Vviewpoints

Economic and
Business Dimensions
Why Bitcoin Has Value
Evaluating the evolving controversial digital currency.

pearing on my bill, I knew they were fraudulent. This type of fraud is almost impossible using bitcoins. No waiter can pad bills, no proprietor can forge new ones, and no one can delay a re-fund after both parties authenticate. Not even credit cards, which indemnify you against fraud, offer this protection. Yet public transactions do not mean Bitcoin infringes privacy. The buyer/seller/amount tuple records an account, not the identity of who owns that account. When properly administered, the Bitcoin protocol guarantees unauthorized parties cannot spend from an account while ownership of that account can remain private.

Fourth, and more practically, Bitcoin has value because people accept it—the same reason any form of money has value. “Money” is a medium of exchange, a store of value, and a unit of account. 5 Bitcoin has all three properties. Money can be wampum, shekels, yen, euros, dollars, rubles or renminbi. Money can be rock (gold), paper (notes), or scissors as long as people take it in trade, keep it as wealth, and measure it in prices. Overstock.com became the first major retailer to accept bitcoins as payments,

HOW CAN AN intangible cur- rency have tangible value? Bitcoin is a currency com- posed of nothing but bits. Unlike dollars or euros, bitcoinsa have no physical form, no government backing, and operate with little more than technical regulation. What value can a bitcoin have? If information can be copied or “wants to be free,” and bitcoins are nothing but information, why are they not free? As Bitcoin enters popular consciousness,b the digital economy offers this interesting question.

Consider four answers. First, Bit-
coin’s technical value lies in solving the
double spend problem. Each bitcoin
transaction uses public key cryptogra-
phy to create a permanent public re-
cord that registers a buyer, a seller, and
an amount as a tuple. This shows who
can and cannot spend a bitcoin. Even
someone who observes the transaction
a “Bitcoin” with a capital “B” refers to the net-
work protocol while lowercase “bitcoin” refers
to a unit of currency.
b Bitcoin entered the Oxford English Dictionary
in the summer of 2013.
cannot forge coin copies. Software keys
prevent anyone but the rightful owner
from spending them.

Second, the Bitcoin network enables near frictionless commerce as transaction fees approach zero. 1 Credit card companies and currency exchanges can take a 2%–3% “rake” from the value of each transaction so companies that currently enjoy this rake might oppose Bitcoin. 9 But any merchant competing online and enjoying a 5% margin chafes at losing half that margin to transaction fees. These fees represent friction that discourages trade and the movement of money. Just think of your neighborhood shop that refuses credit cards for small transactions because of high fees. Reduce these fees, people will spend more easily, and the economy will grow faster.

Third, Bitcoin is better than credit cards at detecting fraud because each transaction requires public authentication from buyers and sellers. Years ago, I had the experience of a restaurant putting fraudulent charges on my card. I dined there often, so I assumed meal-sized charges were accurate. But when I moved to a different city and charges from this restaurant kept ap-

DOI: 10.1145/2594288