Beyond the Bitcoin bubble: What an alt.currency is, why you should care, and what's coming next

Governments are clamping down on Bitcoin, but strike it down and a thousand more cryptocurrencies will rise to take its place

It’s been an odd month for Bitcoin, the digital currency which is either the future of money or the biggest Ponzi scheme in history, depending on your point of view.

At the start of December, a single Bitcoin was trading at 100 times its value of a year ago - over $1,200, to be more or less precise. Serious investment houses were starting to take notice, and the first Bitcoin cash machine came into use.

Then the chairman of the US Federal Reserve called it a ‘bubble’, Germany refused to recognise it, the Dutch compared it to tulips and the EU decided to frown on it. The biggest shocker, though, for Bitcoin boffins has been China’s effective banning of the currency by preventing yuan-to-bitcoin transactions. 

Still, all may not be lost yet…

Bitcoins. Pretend money, right?

In the same way that dollars or Euros are, sure. Such a tiny proportion of the world’s money actually exists in paper form that we might as well accept that all wealth is delusional. 

But you can make it out of nothing! You can’t do that with pounds, sir.

You have heard of quantative easing, right? The invention of money so a government can buy bonds from itself and pretend to pay off its debts while also pretending inflation’s not happening?

Anyway, you can’t make Bitcoins out of nothing. It’s true that miners - people who run software that authenticates Bitcoin transactions - are rewarded occasionally with coins, but chances are you’ll spend more in electricity bills than you’ll ever receive in rewards.

It might look like you’re getting money for nothing, but just running the mining program is an investment, and is essential to keep the currency functioning. So the rewards are generally fair.

What about that billionaire from Wales?

The problem is that the rewards used to be bigger, so earning a few hundred Bitcoins was fairly simple. Now that that they are worth four figures each, it was a good way to earn a living.

OK, so what does China have to do with Bitcoins?

Bitcoin’s dramatic rise in value was partly caused by a Chinese documentary on the subject back in May. Small scale savers rushed to put their cash into Bitcoin, and thus helped keep the currency afloat during times of stress. Like when the Silk Road closed down.

The Silk Road?

An online drugs den which sold class As for Bitcoins. Thus compounding the hallucinogenic nature of the currency no doubt. If you have to ask, you probably don’t want to know.

And what’s happened now?

In the early days, the biggest proponents of Bitcoin were libertarians and online anarchists, who see a peer-to-peer currency as a way of cutting The Man out of financial transactions.

The problem is that The Man has noticed the popularity of Bitcoin and is either taking precautions to protect his citizens against a damaging speculative bubble that could bankrupt them or seeking to wrestle global finance back into the control of the right wing hegemony.

Either way, Bitcoin was briefly on the cards for formal acceptance, and now looks to be back on the periphery.

So that’s it then?

Not necessarily. You can’t keep a good idea down, and Bitcoin is still trading at over $700. Respected opinionistas from The Economist to Nobel prize-winner Paul Krugman have all been generally positive about a digital currency deshackled from the auspices of a central reserve bank.

The problem is that as long as Bitcoins are only used to buy other Bitcoins, or held on to by speculators, that’s the classic definition of a bubble. Still, should Bitcoin fail, there is another.

Bitcoin has a sister?

Actually, Bitcoin has many siblings. Inspired by its success, there’s at least 25-30 other alt.currencies - or psuedo-currencies, or crypto-currencies - doing the rounds.

Most seek to improve Bitcoin in some way or another. Litecoin is popular, Primecoin is a promising newcomer and Offerings to Cthulhu is clearly the work of a true believer.

More after the break...

Offerings to Cthulhu?

I kid you not

What’s the problem with Bitcoin?

Well, for starters transactions take several minutes to authenticate with the network, so it’s far from being a cash replacement just yet.

If you think waiting for your card to clear in Sainsbury’s on a busy Christmas weekend is tedious, imagine if everyone took six minutes to pay.

Some of the alt.coins put computer cycles doing the mining work to use by searching for cures for cancer (by some calculations the combined computing power of all Bitcoin mining machines is roughly analogous to the entire output of the world’s 500 most powerful supercomputers. Sort of).

So a better, more acceptable Bitcoin may arise?

That’s the theory. Or it could just be a bunch of hackers who got frustrated that they missed out on the big bounties of the early days of Bitcoin mining and want to re-create the magic of free money.

Sounds perfect. Count me in.

Well, if you do want to start mining, you’re going to need a powerful machine. Most of the cryptocurrencies are based on the same principle as Bitcoin - running repetitive loops of software to come up with cryptographic codes that are used to secure transactions and update the ‘blockchain’.

That’s the master list of all transactions to date and, in Bitcoin’s case, runs to several gigabytes of data that has to be downloaded before you start.

What hardware do I need?

A powerful PC doesn’t cut it any more. You’re competing for coins against people who’ve bought dedicated ASICs - chips that are designed to do nothing more than run coin transactions as fast as possible. Even then, you’ll need the software - available here  - and be part of a mining pool to make any money. 

Mining in a pool? Have you been at the Silk Road again?

It’s when groups of miners pool resources and share the rewards. Work by yourself, and you might get five Bitcoins in ten years’ time. Mine in a pool and the chance of getting a reward - albeit a small share of one - is much higher.

There has to be an easier way.

Of course there is. If your interest in Bitcoin is about making money, day trading is where the riches are to be had. Buy low, sell cheap.

Thanks to the distributed nature of the coin, every exchange has a different price so you can literally buy in Japan and make a killing in the US in minutes.

There’s even funds for hedging against Bitcoin and trading in Bitcoin futures too.

Blimey. It’s just like real money, isn’t it?

Depressingly, yes.

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