In the New Yorker, Maria Bustillos reviews the history of bitcoins:

In many ways, bitcoins function essentially like any other currency, and are accepted as payment by a growing number of merchants, both online and in the real world. But they are generated at a predetermined rate by an open-source computer program, which was set in motion in January of 2009. This program produced each one of the nearly eleven million bitcoins in circulation (with a total value just over a billion dollars at the current rate of exchange), and it runs on a massive peer-to-peer network of some twenty thousand independent nodes, which are generally very powerful (and expensive) G.P.U. or ASIC computer systems optimized to compete for new bitcoins. (Standards vary, but there seems to be a consensus forming around Bitcoin, capitalized, for the system, the software, and the network it runs on, and bitcoin, lowercase, for the currency itself.)

[. . .]

There is an upper limit of twenty-one million new coins built into the software; the last one is projected to be mined in 2140. After that, it is presumed that there will be enough traffic to keep rewards flowing in the form of transaction fees rather than mining new coins. For now, the bitcoins are initially issued to the miners, but are distributed when miners buy things with them or sell them to non-miners (such as jumpy Spanish bank depositors) who desire an alternative currency. The chain of ownership of every bitcoin in circulation is verified and registered with a timestamp on all twenty thousand network nodes. This prevents double spending, since no coin can be exchanged without the authentication of some twenty thousand independent cyber-witnesses. In order to hack the network, you would have to deceive over half of these computers at the same time, a progressively more difficult task and, even today, a very formidable one.

[. . .]

A casual review of Nakamoto’s various blog posts and bulletin-board comments also confirms that, from the first, Bitcoin was devised as a system for removing the possibility of corruption from the issuance and exchange of currency. Or, to put it another way: rather than trusting in governments, central banks, or other third-party institutions to secure the value of the currency and guarantee transactions, Bitcoin would place its trust in mathematics. At the P2P Foundation, Nakamoto wrote a blog post describing the difference between bitcoin and fiat currency:

[Bitcoin is] completely decentralized, with no central server or trusted parties, because everything is based on crypto proof instead of trust. The root problem with conventional currency is all the trust that’s required to make it work. The central bank must be trusted not to debase the currency, but the history of fiat currencies is full of breaches of that trust. Banks must be trusted to hold our money and transfer it electronically, but they lend it out in waves of credit bubbles with barely a fraction in reserve. We have to trust them with our privacy, trust them not to let identity thieves drain our accounts… With e-currency based on cryptographic proof, without the need to trust a third party middleman, money can be secure and transactions effortless.

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Much of what has been written so far about bitcoins has centered on the perceived dangers of their relative anonymity, the irreversibility of transactions, and on the fact that they can be used for money laundering and for criminal dealings, such as buying drugs on the encrypted Web site Silk Road. This fearmongering is a red herring, and has so far prevented the rational evaluation of the potential benefits and shortcomings of crypto-currency.

Cash is also anonymous; it is also used in money laundering and illegal transactions. Like bitcoins, stolen cash is difficult to recover, and a cash transaction can’t readily be traced back to the source. Nor is there immediate recourse for the reversal of transactions, as with credit-card chargebacks or bank refunds when one’s identity has been stolen. However, I find it difficult to believe that anyone who has written critically of the dangers of bitcoin would prefer an economy where private cash transactions are illegal.

Update: Meet the $2 Million Bitcoin Pizza.

Floridian Laszlo Hanyecz thought it would be “interesting” to be able to say he paid for a pizza in bitcoins. He worked out a deal where he transferred 10,000 of his bitcoins to a guy in England, who ordered him two pizzas from Papa Johns.

Today, one Redditor notes, those 10,000 bitcoins would be worth about $2.3 million, thanks (in part) to folks fleeing unstable and politically risky state currencies in Cyprus and elsewhere.

Some news outlets are covering this as a “doh!” story. But these pizzas were a huge publicity boon for Bitcoin, contributing to the success of the currency today. If Lazslo had been a hoarder, perhaps his bitcoins would be worth very little now. Cashing in bitcoins for pizza when they were worth a fraction of a cent each is not obviously smarter or stupider than selling now would be, with bitcoins trading at $234. It’s a bet on which way the market is headed, that’s all.