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How can bitcoin be anything but a passing fad? Quite easily in fact.

The fact that it has already lasted for four years pretty much rules out the supposition that it is a fad. Perhaps you are thinking of a trend? Where lots of people pick up upon and adopt something similar, which turns into a long-running pattern. It seems you cant open a newspaper or read a website these days without hearing about the superyet-mysterious virtual currency known as bitcoin. Unfortunately usually written by somebody who hasnt done the slightest bit of academic research into the topic, outside of reading the last 6 months top headlines, which is a great shame, and horribly obvious to anybody who understands the protocol, of which now there are a growing number. Everyones talking about it. Richard Branson just began accepting bitcoin as a form of payment for flights on Virgin Galactic, which offers commercial spaceflights. The Chinese website Baidu endorsed the currency, and lawmakers in Washington are holding hearings about it. Even Ben S. Bernanke, the Federal Reserve chairman, told senators in a letter that virtual currencies may hold long-term promise, particularly if the innovations promote a faster, more secure and more efficient payment system. Uh-huh Sounds alright to me too. And then, of course, there is the sky-high march of the value of bitcoin. A year ago, bitcoin was worth a couple of bucks. Today bitcoin goes for $800 each, depending on the day. And the value can swing by more than $100 a day, if not more. This is simply the product of the adoption curve of a currency with a fixed rate of increase of monetary supply base, which is simultaneously being used by traders and speculators. And while we skim that subject, I would like to point out that if we using the term inflation in terms on monetary supply (rather than the conventional cost of goods) then bitcoin is still inflating, but at a diminishing rate until the last coins are mined ~2140. If it all feels a bit like a 1999-style craze, thats because it is. Peter Leeds of the Penny Stock newsletter put it to me this way: In a matter of months you wont be hearing about it. It will go the same way of Paris Hilton. People will move on to the next thing. I think this only needs to be re-quoted in a month to be exposed. Thats not to say there arent fervent believers. Bitcoins early success was a result, in part, of an angry libertarian strain of investor looking for an alternative to the dollar, something akin to a digital version of gold, in the event the world comes to an end or starts to look like a Keanu Reeves movie. I certainly do not know anyone who has invested for this reason, but perhaps you are right, although Im sure the same could be said about almost every other investment vehicle in history. But there seems to be a disconnect between the idea of what makes a great investment or a great speculation and a new currency that will be universally accepted.

There seems to be a disconnect between you trying to place bitcoin into one of the existing placeholders we have for goods and services; Is it a pure currency? No. Is it a stock? No. Is it a share? No. Is it simply then an investment vehicle? No. Then it must not be any of those! Well, you might well be right about that. Bitcoin, in the short or even long term, may turn out be a good investment in the same way that anything that is rare can be considered valuable. Like baseball cards. Or a Picasso. Thats because there are only so many of them. I suppose that is one property of bitcoin, if that is how you choose to view it. But bitcoin aspires to be much more than a collectible, or frankly, even gold. It aspires to be a universal electronic currency. On that score, it is unlikely to succeed. Why? Lets start with bitcoins value or more accurately, the volatility of its value. Which merchants in their right mind are going to accept a currency that seemingly changes its value in wild swings every other day? Mr. Bransons experience with bitcoin is instructive: While he happily accepted bitcoin as a form of payment, he quickly converted the payment into dollars. It is the least volatile 4-year old decentralised cryptocurrency Ive ever heard of myself, but perhaps there exists a better version. With increased adoption, the market will become less susceptible to new stories, panic buy/selling and the price will of course stabilise. This is so basic that it pains me that I have to explain it to a financial reporter. The market depth on the exchanges is simply not there yet, no-one claims that it is. This is, as you seem to already have worked out, the reason for payment processors such as Bitpay to be currently (temporarily?) in existence. So that merchants can happily accept a volatile, young bitcoin. Unfortunately even though you refer to Mr. Branson as accepting bitcoins, I imagine you actually are referring to his company, Virgin Galactic. It is more than possible that accepting 250k payment in bitcoins is not acceptable to them (yet) and this would be the reason for the payment to be converted into USD. This is not to say that Richard himself did not want to keep the payment in bitcoins. We simply do not know. But again, this is painfully obvious stuff to have to explain to a reporter, of all people. That doesnt make bitcoin a currency. It makes it a way for merchants, like Shopify which also accepts bitcoin to get a little publicity. A currency is anything that is used in any circumstances, as a medium of exchange. In this use, "currency" is a synonym for the concept of money. Then there is the issue of how limited the supply of bitcoin truly is. Bitcoin is digitally mined by computers running an algorithm. (If you just rolled your eyes, youre not alone.) The algorithm limits the total number of bitcoin ever mined to 21 million units.

