Q. So Bitcoins have been experiencing a big run up in price lately… before we get to why, let’s start with: what are they?
A. Well, the dry answer is that they’re a new digital currency that’s sprung up over the last decade or so. They aren’t backed by a sovereign or controlled by a central bank. But the bitcoin ecosystem has been growing, they have been gaining acceptance by a few mainstream institutions, and now more people are starting to take them quite seriously… and bid up their price.
Q. Well, obviously, a digital currency is an odd concept that raises a lot of questions. For example, if there’s no central bank, who controls the money supply? Is the quantity of them fixed? If not, how do new coins get created?
A. One of the most interesting aspects of bitcoins. They are “minted” at a specified rate by computers around the world that are all using the bitcoin code. That code limits the number of coins that can be created at a predetermined rate. Recently, in fact, that number was cut in half, an event that was originally programmed into the software…. That’s part of the reason for the recent rise in value. So although new coins are constantly coming in to the system, there is a definite scarcity value.
Q. So no “QE” for bitcoin, I guess… But how about the basic issue of authentication? How do you know you have real bitcoins?
A. That’s a long technical story, and there actually have been a couple of minor glitches in that software, one of which caused a bitcoin “flash crash” the other day. But possibly the most unique aspect of bitcoin is an authentication system that makes sure bitcoins aren’t “spent twice” and that they are genuine.
Q. And you said they’ve been gaining acceptance with some real world merchants?
A. Yes. WordPress and Reddit, for example, accept them, on the basis that they don’t want to be subject to governmental restrictions on opening accounts or transferring dollars or any other traditional currency. And Silicon Valley Bank has recently entered into a partnership agreement with one of the bitcoin “miners” that create the currency. It’s definitely gaining steam.
Q. And I guess we see that in the price chart… a bitcoin is now worth about $40 US.
A. Yes. Currencies are the ultimate “con game”: if people have confidence in a means of exchange, it works as such until they lose confidence. For many reasons – especially the carefully calibrated growth of supply – folks are beginning to get comfortable with bitcoins.