Bitcoin: Open source money whose time has come

The recent bubble -- and reports of criminal activity -- may have scared off onlookers, but there's little question bitcoin has arrived

Once considered a curiosity, the digital currency bitcoin has held the mainstream media spotlight the past few weeks. Its price reached parity with that of gold at one point; then last weekend skittish speculators dumped huge quantities in response to negative news from China. Meanwhile, the financial world has been paying closer and closer attention. Don't be distracted by the Silk Road bust -- bitcoin is becoming a mainstream phenomenon.

What exactly is bitcoin? On one level, it's an alternative currency that is managed not by a bank but by the consensus of its users, backed by a completely transparent ledger and open source implementations of the code that regulates it. You can buy a bitcoin in one place using your local currency and send it anywhere in the world to anyone without the intervention of authorities, at which point that person can sell it in their local currency. At a deeper level, it's more: A clever system of messages and digital signatures that allows global proof of any kind of action or transaction that can be documented.

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There's no actual coin; rather, the history of agreed, computer-readable transactions is notarized in a global ledger (the "block chain"), and the right to notarize is given in exchange for completing compute-intensive tasks.

Even that explanation is a huge simplification. Michael Nielsen has attempted a full technical description, and there's an excellent description in a white paper from the Federal Reserve Bank of Chicago. In short, it's the use of something provably rare as an intermediary token for trading between people, just as earlier groups used rare shells or glass beads to represent value. The radical transparency of the system makes it trustworthy enough for people to actually use, and the open source reference implementation lowers barriers to entry.

When I first took an interest in bitcoin back in 2010, it was very much a minority topic for enthusiasts. But this week has seen some of the biggest actors of the financial world take stances -- for and against -- concerning bitcoin.

As well as the Federal Reserve paper above, we've seen a proposal in the Swiss parliament to recognize bitcoin as a currency, a statement by the central bank of China forbidding use of bitcoin as an alternative to the yuan, a conference about bitcoin in Las Vegas, news that the president of PayPal owns bitcoins, Apple taking action against use of bitcoin in App Store apps, a view from Bank of America that the true value of a bitcoin is probably $1,300 as it commences coverage, a $25 million investment in a leading bitcoin trading company led by VC Andreesen Horowitz, and even a Bay Area car dealership accepting payment for a Lamborghini in bitcoins.

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