Being at the opening of the world’s first Bitcoin conference was like showing up for the first day of camp—a boys’ camp—and finding that everyone already knew one another in an alternate universe. For a couple of days in August, the Roosevelt Hotel in New York City served as a real-world meeting place for about 50 people who had spent months riffing with one another on the phone, in chat rooms, and over Skype. They came to talk about how Bitcoin could change the world—and how it could make them rich.
Bitcoin is a digital cryptocurrency designed to resolve the discord between the way we move money online and the decentralized nature of the Web. The Internet has already eliminated other barriers to communication and trade, such as time and geography. You can browse Moroccan floor tiles in a virtual showroom at 3 a.m. on Christmas Eve if you feel the urge, but paying for your purchase will inevitably require the cooperation of a third party. The problem is that dollars do not exist on the Internet, only promises of payment that require the backing of trusted and centralized financial surrogates like banks and credit cards.
On Halloween in 2008, a hacker operating under the pseudonym Satoshi Nakamoto published a paper that described an entirely new currency called Bitcoin, which was made out of information instead of paper. In Satoshi’s system, all the tasks performed by banks and credit cards, and even some chores of the federal government, were trusted to a peer-to-peer network instead.
Satoshi ducked into the shadows shortly after delivering the code that generates and processes Bitcoins, but new programmers, lured by the vision, quickly stepped in to shepherd the software development and create supporting websites and applications. In 2010, enthusiasts founded a website called Bitcoin Market, which allowed individuals to exchange Bitcoins for dollars and, for the first time, provided a way for curious investors to participate.
Soon after, a Bitcoin owner known on forums as "Laszlo" forked over 10 000 Bitcoins for a pizza—a notorious exchange now regarded as the first time anyone used Bitcoins to purchase physical goods. As more people became interested in the new currency, the value of Bitcoins continued to rise, culminating in a media feeding frenzy in the spring of 2011. The commotion seems to have enticed new speculators that temporarily drove the price even higher. When he bought his pizza in 2010, Laszlo spent about US $25 in Bitcoins. At the Bitcoin conference on 19 August, Laszlo’s meal would have set him back over $100 000 at the new Bitcoin trading rate.
But what exactly is Bitcoin? That was the first question Jeff Garzik, a developer for Bitcoin and Linux Kernel, asked when it was his turn at the podium. "You’d be surprised at how difficult that is to answer," he said. He began to poll the audience. Is Bitcoin a currency? A commodity? A security? Hands went up and down with each term, and the only time the room agreed affirmatively was when Garzik asked whether Bitcoin is a "distributed digital notary service."
If you’ve never heard of Bitcoin, watching this video put together by the Bitcoin community is probably a good place to start. The simplest way to understand how Bitcoin works is to think of it as a digital transaction log. Imagine a bunch of people at a table who all have real-time access to the same financial ledger on laptops in front of them. The ledger records how many Bitcoins each person at the table has at a given time. By necessity, the balance of each account is public information, and if one person wants to give part of his wallet to the person sitting across from him, he has to announce that transaction to everyone at the table. The entire group then produces a new draft of the ledger that they all agree on. The money never has to exist in a physical form because it’s all accounted for and can’t be moved without consensus.
This is basically how Bitcoin works, except that the participants are spread anonymously across a global network, and access to an account on the ledger is protected by public key cryptography. People who own Bitcoins use a Bitcoin client to manage their accounts. When they want to access their funds, they use the client to send an encrypted transaction request. Each active Bitcoin node then competes to validate the request and sign over the funds to the new owner.
This effort does not go unrewarded. By volunteering their computers to secure and facilitate Bitcoin transactions, users can earn new Bitcoins. These participants are called miners, and like their physical counterparts, the more time and energy they put into the Bitcoin network, the more they earn. The reward, however, gets smaller over time and will stagnate when the number of Bitcoins approaches 21 million, at which point a transaction fee will likely have already been phased in to replace the built-in incentives.
At the conference, the attendees stood up one by one to introduce themselves. A few identified themselves as miners. Then there were representatives from the online Bitcoin exchanges like Mt. Gox and Camp BX, which allow people to convert Bitcoins into traditional currencies and vice versa. There were also students in economic theory, programmers working on smartphone apps, general enthusiasts, a corporate lawyer, and one man who simply introduced himself as a "Bitcoin millionaire."