Bitcoin: Open source money whose time has come

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.

There are plenty of pro and con voices about bitcoin, but the sheer energy levels surrounding it show it can’t be ignored. While it’s easy to find naysayers who think bBitcoin is a mere sideshow — an article in the Washington Post says as much — there are others who are bullish, in a ratio of 2:1 according to an article in USA Today. National-level coverage like this speaks for itself; this is a subject worthy of attention, a new phenomenon arising from the meshed society of peer-to-peer connections that’s disrupting government and commerce globally.

The crash in value caused by news from China is especially interesting. It happened because many people in China saw in bitcoin a way to freely trade globally without being under the thumb of the Chinese central bank. Over the last month, people in China have driven the growth in value of the bitcoin from $250 to $1200 as they sought the ability to trade and speculate freely without their government’s control. The statement by the central bank was initially read as an outright ban on bitcoin, leading to a sudden price crash. That coupled with further dumping when Chinese search provider Baidu also ended its flirtation with Bitcoin halved the dollar price almost overnight.

But over the last few days, the price has recovered as people have realized that the central bank statement actually tacitly permits use of bitcoins and merely seeks to avoid its destabilizing the Chinese domestic currency. One useful article explains:

With the People’s Bank of China’s announcement, the establishment of bitcoin as [another Special Economic Zone] — the first ever that only exists in cyberspace — has essentially become official.

Looking at all the news — the national-level coverage, the serious VC investment in the sector, and especially the amount of money changing hands on the biggest Bitcoin exchanges — it’s clear the virtual currency phenomenon is hitting prime time. There are many alternatives being tried, with names like Litecoin, Ripple, Ven, Namecoin, and more. Each has experienced growth this month.

This makes sense. The Internet is creating a society where each of us can play the roles previously reserved for corporations and moguls, if we choose — all without needing an intermediary. We can start businesses, trade goods, conduct relationships, publish, editorialize, and conduct politics, all without needing an intermediary to empower us — a phenomenon I call “the meshed society.” A currency we can use as we engage in those activities is a natural complement and vehicle. As the meshed society matures, our need for digital money is inevitable.

This article, “Bitcoin: Open source money whose time has come,” was originally published at InfoWorld.com. Read more of the Open Sources blog and follow the latest developments in open source at InfoWorld.com. For the latest business technology news, follow InfoWorld.com on Twitter.