Yay, Bitcoins! Bitcoins are a technology that I've been keeping an eye on. I downloaded a wallet application and a Bitcoin miner about a week or so ago, but haven't used either to any extent yet aside from experimentation. Apparently, my laptop's GPU is powerful enough to mine approximately $0.03 USD per day worth of Bitcoins. This figure doesn't include Bitcoins earned through transaction fees, but I don't have any way to estimate that amount other than spending a few days mining Bitcoins, and that would require disabling my FaH client to free up my GPU.
However, it will always have applications amongst those who are very interested in their privacy as it is impossible to trace to a recipient (Well, you can see if the same person is receiving funds, but you cannot trace a wallet address to it's owner)
There are some aspects of Bitcoin that make it difficult to derive the identity of a Bitcoin holder (for example, if you use a different wallet any time you receive funds), but it's worth noting that tracking people through Bitcoin isn't necessarily impossible. This is due to the interplay of a number of factors:
- Though Bitcoins aren't inherently associated with real life identities, they are associated with wallets that have a (random looking) unique identifier.
- Some people do publish the address of one of their wallets so that their Internet fans can send money to that address. For example, Randall Munroe, the author of XKCD, has done exactly this; his Bitcoin address is BTC 14FHqYSgAi39CEJksUJJsK8JzJzyqFpLVk.
- The history of transactions between wallets is public (this effectively ensures that a single Bitcoin cannot successfully be spent twice). Consequently, it's possible to view transactions that come from a given Bitcoin wallet. For example, this is the history of Randall's public Bitcoin wallet.
- By viewing data such as this on a massive scale (possibly alongside data obtainable elsewhere) and searching for patterns, it is possible to derive data that wouldn't have otherwise been apparent. As a cursory example, if multiple wallets are used for the same payment, it is likely that all of those wallets belonged to the same person, which in turn links the purchases that were made with those wallets as all belonging to the same person. If the spender's identity can be identified for any of those transactions through outside information, their identity is effectively compromised for all wallets they've used for the transaction in question. This is a technique that is called frequency analysis, and the principles of its effective application have matured from the historic utility of that technique.
There are ways as a privacy oriented consumer to inhibit this possibility. It's worth mentioning, though, that although Bitcoin doesn't actively destroy one's privacy, it doesn't actively protect it, either.
Bitcoins are likely always carry a fairly high price due to the anonymity factor and their having a hard limit on the amount produced, which will be less than the demand for them (Economics 101, here we come!)
Here we come indeed!
Since Bitcoin is a currency rather than a good, its supply and demand work a little differently than they would for a good. From an extremely simplistic macroscopic perspective of a closed economy with a single currency, the following assertion can be made by viewing all of the purchases within a country under a number of different paradigms:
<gross domestic product> =
<volume of goods/services sold> * >price of those goods/services> =
<wage of an average laborer> * <number of citizens participating in the workforce> =
<quantity of currency or currency equivalent in economy (a.k.a "money supply")> * <average frequency a unit of that currency is spent (a.k.a. "velocity of money")>
When considering only the existence and use of a single currency, the "value" of a given unit of that currency is... well... moot. If a single Bitcoin was considered to be more valuable than a typical month's wage, most trading would occur with fractions of a Bitcoin; however, if a single Bitcoin wasn't considered valuable enough to buy a small piece of candy, most trading would occur with large quantities of Bitcoins. Similarly,
in the long term, the volume of currency available to the economy doesn't affect the volume of produced goods or the supply of labor; these values are (again, in the long term) fixed by a number of factors unrelated to the money supply itself (such factors include technology, labor culture, and age distribution). The fact that Bitcoins are highly divisible (and that the protocol can be modified to make them more divisible if necessary) means that (from a theoretical perspective) the same finite supply can suffice for any arbitrary large economy; products will simply be sold for less Bitcoin as more products are sold.
Things get a little more complex when you consider the economic consequences of the existence of additional currencies and/or of multiple national economies. This, especially the part about multiple currencies, is a subtopic of economics I'm less fluent in, and I lack the time to try and contemplate this. I leave this as an exercise for anybody else who would like to expand on my Macroeconomics 101 lesson.
