not every government will block it.

  4. lmack

    The bitcoin economy will only work if there are legal venues to spend bitcoin. The artist saddet is releasing his album “The Empire” for free at with an option to donate using bitcoin – this is a good first step toward legitimizing the currency.

  5. If I write down a long number on a piece of paper and sell it to you for a hamburger, under what law would that be illegal?

    Did you even bother to read the ‘Private Currency’ Wikipedia article to which you linked?
    I have a Google Alert and I’ve been reading every news article about Bitcoin that has come out for days and Matt, this article is by far the worst. It is poorly researched and shows a near total ignorance to the nature of fiat money. You need need to work harder on your articles if you’re going to bother writing them.

    • I did read the article, yes — and I am familiar with the arguments around Bitcoin from a number of different perspectives. If you could point out any specific errors in the post, I would be happy to respond to them. Thanks for the comment.

  6. Jeff Ryan

    US Government won’t bother until this system gets any traction to speak of. And of course if system offers possibility to pass transactions outside of taxation system (which looks like it’s the case with bitcoins) – it will have hard time surviving.

    • cinober

      The system has actually already gained quite a lot of traction and it’s growing by the day. The article’s tone (though not that bad overall) doesn’t really do justice to the amount of popularity bitcoin has already gained. For one, it was already featured in NY Times, for instance. Also, the BTC/USD exchange market is growing and an experimental stock market in BTC is already open. The number of services available by paying in BTC is growing by the day too.

  7. I think you are safe to use words like “shadowy”. You also could of called it “magic” or “witchcraft”. Most people that are scared of change and things they dont understand result to words like that. The next big test will be if China trys to stop it by bringing online some super computer nodes. The idea is out of the bag for sure, but bitcoin has not yet been tested or attacked by governments yet.

  8. “shadowy hackers” Your article is kinda crap. For one the Bitcoin project is Open source. There is nothing “shadowy” about an open source project. Any one can see the code and commit on it. Thats the main reason why bitcoin is completely different from other digital currencies backed by a “private” company.

    Just because someone knows how to read computer code does not designate them as a “Hacker”.

    • You’re right — “shadowy” makes those working on the project sound shady, and that’s not what I meant. I should have said “little-known” or something like that. I also thought it was a little odd that no one is sure whether Satoshi Nakamoto is even a real person. In any case, thanks for the comment.

  9. Bitcoin is not in any way illegal! But the rich1% that looks down at you as their slave would very much like you to think so and they’ll do anything to protect their precious Dollar.

  10. Lucian Armasu

    If Bitcoin keeps spreading like this for the next 6-12 months, I don’t think they’ll be able to stop it anymore.

    Jason Calcanis was right in his show on Bitcoin. In many ways Bitcoin is like BitTorrent and once it’s out of the box, you can’t put it back in. But Bitcoin would most likely bring much bigger changes than BitTorrent ever did, and I mean in that in a good way. People might need things like Bitcoin in the future to escape their increasingly oppressive Governments that want to control and censor everything.

    And speaking of which: