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How can you obtain bitcoins?

Exchanges like Mt. Gox provide a place for people to trade bitcoins for other types of currency. Some enthusiasts have also started doing work, such as designing websites, in exchange for bitcoins. This jobs board advertises contract work paying in bitcoins.

But bitcoins also need to be generated in the first place. Bitcoins are “mined” when you set your Bitcoin client to a mode that has it compete to update the public log of transactions. All the clients set to this mode race to solve a cryptographic puzzle by completing the next “block” of the shared transaction log. Winning the race to complete the next block wins you a 50-Bitcoin prize. This feature exists as a way to distribute bitcoins in the currency’s early years. Eventually, new coins will not be issued this way; instead, mining will be rewarded with a small fee taken from some of the value of a verified transaction.

Mining is very computationally intensive, to the point that any computer without a powerful graphics card is unlikely to mine any bitcoins in less than a few years.

Where to spend your bitcoins

There aren’t a lot of places right now. Some Bitcoin enthusiasts with their own businesses have made it possible to swap bitcoins for tea, books, or Web design (see a comprehensive list here). But no major retailers accept the new currency yet.

If the Federal Reserve controls the dollar, who controls the Bitcoin economy?

No one. The economics of the currency are fixed into the underlying protocol developed by Nakamoto.

Nakamoto’s rules specify that the amount of bitcoins in circulation will grow at an ever-decreasing rate toward a maximum of 21 million. Currently there are just over 6 million; in 2030, there will be over 20 million bitcoins.

Nakamoto’s scheme includes one loophole, however: if more than half of the Bitcoin network’s computing power comes under the control of one entity, then the rules can change. This would prevent, for example, a criminal cartel faking a transaction log in its own favor to dupe the rest of the community.

It is unlikely that anyone will ever obtain this kind of control. “The combined power of the network is currently equal to one of the most powerful supercomputers in the world,” says Garzik. “Satoshi’s rules are probably set in stone.”

Isn’t a fixed supply of money dangerous?

It’s certainly different. “Elaborate controls to make sure that currency is not produced in greater numbers is not something any other currency, like the dollar or the euro, has,” says Russ Roberts, professor of economics at George Mason University. The consequence will likely be slow and steady deflation, as the growth in circulating bitcoins declines and their value rises.

“That is considered very destructive in today’s economies, mostly because when it occurs, it is unexpected,” says Roberts. But he thinks that won’t apply in an economy where deflation is expected. “In a Bitcoin world, everyone would anticipate that, and they know what they got paid would buy more then than it would now.”

Does Bitcoin threaten the dollar or other currencies?

That’s unlikely. “It might have a niche as a way to pay for certain technical services,” says Roberts, adding that even limited success could allow Bitcoin to change the fate of more established currencies. “Competition is good, even between currencies—perhaps the example of Bitcoin could influence the behavior of the Federal Reserve.”

Central banks the world over have freely increased the money supply of their currencies in response to the global downturn. Roberts suggests that Bitcoin could set a successful, if smaller scale, example of how economies that forbid such intervention can also succeed.

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Credit: Colin Jaworski | MIT Technology Review

Tagged: Computing, security, EmTech2013, cryptography, math, digital currency, digital cash, online shopping

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