Technical problems caused preeminent Bitcoin exchange Mt. Gox to suspend deposits today, and led to a major sell-off of the cryptographic currency. The news was reported by Ars Technica, and follows an unprecedented run that’s seen Bitcoin rise from a low of $2 in June of 2011 to a high of over $48. While the price at one point fell below $37, losing nearly a quarter of its value, it quickly recovered to within a few dollars of its high.
The sell-off was precipitated by a glitch that prevented a newly-mined Bitcoin block from checking out with an older version (0.7) of the software. Since each new block of the digital currency relies on the blocks before it for authentication, this created a fork in the chain — miners running the newest software (version 0.8) continued on as though nothing had happened, while those running the older version were forced to pick up where the troublesome block had left them. Bitcoin developer Pieter Wuille is suggesting that miners revert to the older version of the software until the problem can be ironed out, and is calling for merchants to stop processing purchases using the newer software. The Tokyo-based Mt. Gox says believes its suspension will be lifted by the end of the day.
Comments
Here we go again….
By NathanLawrence on 03.12.13 2:53am
Does anyone understand Bitcoin??? I have no freaking idea what this is…
By Robe1Kenobi on 03.12.13 3:00am
It’s honestly not that complicated. It’s an open ledger system.
Imagine a village where people don’t actually hold any currency, but instead rely on a big book that lists how much “credit” each person has to their name. Further, this book also documents credit transfers, effectively tracking who payed who. People who volenteer are randomly selected to audit the book, and after auditing they are given a newly generated lump sum of “credits” with which they can acquire goods. A fee is also charged to all transactions and payed to the auditors as well.
The system is set up so that less payouts are made over time resulting in each credit being worth more due to scarcity.
Now, imagine that people wanted to keep how much they own private. So instead of listing names, each account is just a series of random numbers. To prove ownership of the account, you must provide a numeral “key” that corresponds to the random number series.
This is a basic example of how bitcoin works. The main differences is that instead of a big book, bitcoin uses a blockchain. The blockchain is downloaded by everyone, and checked by everyone, insuring no fraud occurs. Thus, everyone is auditing at the same time, and select volunteers are processing transactions at the same time. A random person out of all of the auditors is selected to get payed the additional bitcoins each auditing cycle. This is done through the digital clients.
When people say they “hold” bitcoin, what they are actually saying is that they know the private set of “keys” which prove they are the one in possession of a given account assigned a given number of bitcoin. If they give those keys to others, those others can take actions with the given accounts.
Finally, what happened in this case is that an older “auditor” got confused while auditing, while younger “auditors” kept going without a problem. Now the “book” has two different set of entries, the chain of events documented by the younger group and the chain of events documented by the older group (who ignored one transaction due to the perceived problem).
The beauty of the system is that since everything is held as information, and everyone shares the same information in real time, exchanges can be done very quickly.
By zhearns on 03.12.13 4:09am
To address one last point before going to sleep, people tend to believe bitcoin is a scam. Specifically, people call it a “ponzi scheme.”
Now, a ponzi scheme, is really just a modified pyramid scheme using investments. For an example of a pyramid scheme, imagine I start a club and charge $10 to join. Everyone who joins has the right to bring in new members at a cost of $10, but they must pay me half of that payment ($5). The new members brought in by my recruits pay my recruits for new members as well. Further, my recruits must pay me half of what they get payed from their recruits. As you can see, this creates a system where money is constantly funneled up the “pyramid,” thus, the first to join make the most. Further, eventually, the system becomes unsustainable and collapses.
A ponzi scheme differs from a pyramid scheme mainly in that one (or a few) agents do all of the recruiting. They promise returns on investment, and pay investors using money obtained from new investors. This is also unsustainable, as can quickly be assessed.
People equate this to bitcoin because you have to sell bitcoin to get its value in “fiat” (government regulated) currency. The problem with this analogy is multi-fold.
One: ponzi scheme hedge funds have no intrinsic value. However, bitcoin due in that they provide a way to transfer value quickly anywhere in the world. Another benefit is that they can due this (pseudo) anonymously. Thus, while there are people who purchase bitcoin to make money, there are others who are doing it solely to transfer value.
Two: Holding a investment for the purposes of selling it later on is not in itself a scheme. This is actually how stocks work. If you feel the thing being held has intrinsic value (which bitcoin has due to the above) then this is a reasonable investment. Basically, owning a bitcoin is like owning access to a value transfer system more efficient than our current banking system.
Three: Many locations are now accepting bitcoin for products directly. As such, bitcoin’s value is becoming increasingly separated from the fiat currency, and more associated with purchasing power. If this trend continues, there will be no reason for anyone to sell bitcoin, and the ponzi scheme analogy falls apart.
Four: Scarcity based currency isn’t a scheme, or even a new concept. This is basically how the “gold standard” worked in the past.
While I’m not convinced that a scarcity/deflationary currency is the best way to transfer value within a society, those who call bitcoin a “scam” are really just proving their own ignorance of economics, finances, investments, and the concept of currency in general. It’s honestly kind of sad…
By zhearns on 03.12.13 4:39am
Thank you a lot for your clear and concise explanation. I certainly form a way better opinion on Bitcoin now.
By R. Walton on 03.12.13 8:34am
Great post, for sure — a solid baseline for understanding BitCoins.
