Last week, WordPress.com announced that they would begin accepting Bitcoin as payment. As the juggernaut behind the internet’s most popular blogging platform, they are probably the most high-profile company to accept Bitcoin so far—at a time when most of the world has never even heard of it. (The Economist wrote a largely dismissive article about Bitcoin last year, and The Good Wife had a somewhat misguided episode featuring Bitcoin—don’t ask me how I know that—but the population at large hasn’t really caught on.)
So what is Bitcoin? Bitcoin is a burgeoning new digital currency; a medium of exchange (money) without any governing body. It’s fascinating in many respects—besides being entirely decentralised it implements an ingenious mining system whereby new Bitcoins are added to the economy in exchange for computing power and inflation rates are pre-defined. Bitcoin began three years ago; the entire Bitcoin economy today is worth over $100 million USD and growing .
Bitcoin was invented by a hacker using the pseudonym “Satoshi Nakamoto”. He released a paper detailing his invention in 2008 and released an implementation of the system in January of the following year. The way it works is fairly complex; not “three people in the world each understand a part of it” complex but certainly “sophomore computer science student” complex. From a business perspective, however, it is fairly straightforward:
- Bitcoins are mined. Miners use computers, not shovels, but the result is comparable to the mining of natural resources—effort is expended in return for profit. Bitcoin mining was initially done mostly at the hobby level, although as the economy has grown and the mining difficulty has increased larger mining groups and mining companies have emerged.
- Bitcoins can be bought and sold using traditional currency—several Bitcoin exchanges exist for this purpose, taking a small fee in a manner analogous to traditional currency exchanges.
- Users store Bitcoins in a file called a Bitcoin wallet. Wallets are plain text, and can be printed out to be stored on paper. Several online Bitcoin wallet services exist, and their services often overlap with that of Bitcoin exchanges. While these services are convenient, it is generally unwise to store large amounts of Bitcoins on any device connected to the internet (see the next point).
- The Bitcoin transaction method is extremely secure, but Bitcoin storage is somewhat of a weak point for many users. Since Bitcoin wallets are just plain text, they can be stolen like cash and need to be protected in the same way. For large amounts of Bitcoin, this can either mean printing the file (deleting the original) and storing the paper in a safe or moving the file to an external drive and storing that drive in a safe. Some of the larger Bitcoin wallet services act like banks, attempting to securely store large amounts of Bitcoins for their users. Unlike banks, those services are not insured and should not be used for that purpose.
- It is possible to make Bitcoin transactions in a very anonymous way, if desired. Like any “anonymous” activity these days, it is also possible that certain three-letter agencies could trace the transaction—that’s all I’m going to say about that.
- Bitcoin transactions occur instantaneously, but they need to be verified by the network; a process which can take up to ten minutes. (Basically, the system keeps track of which wallets contain which amounts of money. A transaction moves Bitcoins from one wallet to another, and asks the network to update the records as long as the sender actually had the Bitcoins they claimed to have.)
There are many services emerging which aim to make it easier for consumers and businesses to use Bitcoin—two that I currently find interesting are Coinbase and BitPay. The potential reasons for wanting to use Bitcoin are manifold, but I suspect that more companies will be following WordPress.com in the months to come. If you operate a business with a truly global reach, Bitcoin is the first truly global payment system. If you operate a business where anonymity may be valuable (for example, if you enable political activists like WordPress does), Bitcoin may be your solution. But increasingly, I think we will begin to see businesses adopt Bitcoin for the reason it was originally created: freedom from banks, freedom from central fiscal authorities, freedom from monopolistic transaction fees. It’s less of a political statement and more of a pragmatic one—for better or worse, traditional banking is headed the way of traditional record labels and traditional journalism.
 The last three years of Bitcoin would probably make excellent fodder for doctoral theses in many disciplines. Besides being an obvious case for a study in economics, the social and cultural implications of the currency are astounding—a quick search of my university library’s databases reveals no such research.