Bitcoin, an alternative currency protected by cryptography, has been popping up all over the news for a while. First, Bitcoin-driven marketplace Silk Road shut down. Then the Japanese Bitcoin exchange Mt Gox crashed (and is now bankrupt). You can make real-world Bitcoin transactions at a Bitcoin ATM in Texas. And then of course there’s Dogecoin (much coin, very currency).
As skeptics, we wanted to know: should we be skeptical about Bitcoin? How does the currency really work, and what are some of the opportunities and risks we need to be aware of? To find out more, we talked with financial activist Brett Scott to discover the ins and out of Bitcoin. We first learned about Brett through his awesome post on gender inequality in the cryptocurrency world, another issue worth exploring in depth. Before diving into the interview below, you might want to check out Brett’s guide to explaining Bitcoin to your grandma to get oriented.
Do people need to know how to code, or understand cryptography, to use bitcoins? To mine them?
Brett Scott: No. In much the same way as we don’t need to know how to code to engage in normal electronic financial transactions, coding experience is not required to use Bitcoin. It’s actually easier than using online banking. To open a Bitcoin ‘bank account’ you just download a wallet like Multibit, and you’re good to go.
Mining is slightly different. To continue the analogy with bank accounts, being a miner is a bit like being a clerk at the bank in charge of processing other people’s transactions. That requires more expertise. But you don’t have to mine to participate in Bitcoin.
What protections are in place against manipulation of Bitcoin?
Brett: If you have a Bitcoin wallet, it’s up to you to protect it, much like if you were carrying cash around you’d have to protect it. There are many ways of doing that – such as adding a strong password to the wallet and backing it up – but it’s only really an issue if you’re dealing in large amounts of Bitcoin.
In terms of manipulation, the Bitcoin code is very secure, but it is technically possible for the exchange rate of Bitcoin to be impacted by the activities of large buyers and sellers. It’s pretty volatile, so I wouldn’t recommend someone converting their whole savings into it!
Is Bitcoin likely to be volatile indefinitely, or will it become more stable as more people adopt it?
Any new market tends to be volatile, but as more people join the volatility should decrease. Stability tends to emerge when no particular participant in a market has much ability to affect the decisions of any others. Thus, if there are 100 people in a market, it’s easy for them all to get spooked and panic, or for them to get euphoric and create bubbles. If, on the other hand there are 10 million people in a market, it’s harder for quick bubbles and crashes to occur.
Is Bitcoin a currency only a libertarian could love? Is it good to have a financial system based on lack of trust?
Brett: Bitcoin is pretty versatile, so it has the potential to appeal to a wide range of people. It’s true that it has found favour with right wing elements of the libertarian community, who see it as some kind of salvation from government domination, but there are interesting potential uses of Bitcoin that go beyond overt ideological agendas. Also remember that there are a lot of other cryptocurrencies, like Dogecoin, that are emerging and that have different types of communities that they attract.
In some ways, using cryptocurrencies require more trust than normal electronic transactions. If I use a bank card to buy something online, I have to trust a commercial bank to stand between me and a seller, but this actually means I don’t have to trust the seller as much, because I can always ask the bank to reverse the payment if the seller doesn’t send me the goods. Bitcoin is sort of the opposite. In place of the bank intermediary, Bitcoin has a network of anonymous people (‘miners’) who verify transactions between me and a seller, but this means I need to trust the seller more, because it’s impossible to reverse a payment once it goes through.
Is Bitcoin meant for near-term speculators or for long-term investors – or both?
Brett: Well, in theory it’s meant to be for neither – it’s meant to be a currency to be used in day-to-day transactions to purchase or sell real goods and services (just like the US dollar). It’s true, though, that many people have begun to imagine that Bitcoin is an ‘asset’ that you ‘invest’ in. A true investment, though, is something that produces stuff over time – like a factory or a farm. Bitcoin is only an ‘investment’ insofar as it’s ‘price’ (exchange rate with other currencies) is pumped up over time by speculation and by greater usage. I do not recommend viewing it as an investment. View it as an interesting alternative means of engaging in exchange.
How do Bitcoin investment vehicles like Bitcoin Investment Trust work?
Brett: They work like any other investment fund. You put your money (in dollars) in the fund, the fund managers use your money to buy Bitcoin, and then later sell it and then give you back any gains you’ve made (or losses). It’s kind of the same as putting your US dollars in a fund which then buys Russian Rubles. This is an example of viewing Bitcoin as an ‘investment’, rather than as a currency.
Are alternative currencies more likely to alleviate or exacerbate economic inequality?
Brett: It depends on what alternative currencies you look at. Bitcoin is just one type of alternative, and it has no explicit provisions built into it that prevent inequality. If anything, the prime motivation behind Bitcoin is to preserve individual autonomy, rather than say, promoting community cohesion or environmental resilience. This is in contrast to, for example, small local currencies or timebanks that explicitly link exchange into local communities. If you’d like to learn more about these dynamics, I wrote a piece about starting your own alternative currencies.
What are some of the biggest political advantages of Bitcoin? How do the exchanges differ in different countries?
Brett: We can describe the characteristics of Bitcoin – that it is decentralised, anonymous and open source – but the political values attached to those characteristics are really in the eye of the beholder. Libertarians see in it the opportunity to escape the government and taxes. Anarchists see in it the ability to create a mutualistic economy run on community principles. Silicon Valley investors see in it the chance to make loads of money by using it complement the existing banking system. And the governments of each country are reacting differently to it, partly depending on how citizens treat it (which may stem from those citizens’ values). Rich people in China, for example, were using it to get around government-imposed foreign exchange controls (i.e. getting their money out of the country), so the government is now clamping down on it there.
As alternative currencies evolve, will companies like Google get involved in creating currencies? What are the implications of that involvement?
Brett: Possibly. Big companies could create their own currencies in much the same way as they can create vouchers that can only be used to buy their products. Whether people would really want to accept those currencies is debatable though. The psychological power of our normal currency is partly backed by the fact that we know we can use it to pay taxes. Likewise, if there is a huge company that everyone uses – such as a big retailer – they may be able to issue vouchers that people begin to use among themselves as currency, secure in the knowledge that eventually they can be used to get real goods from the retailer.
What’s the best way for people to get involved with Bitcoin?
Brett: The best way is to set up a wallet like Multibit or Electrum and tinker around with small amounts of Bitcoin. If you’re self-employed you can even request payment for goods and services in Bitcoin, which is fun to try out. I personally sell my book for Bitcoin and other cryptocurrencies like Dogecoin, which is how I get hold of it. I then use it to buy stuff – I’ve bought design services with it, paid bills in it, paid interns with it, and I’ve even used it to buy stuff from Crypto-sex toys, which is pretty hilarious. The important thing is to experiment and try have fun, and if nothing else, you’ll learn a lot about how currency systems work or don’t work.