I mentioned Bitcoins in “What is Money?” a blog I wrote almost two years ago. In that blog I predicted that by itself, Bitcoins would not gain wide use, that it needed a backer for it to gain the necessary trust of people. Boy was I wrong. Bitcoin has become so popular since I wrote that blog. It has had its ups and downs, but I think it is slowly but surely gaining adherents. I am now definitely a believer.

There are two things about Bitcoins that are quite remarkable.

The data that holds the blueprint for our biological being is stored in our DNA. Now each DNA strand is a very fragile thing. The absolute genius of the design is that the same data is stored not in a single DNA strand, but in billions of copies of the same data storage DNA. The whole organism will have to die in order to lose this data, but even then it is possible to retrieve it. It is even possible to retrieve it from anything the organism has touched.

What has this got to do with Bitcoins? This same idea of a distributed, highly redundant design has been applied to the Bitcoin system. The database that holds all past Bitcoin transactions are stored in a set of files that are distributed in every corner of the world. So the reliability of this database is unprecedented, in that it is truly distributed. It is scattered all over. Once you use Bitcoins, your computer system (whatever it is, a PC, a tablet, a cell phone) will be storing this database. This means that, as it gains wider use, it becomes more resilient. In order to destroy the database that holds Bitcoin transactions, the whole world would have to be annihilated along with it.

Our DNA is somewhat static in that in doesn’t change in our lifetimes, so duplicating it a billion times is trivial. The Bitcoin database, however, is very dynamic, and so computers that store it use the Internet to update each other constantly. The update process itself is complex because a million different versions of the same database can exist at any one time.

Amazing, isn’t it? Bitcoin may be the solution to the coming fiat money crash. It is very decentralized, and so is not controlled by any entity nor any country. The only way that any government can control it is by prohibiting its use, but even then enforcement would be almost impossible. It has now gained a free life of its own.

The other thing that’s remarkable about Bitcoins is its use of cryptography. Of course, the distributed database of transactions is fully encrypted, in blocks. But the more interesting question to ask is, How can I own Bitcoins? How does the system know I own, say 23 Bitcoins? Each of us can have as many Bitcoin “account numbers” as we need. A Bitcoin account is just a long, unique pattern of computer bits, such as

17Wym1bjWKuQ2WhVtgZxvLzFohGp9tDPws

Which happens to be one of my accounts, and which is now useless (more on that in a minute). This pattern of bits is also called a Bitcoin address, and it can be both a destination (payor account) or a source (payee account). For this particular address or account to receive payments, nothing else is required other than this account number itself. Anybody can send Bitcoins to this account. However, because I lost my private key to this account, I can’t use any of the Bitcoins that may be credited to it, and nobody else can, either. One needs a PRIVATE KEY in order to send from one’s Bitcoin account. This is no different from needing a password in order to access your email account. If nobody else knows that password, you can be assured that only you are able to read your emails. If you forget that password, and the email system you use does not have a password retrieval system, then all your email is lost.

The PRIVATE KEY is the Bitcoin system’s only way to determine ownership of an account. You can claim ownership of the account above if you know its private key. Simply trying to guess it is next to impossible, because it’s about as long as the account number itself. Lots of computational power will have to be applied in attempting determine that key, which is akin to dropping a safe from a window in order to open it. But even then there is only a small chance of determining that private key and thereby gain ownership of the account. (Some accounts can have more than one private key, just like you can open a bank account that needs two or more signatures to withdraw.)

An account is therefore useless without its private key. This has two implications:

1. The account owner better be sure that this key is safe, specially if the account already holds Bitcoins. Any thief can steal all your Bitcoins by somehow obtaining your private key. If you plan on using Bitcoins, this is one aspect that you have to be extra careful about. Because this private key is not easy to memorize, you will have to store it somewhere. You can encrypt it, but then you will have to remember the key you used to encrypt it. (This is like hiding a key in a drawer, and holding on to the key to that drawer.) Bitcoin trader sites like MtGox.com store this key in their servers, which I think is problematic. It’s not that I don’t trust MtGox.com, but if anybody lays their hand on those private keys, they would be certainly tempted to run away with all those Bitcoins. I would never allow any of my private keys to be stored anywhere else except in something that is in my possession. However, even storing it in any of my personal computers can carry a certain risk because cyber thieves can possibly get hold of them. I think the safest way to protect an account that holds some considerable amount of Bitcoin money is to encrypt the key using another key that is very easy to remember but very difficult for others to guess, copy the encrypted key to a USB thumb drive, and then hide that thumb drive in a safe.

2. It is quite possible for an account that holds lots of Bitcoins to get lost, like I lost my key to the above account. My understanding is that, Bitcoins lost in this manner are lost forever. In other words, if I inherited millions of Bitcoins from my father, and he dies without giving me the private key, there is no way for me or even my descendants to retrieve those Bitcoins.

I may be wrong on this, but I think this also means that, the absolute count of Bitcoins can decrease in time. This happens to real coins too, and so minting of real coins is a regular affair. However, in the case of Bitcoins, it seems that “minting” new coins is not possible. (Bitcoins can be “mined”, but the total quantity that can be mined is also limited.) Even though each Bitcoin is divisible into billions of parts, the value of each Bitcoin, and each of its billions of parts, can only increase and never decrease. No inflation! But deflation maybe just as bad as inflation. This certainly is worth looking into more closely.

Nevertheless, in the current state of affairs, Bitcoin has certainly exceeded expectations. I believe it will continue to do so in the foreseeable future.