Why on Earth Do People Use Bitcoin?
Texas Tech University School of Law
Business & Bankruptcy L.J., Forthcoming
Bitcoin is making near-daily headlines, whether about its volatile exchange rate, the regulatory issues is raises, or its criminal associations. As the public becomes familiar with the idea of virtual currencies, many people struggle to understand why users exchange government-backed (“real”) currencies for Bitcoin. This paper explores the appeal and danger of investing in Bitcoin for speculative gain, for moral purposes, for its spending power, and for its criminal applications.
Why on Earth Do People Use Bitcoin? – Introduction
Since I began reading, writing, and speaking about Bitcoin, I often find myself describing it to people who’ve never heard of it.
“It’s a digital currency,” I explain.1 “It exists solely on the internet. It’s not backed by any government, or a company, or by the price of gold. It’s a computer code that’s run on thousands of computers, all networked together over the internet.
“The code solves a series of math problems,” I continue. (I have my spiel pretty well down by now.) “All the computers networked together work to solve these really complicated math problems, and the solution to each problem is a long string of letters and numbers that is a bitcoin.2 Once a bitcoin is generated, it’s randomly awarded to one of the computers in the network, and the code starts in on solving the next math problem.”
I then explain mining versus buying: “If you want to, you can download the Bitcoin software onto your computer and contribute your computing power to solving the math problems. You might do this in the hopes of being rewarded with a bitcoin once it’s generated. That’s called mining for bitcoins. But it would probably take you a couple of years to mine a bitcoin from your home computer, so if you don’t want to wait that long, you can just buy some from a website, a digital currency exchange. You give them dollars and they give you bitcoins.”
If I’m really testing the boundaries of Bitcoin-newbies’ patience, I’ll also throw in, “You may have heard of a big FBI bust of a website called Silk Road, in early October, 2013. Silk Road was a website that matched up buyers and sellers, kind of like eBay, except that there were illegal drugs and weapons for sale, so long as the parties transacted in Bitcoin. Silk Road used Bitcoin because your Bitcoin account doesn’t have your name attached to it.”
Plenty of people look pretty shell-shocked by this point in my talk, so this is where I usually pause for questions.
“People spend real money on this?” is a frequent question I hear. Yes, they do – in late October, 2013, a single bitcoin cost about $200 (which was actually more than a bitcoin was worth before Silk Road was shut down).3 In November, 2013, after some positive media coverage in China and a U.S Senate hearing that signaled the currency’s legitimacy, the price of one bitcoin shot up over $900, and as of this writing, it remains high.
These details usually lead to my favorite question, one where listeners take a huge step back in an effort to see the big picture: “Why would anyone get involved in all this?”
So, why on earth do people use Bitcoin? Why bother mining for bitcoins, why exchange your salary or savings for an intangible digital currency? An intangible currency with a wildly-fluctuating exchange rate and criminal associations, to boot?
Many individuals invest in Bitcoin specifically to take advantage of its price fluctuations. The old standby of “buy low, sell high” applies to Bitcoin as well as it does to anything else, and plenty of people buy bitcoins because they believe that the current price is less than the price will be in the future. For example, Kristoffer Koch spent about $27 in 2009 to buy 5,000 bitcoins, and by late 2013 had $886,000.
See full article by SSRN