Bitcoin: This Looks Like a Job for SocFinance!
June 14, 2011
If ever a topic called for a sociology of finance-based analysis, it would be Bitcoin. Bitcoins have been in the news recently, but in case you haven’t caught wind of this fascinating experiment in anonymous, electronic currency, here’s a nice summary from DailyTech:
Bitcoins are virtual currency similar to the Linden Dollars (L$) used by Second Life users.
However, unlike L$, which are ultimately controlled by Linden Labs, a company (or “governing body” in some people’s eyes), BTC have no central authority. The currency instead relies on a peer-to-peer system where everyone logs transactions and monetary events, prevent false transactions.
Also, unlike the L$, the focus of BTC is to exchange the virtual currency for real world services, not virtual ones.
People can obtain Bitcoins in two ways — buying them or generating them.
To generate them, you have to run a complex math hashing algorithm, which tries to find a new bitcoin “block”. Parallel computing devices — namely GPUs have shown themselves most capable for this task. In fact with modern AMD GPUs it is possible to “break even” on your hardware costs by generating Bitcoins.
The use of computing time to generate Bitcoins is particularly fascinating to me as a history of economics on one hand, and a SSF aficionado on the other (see The Economist for a lengthier description). Are Bitcoins the next wave of commodity money, with a socially average computing time of production?
Bitcoins have been in the new recently for two (possibly related) reasons. First, Bitcoins have found a nice market: illegal internet transactions. As Gawker reported, there are now webmarkets for illegal drugs that transact using Bitcoins. Because Bitcoins are anonymous*, they are the perfect medium for those wishing to conduct illegal exchanges electronically. If you want to buy 10 hits of LSD in Silicon Valley, why bother tracking down a dealer when you can simply send a few of your Bitcoins across “Silk Road” and receive the drugs a few days later in a plain envelope?
The second reason for Bitcoin’s recent notoriety might be of more interest to the SSF crowd (as if a purely electronic semi-commodity currency with no central authority wasn’t interesting enough!): Bitcoin recently experienced a boom-and-bust. Here’s a graph of recent price trends (check out the 1-day or 1-hour views for a good look at the bubble). After rising quickly from about 6.50$ to 30$ in the beginning of June, Bitcoins dropped 30% of their value in a single day, and then partially bounced back a bit the next. It’s not clear what caused the spike, but it was connected to big uptick in trading volume: “[T]oday on Mt. Gox alone, approximately $2M USD in Bitcoins were bought and sold in 5,871 trades. That’s unusual in and of itself — only a total of $19M USD in trading volume occurred over the past six months.”
So, what do you think SSFers? How do we make sense of Bitcoin?
*DailyTech notes some of the caveats to that claim of anonymity:
That said, there’s numerous ways your privacy could be compromised if you’re buying drugs or performing elicit activities. Some points of possible attack include:
1. Failure to anonymize IP due to using your direct ISP-provided IP address.
2. Failure to anonymize IP due to misconfiguration of Tor or other anonymizer (a surprisingly common occurrence).
3. Tracking of physical goods associated with purchases.
So, the currency itself might be anonymous, but the ways of accessing it (or the goods purchased with it) might not be.