At the same time, I think it’s important to expand on one point in particular. Any time a significant percentage of the holdings of a commodity/currency/etc. are held by speculators, it takes on a lot of the volatility (and thus risk) of a speculative security. There are enough bitcoin speculators that a crash could come at any time, simply due to indicators shifting in a way that leads to automated selloffs that snowball.
By contrast, even if you are nervous about the long-term viability of fiat currency, in any short- or medium-term time horizon, there’s no particular reason to think that one of the world’s major currencies will undergo even a 2:1 change in purchasing power. Thus if you have money you want to be able to spend on groceries or your rent in any given week, it’s probably safer to keep that money in a fiat currency than in BitCoins.
Of course, if the volume of BitCoin transactions used for purchases instead of speculation continues to grow at a rapid enough rate over the next few years, this could change. But for now, I would strongly recommend only putting money in BitCoins if it’s money you can afford to lose in the event of a crash.
By tesseractive on 03.12.13 3:36pm
“Thus if you have money you want to be able to spend on groceries or your rent in any given week, it’s probably safer to keep that money in a fiat currency than in BitCoins.”
You can tell that to the Cypriots.
By rghrty on 03.30.13 5:15pm
Great explanation
By algeria on 03.12.13 7:03am
Wow, thank you all for the very in-depth explanations. That’s actually pretty cool, and very helpful. Thanks again.
By Robe1Kenobi on 03.19.13 9:50pm
This has been resolved and trading is back to normal.
This article doesn’t really explain what happened at all. Basically the chain of mined blocks forked and had to be corrected. The blocks mined on the new fork will automatically get merged into the valid block chain and it shouldn’t cause any issues for transactions, unless you tried to double spend the coins of course.
It’s also worth noting that 0.7 put itself into safe mode as soon as it detected the bad block, which prevented automatic transactions, so the failsafe worked.
By denoer.nodus on 03.12.13 3:02am
How can 1 bitcoin be worth $40? If I want to spend them, will I be spending 0.0001Bitcoin?
By cjschris on 03.12.13 3:17am
Bitcoins are not tied to any other currency and are divisible down to many decimal points. So, yes .00001 bitcoins is valid, has value and can be transferred.
By denoer.nodus on 03.12.13 3:23am
Yeah, you can do that. The smallest denomination of bitcoin is 0.00000001 BTC, which is one hundred-millionth of a bitcoin.
By Code.Red on 03.12.13 3:25am
So simple a child could understand.
/s
By ttringle on 03.12.13 9:03am
It’s just math.
By donisewell on 03.12.13 12:06pm
Because that’s how bad the US economy is now!
j/k. Bitcoin’s potential is to be worth millions of dollars, if it even ends up being a fraction of the world’s transactions (well a double digit percentage of world transactions). Since Bitcoin is finite, the its value will keep rising, the more popular it gets. Just like with gold, if gold was a lot more finite and if people were allowed to use gold as currency.
By minsk on 03.12.13 4:37am
What makes it finite? Isn’t bitcoin mining generating new bitcoins because it does something (decrypt or encrypt something that makes it bitcoins?)? That’s part of what I don’t understand about bitcoin.
By pressstart on 03.12.13 8:29am
That’s my problem with BTC. Where’s the intrinsic value of it? Without intrinsic value how can it be finite? Is this done artificially? And if so, how is it any better than the USD or gold for that matter?
By Schnydz on 03.12.13 10:33am
Bitcoin is valuable because it has utility to people, namely, it allows the efficient transfer of value over the Internet. For example, gold also has utility and that’s in our ability to use it in electronics. That’s the intrinsic utilitarian value, but there is also the speculative value. The market value is derived from the supply/demand and speculation on the markets. Again, no different from gold.
As we’ve established above, there is intrinsic value, but even if there wasn’t it would still be finite because the protocol allows for the existence of no more than 21 million bitcoins. If people want to make more than 21 million bitcoins, then they will have to use a different protocol and it wouldn’t be called bitcoin at that point.
I don’t know if you would label a protocol as artificial… not sure if the term really applies.
It’s better than USD, because its limited supply and it’s better than gold because you don’t have to lug it around (especially if you have a lot of gold). It’s better than both, because you can send it over the Internet to anybody in the world in a matter of minutes at no transaction cost. If you want to redeem it for cash or commodities, then you can do that at the appropriate exchange.
By ithinker on 03.12.13 12:04pm
There will only ever be 21 million Bitcoins. More miners only increase the difficulty, not the rate at which Bitcoins are minted (approximately 150 per hour).
By REAVER117 on 03.12.13 10:49am
Yes…
By donisewell on 03.12.13 12:05pm
Most companies wont take less then .01 for a transaction which is about .42 cents. Makes sense because of the computational work. However you can get .00008 bitcoins for visiting sites added to your account.
By StrawberryMan on 03.12.13 2:05pm
A “purely digital currency” that is “not tied to any hard currency” – yet everybody only seems to meassure its value in US Dollars. In the end, that is all that counts. Most people involved in this Bitcoin scheme are simply trying to make hard cash with it. And for some it does work out wonderfully…
By Bahumbug on 03.12.13 3:47am
People need to be able to describe what it’s worth. That doesn’t tie it to any hard currency. Someone could just as easily say a 1 Bitcoin = 1 Keg of Beer.
By Kesey on 03.12.13 9:42am
Many people use it to purchase goods and services online anonymously. They compare if to USD because that’s what we’re used to and that’s what more people use (in the US at least).
By donisewell on 03.12.13 12:09pm