How Bitcoin Works
“It seems to me that simple altruism can suffice to keep the > network running properly.” – Satoshi Nakamoto
This section gets a bit technical. Few truly understand how bitcoin functions, but by coming into contact, if even briefly, with the degrees of technology that go into powering a p2p network like bitcoin, one can have their mind expanded. To paraphrase Karl Marx, “the masses must live through the revolution in order to understand the revolution.”
“Preliminary research” suggests that bitcoin is an autonomous thing. In other words, the bitcoin open-source community acts as one united soul – an institutional-entrepreneur – in which countless actions of individual agents converge over time to create the bitcoin hologram. The collective and not the individual, nor a single organization, resolve the future of bitcoin. But, this collective is comprised of diverse individuals: of communists, of libertarians, of anarchists, of speculators and of the a-political. What inspired these individuals to create this community? Bitcoin.
Bitcoins are computer files, so they behave similarly to a music or a text file, and can be destroyed or lost like any computer file. Many say bitcoin is digital cash. To be sure, bitcoin is not exactly like physical cash. When you lose cash, someone else can theoretically find it.
If you lose bitcoins, they are not readily available to another person unless you were hacked. Lost bitcoins are not just found in cyberspace by web-surfers. Also, your brain does not store a trail as to where your cash was last. If a $100 bill falls out of your pocket, you might not have access to any data whatsoever as to what-in-the-world happened. Potentially, when you lose bitcoins, a computer security expert can do research into the issue.
As Trace Mayer puts it, “Bitcoin is like a gold coin that you can e-mail.” As we’ve covered, the central aspect of bitcoin is that it is an open-source software and community, and open-source communities are strangers, from anywhere in the world with Internet access, coming together and self-organizing around a shared interest so as to create value through sharing knowledge and innovation.
Undoubtedly, the community has not been able to tame the tide of misconceptions about bitcoin. Such as that bitcoin’s are backed by nothing. Therefore, bitcoin is not a virtual gold. But, the value of gold is largely reflected in the amount of energy consumed in mining and refining the metal, which contributes just as much to gold’s value as does its suitability as money. As one individual once put it, “a gold coin represents a large amount of land, highly refined, with the input of a great deal of energy, labor and capital.”
In a similar manner, bitcoins represent the computing power, energy and capital required to create them. It takes specialized technology running for sometimes many days to create a bitcoin. This was even true many years ago. Like mining for precious metals, it is not easy to mine bitcoins profitably. Bitcoin mining is extremely competitive, as we will detail later, and it’s rarely a profitable venture unless higher future prices in bitcoin are assumed. A main advantage of bitcoin is its peer-to-peer nature. This means there is no “issuing authority” for bitcoin, no central depository or central bank.