Dear 100 Hour Board,
What's the deal with Bitcoin? Online currency--got it... but isn't it called PayPal? I guess I don't see the advantage of a currency that it seems like some guy made up while sitting alone in his basement.
Dear 22 Black,
You are sort of on the right track, but not quite all the way. Paypal is an online transfer of whatever currency you're using between accounts; PayPal just acts as a super-secure moderator in the transitioning of funds from one hand to another. You lose $X, the person gains $X. A Bitcoin is an actual currency, like the dollar, yen, or real. The value of a Bitcoin is determined by some crazy math during transactions (my coworker spent almost an hour trying to explain to me how it worked, and I was still having some trouble). They take a bit of heat for having really jumpy exchange rates and for not being accepted by many retailers here in the States, but people who have them have a lot of confidence in their future. In fact (and a big thanks to Genuine Article for this info), there's a documentary being made called Life on Bitcoin, where BYU graduate Austin Craig and his wife Beccy are daring to use only Bitcoin for the first 90 days of their marriage. The culture of Bitcoins is still developing, so keep your eyes peeled for news regarding them, and read the Wikipedia article for every last tiny detail.
Dear 22 Black,
Like Tootles pointed out, PayPal is a company that lets you make payments, but they're still in some other currency. In some regards, PayPal isn't that different from Visa or MasterCard: they just process payments and move money around. Furthermore, PayPal has a pretty bad reputation; they're notorious for freezing accounts of nonprofits and others with little explanation, and for really dragging their feet on making things right. (See here for some examples, and more links.)
In contrast, Bitcoin is a currency. And not one that someone "just made up": it's actually built on solid cryptographic principles, building on previous attempts to create a cryptocurrency, and whoever created it was fairly smart. (No one knows the identity of the creator; the original paper was published under a pseudonym.)
Why would anyone want to use Bitcoin? Unlike other currencies, you can send bitcoins directly to someone else online without a middleman. You don't need someone like PayPal, Visa, or Mastercard, skimming their percentage off the top. You just pay someone. This is part of the appeal.
How do you get them in the first place? You can either "mine" them yourself (by having your computer solve certain very hard mathematical problems, like Tootles mentioned, in order to discover new ones), or by simply exchanging some other currency (like dollars) for bitcoins at one of the exchanges.
In contrast to nearly every other currency, the creation of new bitcoins isn't controlled by a government or any other organization. There's no equivalent to the Federal Reserve, which controls U.S. currency and manipulates it to regulate inflation and such. That might seem kind of weird. However, there are rules; they're just inherent in the math that defines the system. For instance, the number of bitcoins is finite (21 million), and the remaining ones are getting harder and harder to discover (the last ones will be mined in 2140). Again, that's just a property of the system involved; no one can change it. This is in contrast to most other currencies, including the dollar; the U.S. government (and most other governments) can literally make more money anytime they want, which some people don't like. I'm not an economist, so I can't get into the consequences of things like limited supply, but it's at least interesting.
Bitcoin does currently have some problems, though:
- Like Tootles mentioned, the exchange rates fluctuate quite dramatically, which is problematic for a currency.
- A couple of popular sites that let you store your bitcoins have also had problems with money being stolen as the result of hacking, and there have been some scams.
- Not many places accept Bitcoin as payment yet.
- Mining your own is not currently viable unless you buy a very specialized FPGA or ASIC rig just for that purpose (using your laptop or desktop will cost you more in electricity than the value of the Bitcoins you'd get; early on this wasn't the case).
I don't personally own any Bitcoins because I'm risk-averse, and I won't say you should jump on the bandwagon either. However, it does have some real reasons for existing, and if nothing else, it's an interesting experiment. Given more time, it may become stable enough to be more viable. Personally, I would love to have a better way of making online payments without needing a middleman taking their cut.
For more of an introduction to Bitcoin you can check out this article from Wired (though its conclusions are two years old and somewhat out of date, the basics of how the system works haven't changed), or (for more details, and more recently) this one from Tom's Hardware.