What the heck is a Bitcoin?
A pile of Bitcoins are shown here after Software engineer Mike Caldwell minted them in his shop on April 26, 2013 in Sandy, Utah.
All this week, Marketplace Tech is looking at Bitcoin. The cryptocurrency's price has soared. Banks and governments are starting to pay attention and develop monetary policy when it comes to the form of digital cash. We plan to talk about everything from how to make it to who is holding it. But first, what the heck is Bitcoin?
We kick off our series with a Techsplainer from Harvard University's Jonathan Zittrain. Zittrain says Bitcoin is a lot like all currencies, but also quite different.
"Bitcoin is itself a collective hallucination -- as it turns out, most currencies are -- in which, there is agreement that the units of currency will have some form of value," he says. "And the neat thing about Bitcoin is that there is a record as to who possesses it. And, the only thing we need to kind of make Bitcoins work on a fundamental level is a mechanism for me to be able to advertise in a way that nobody else can that I, in fact, have pushed the Bitcoin to someone else."
One way to think of Bitcoin, Zittrain says, is as the closest thing to cash in the digital realm.
"The only major difference between cash and Bitcoin -- well there's probably two. Here's one of them: With Bitcoin, it's less about an object and more about how do you ensure that I have the most recent instance of that object. And the answer is, a network that records transactions -- so called chains."
While you might assume Bitcoin is opaque, Zittrain says the currency is not as trace resistant as many assume.
"I think that the other big difference from cash is that there's no way to arbitrarily increase the number of Bitcoins the way that government can print more money."
So, if you think of Bitcoin as strings and numbers with unique identifiers made by computers -- how do you make more of them?
"Well, there is a process in the protocol by which additional Bitcoins can be hatched through the solution of the agreed upon arbitrary really difficult problems," Zittrain explains.
But if you're looking to get rich on Bitcoin, Zittrain says its best to invest like you would in a stock. Or, also do the opposite of that.
"I can think of two ways to do it. One is to buy low and sell high. And the other is to sell high and buy low. I suppose a wild card might be is one betting that there isn't some flaw in the technology that could allow for the compromise of the entire Bitcoin system. And, I've got to say, my guess is more traditional banks will stop hating it and learn to love it and become the trusted intermediaries for moving Bitcoins around, and at that point, the currency will have come into its own."