So the dudes have mentioned them a few times in podcasts/quick looks, and I get that its some sort of digital currency, but what is it actually used for? the wikipedia page is covered in jargon, and I don't understand the practical value (if there even is one) to owning them. Where/how do they get spent/traded/used?
What the hell is a bitcoin?
Yep, pretty much what @renegadedoppelganger said. Supposedly they are very popular with smart drug dealers, being completely untraceable and all, which is probably the only thing keeping the scheme afloat. And I do mean scheme - the very fact that early adopters had an easier time getting Bitcoins than later adopters for no other reason than that they jumped on it first puts up red flags all over the place. That's basically how Ponzi schemes work. It used to be the case that anyone with a decent gaming rig could mine some coins and make a profit, these days you need to build specialized rigs because if you don't, it's perfectly possible that your electricity costs will be higher than the value of the coins you mine. Nobody really knows what will happen to the thing the day it will actually be physically impossible to make a profit on mining, but my guess is that it won't be pretty. Why?
The problem is that the currency isn't actually fulfilling some kind of demand. Overall, people and businesses are perfectly fine with the "conventional" currency. There isn't any massive dissatisfaction with the humble dollar, even if it went through some major inflation in this last crisis - which it did. I should know, I'm Swedish and buy a lot of tech that starts off priced in USD. It used to be that pre-crisis, a USD was worth around 8 Swedish Kronor. On last count that was down to 6.5 SEK, and at the worst points in the crisis that value occasionally dipped below 6. So right now, I'm getting close to a 20 % discount on anything I buy in dollars compared to a few years ago. But for ordinary people this doesn't matter that much - you can still trust that your salary this month will almost certainly be able to buy you the same things it did last month, or will next month, because we trust that our governments and central banks will keep it that way. Which they do, most of the time. For normal people that's all that matters.
So why Bitcoins? Apart from any possible get-rich-quick schemes, or wanting to cover for illegal activity, it's down to ideology. Bitcoin acolytes deride conventional currency as being unreliable and usustainable, prone to rapid shifts in value and doomed to long-term inflation and devaluation, because it's not based on something with physical value or anything else beyond what the Fed and other central banks around the world say it's worth - which Bitcoin, supposedly, is. That's the argument I hear the most from Bitcoin supporters: that because Bitcoins are limited in number they are more resistant to inflation and speculation than real world currency.
Oh, if that was only the case. In reality, Bitcoins are significantly more prone to sudden and dramatic devaluation and revaluation than any other currency on Earth. This is how the value of Bitcoins changed over the past few years:
Yes, you're reading that right - time on the X axis and exchange ratio of Dollars-per-Bitcoin on the Y axis. In May 2011, Bitcoins were worth about 4 USD. At the high-point in June, they were worth an insane 700 % more than that at 29 USD per Bitcoin. They then rapidily devalued back down to 4 USD in November. Imagine if you got a new job paid in Bitcoins and came to an agreement with your employer when it was worth 16 USD in early June: in mid June it looked your salary was going to be worth twice as much, at payday at the end of June it was back to the same value and a little under half a year later, in November, you would struggle to put food on the table because your salary would only be worth 4 USD, a mere quarter of what you started off with. It doesn't actually matter if Bitcoins are immune to inflation, as some claim, because we do not live in a world where you can sustain yourself on Bitcoins alone: you need real currency to pay rent, buy food, electricity for your rig and countless other things. Because of this, the consequence of a devaluation of Bitcoins in relation to USD are identical to an inflation for someone living in America. The end user sees his hard-earned money suddenly drop in value due to factors beyond his control. If you look closely you can spot countless times that Bitcoins underwent devaluation that are less dramatic, and each of those times are like a mini-inflation.
The 2011 spike had nothing to do with the supply of Bitcoins. There was no dramatic decrease in supply which pushed prices. This article speculates that it might be connected to an article in Wired that pointed out to a lot of people that yes, you can totally buy untraceable drugs with Bitcoins, which might have increased demand, but that's impossible to prove. In any case, the vaunted stability of Bitcoins as compared to real currency is an illusion borne only from the ideologically fueled misunderstandings of economic theory that Bitcoins are based on, not actual, real world data.
So you might have figured out by now that I'm not a fan. I'm really not. I mostly find the entire enterprise rather harmless in the grand scheme of things, seeing as how I believe anyone ending up losing money on this only have themselves to blame, although I roll my eyes at the inane arrogance that drives it. Well, mostly harmless if you exclude miners suffering heat strokes while sleeping in the same rooms as the ludicrously heat producing rigs they build and suffer permanent brain damage as a result, I guess.
But mostly my disgust for the whole thing comes down to very simple fact: real currency is born from creation. People providing a service or a product that other people want. It was born from a desire to simplify trade beyond having to figure out how many sheep a cow is worth. Other real currencies that are by design limited in supply are connected to a commodity, mostly gold, that has real world demand and use. Those that are not can be created and destroyed at will, as they are nothing more than what we as a society agree that they are.
Bitcoin adherents say that the commodity Bitcoins are based in is "work" - but this is so laughably untrue that it barely requires refutation. Mining Bitcoins is not work. All you have to do is buy some equipment and run it. It requires nothing else; no expertise, not a single action beyond that to be taken to be taken by the "miner". He can lie down on his couch and let the rig "work" for him. That's not work, it's not even investment - it's barely consumption! It's waste, pure and simple. In all of human history, Bitcoin is the only currency that actively demands that we sacrifice real-life resources to sustain it. Every watt of energy, every piece of electronics that go into mining Bitcoins are things that could be so, so much better put to use somewhere else. Anywhere else. Instead they are wasted on nonsense equations that do not provide anyone with anything in order to make it possible for Bitcoin acolytes to claim, wrongfully so, as I pointed out, that Bitcoins have inherent value. Which they don't. And never will have.
Beyond drug dealers, illegal arms dealers and terrorists who like them because they can't be traced and are the perfect money laundering scheme.
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