Bitcoins are a form of digital currency. They are the digital creations of software in a peer-to-peer system, meaning that there is no central server location, no owner. Bitcoins, the system, was created by someone going under the pseudonym of Satoshi Nakamoto in 2009. Bitcoins are regulated by no one (no governmental agency) and by everyone (every “miner” using the software system). Each miner has full view of the system, except for a complex private password held by each user of the system. This highly private password is what allows holders of bitcoins to do so with confidence. Transactions are essentially free and anonymous, two of the strongest appeals of virtual currency.
Bitcoins are acquired generally in one of three ways. First, they are “mined.” The software itself maintains the bitcoin system through a sort of complex mathematical problem that today takes enormous computing power to “solve.” The problem takes the form of following strict cryptographic rules to pack the ongoing bitcoin transactions into a “blockchain,” which is approved by a consensus of miners in the system through the operation of the software. Once the blockchain is completed (solved) it takes its place in the chain, the system releases 25 bitcoins to the solver, and the next blockchain begins. In the earliest days, one might solve one of these problems with a home computer and the reward (bounty) then, like now, would be the release of 25 bitcoins. Today, however, the computer power to solve the problems and release the bitcoins is enormous and the problems are generally solved by pools of miners with machines running around the clock. The miners’ shares will be determined by the computational power each brings to the mining. Each solution takes a few minutes and the 25 bitcoins usually go out to individual miners in small fractions. The machines largely used for mining today are not “computers” in the traditional sense, but special processing machines that do nothing but efficiently mine at high rates of speed. Anyone can participate. To do so meaningfully will require an investment of several thousand dollars. Note that bitcoins will continue to be released at increasingly slower rates until approximately 2140, when the system will reach the prescribed limit of 21 million bitcoins. There are slightly more than 12 million in circulation as this is being written. The machines mining bitcoins are valued in the tens of millions of dollars and the electricity being used for mining would supply a small country.
Second, one may simply buy bitcoins. The most common way is to go to one of the online exchanges, where you can lay down cash for the bitcoins. There are several large exchanges. Bitcoins are in the news today because the largest of the exchanges—Mt.Gox—has gone off line, allegedly losing more than $300 million through theft. It remains to be seen whether bitcoins will survive this calamity. Bitcoins are commanding about $575 per coin as this is being written one day after Mt.Gox’s collapse.
Finally, one may exchange goods or services for bitcoins. The number of providers accepting bitcoins is growing daily, slowly. One of the best known acceptors of bitcoins is Cheapoair.com.
Are bitcoins legal? It depends on where you stand. As of now, in the United States, the answer is yes, but the unanswered questions are enormous. Regulation is almost surely on the way, and the law will be dealing with the treatment of bitcoins likely for a long time. With the fall of Mt.Gox, the entire system will undoubtedly be under scrutiny. Legal or not, bitcoins operate more like a commodity than money for the present.
Note: The first “ATMs” have gone live in the United States and may be found in New Mexico and Massachusetts.
Gary L. Walters is a partner at Walters & Wasylyna. He focuses on civil (business) litigation and intellectual property disputes. Walters & Wasylyna is a litigation and patent boutique.