Im afraid you are playing up to your ignorance again. Yes bitcoin is mined, but it appears you have no idea what this word means in this context, and thats OK; the computers surely do not don shovels! Mining in this context can be thought of as auditing the transaction ledger using computing power to verify that no coin or sub-unit of coin has been spent twice, and that each transaction has in general obeyed all of the consensus-agreed rules of the protocol. The reward for donating your computing power towards this cause? Freshly minted bitcoins, sent to an address of your choosing. The total number of whole coins as we know them, is indeed limited to (just under) 21,000,000. The last of which should be mined sometime late in the 2100s (its variable). However, the whole coins themselves are currently divisible into units of 100,000,000 (100 million), each one colloquially called a Satoshi. This gives a current total (sub) units of bitcoin of 2,100,000,000,000,000, 2 million billion, or 2 quadrillion Satoshis. Giving us quite a bit of wiggle room for the foreseeable future in terms of coin divisibility. But even this can be extended further with the consensus of the network, if each Satoshi became too valuable. But there is no Bernanke (or Janet Yellen) of bitcoin. Nobody knows who created it and no one controls it. Thats supposed to be a benefit. Its also why the currency is often associated with illicit sales. Bitcoin can be transferred anonymously and without banks taking transaction fees. But if, and this is a big if, your peer-to-peer transaction doesnt work properly, there is no central clearinghouse to complain to. You are right, there is no Bernanke or Yellen of bitcoin. The rules of the protocol have already been created and agreed to by a great many people using it currently, and again this is one of the principal draws of it. If you care to download the source code (or read any technical literature on the subject) you too can read them, and choose, if you want to use bitcoin. Isnt that nice? You go on to say that the fact that bitcoin does not have a Bernanke is the reason it is often associated with illicit sales, which is a sentence that does not seem to substantiate the claim. Anyhow, I would take just a moment to point out that Bernankes issued dollars have indubitably been associated with, funded and facilitated more illicit trade than any other currency in the history of the world, ever. I wouldnt worry about bitcoin yet. Some of these USD banks are laundering more money than the entire bitcoin market cap (incorrectly used term, used for clarity). You say there is an if, a big if, your peer-to-peer transaction doesnt work properly, there is no central clearinghouse to complain to. You have stumbled onto the whole point of bitcoin. Seemingly by accident: you dont need a central clearing house to complain to. Finally, you can send your money where you want, when you want, for extremely low cost (or even free!). No questions asked. There can be no errors in the transfer process (I challenge you to provide evidence of one!) The main reason a transaction might not complete successfully is if: You do not own the coins you are trying to spend You have already spent the coins you are trying to spend You transaction was not mined by the miners (usually the fee is too low relative to the size of the transaction; not the value of the transaction mind, the size of the text it takes to write down the transaction and send it to the network (value is irrelevant here). Your wallet is not connected to a node and so cannot broadcast the transaction

In any of these circumstances the follow-up action is predefined, again in the protocol nothing is left to chance here (except mining!) The rule is if the funds didnt reach the recipient address, then they never left the send address. Simple, clear to all parties, and verifiable to everyone in the world via the public ledger that is the blockchain. Whether the government ultimately seeks to regulate bitcoin is an open question. It seems hard to believe that the government would allow the growth of such an unregulated market in which moms and pops, widows and orphans, and other individuals may be subject to all kinds of fraud. They can try (oh my, theres that angry libertarian from above!) I would personally like to pay taxes for schools, roads, healthcare etc. But I do not consent to paying taxes (OK charge, imposed onto me but not punishable by law) to rich and greedy banks so that they can gamble my money away, in order that I can participate (via currency) with the rest of the people in the world, with whom I might actually want to do, shock-horror, business. Oddly, the Chinese government has seemingly embraced the early use of bitcoin. Gordon G. Chang, writing in Forbes, has a provocative explanation for that stance: Digital money can undermine the dollars status as the worlds reserve currency. Bitcoin is on track to becoming the worlds first trillion-dollar nonfiat form of money. I think its just a fad. Finally, there is the question of what happens if other alternative digital currencies also rise. More than a dozen digital currencies are trying to compete with bitcoin. Can you imagine a world in which we all transact with dozens of different currencies every day with different rules? Neither can I. I think youll find that we already do this, Andrew, and I know its big and scary, but perhaps a majority of people using a single currency might help to iron these complicated (and expensive) predicaments we already find ourselves in, out. Every big idea starts out sounding crazy. But not every crazy-sounding idea ends up being big, Matthew OBrien wrote in The Atlantic in a brilliant takedown of bitcon. This bitcon, is it anything like bitcoin? In truth, the best bitcoin can hope for is to be a second-rate version of gold, if that. And Warren Buffett once described gold this way: Gold gets dug out of the ground in Africa, or someplace. Then we melt it down, dig another hole, bury it again and pay people to stand around guarding it. It has no utility. Anyone watching from Mars would be scratching their head. Only once before has a protocol had so much impact on the human race as bitcoin has the potential to have; TCP/IP. Perhaps if you read the Wikipedia page for this protocol, and then understand the myriad of marvellous ways in which it has been used and transformed all of our lives over the last 20 years, you might begin to wonder, what could an irrefutable (secured by laws of mathematics/cryptography) and pseud-anonymous (read: as anonymous as you care to make them) transfer of tokens be used for. Money/value transfer/storage is but one immediate and obvious use. Thats pretty much the way a Martian might think about bitcoin.

I would like to recommend some reading for you: http://bitcoin.org/bitcoin.pdf http://bitcoin.org/en/faq https://dl.dropboxusercontent.com/u/3658181/PiotrPiasecki-BitcoinMasterThesis.pdf

Andrew Ross Sorkin is the editor at large of DealBook. Twitter: @andrewrsorkin