The Insanity Of Bitcoin, Explained

There's no better way to appreciate the trippiness of the digital currency Bitcoin than this hallucinatory animated video.

If you've been paying attention to the news, you might have heard that digital currency Bitcoin is currently the talk of Wall Street after skyrocketing in value to trade at over $1,000. That's no mean feat for a virtual currency with no real-world representation that is, in effect, the collective hallucination of the world's hackerspace.

But if Bitcoin isn't real, how does it work? There are some incredibly thorough write-ups about Bitcoin on the web, but if you want to learn about the world's first all-digital currency, there are few ways more enjoyable than this beautifully animated three-minute short. It makes learning about Bitcoin as fun as dropping a tab and hitting the planetarium for a Pink Floyd laser show.

That Bitcoin Explained is so beautiful should be no surprise. Created by director Duncan Elms, recipient of an Honorable Mention at the 2013 Kantar Information is Beautiful Awards, the film's design pedigree is top-notch, with a cyberpunk visual style that looks like Neuromancer come to life. That's a wholly appropriate aesthetic, as the idea behind Bitcoin itself is something that seems like it came out of a William Gibson novel.

So what is Bitcoin? Essentially, Bitcoin is a digital currency created by a decentralized network of millions of computers. In this network, setting your computer to the task of solving increasingly complicated mathematical problems creates Bitcoins. Every time a computer solves the algorithm, its owners are awarded a certain number of Bitcoins. But there's a rub: the math problems Bitcoin asks computers to solve become more complicated roughly every 10 minutes, while the rewards for successfully solving those problems halves roughly every four years. Add to that the fact that only 21 million Bitcoins can ever be created, and what you have is a digital resource that acts like a natural resource: Bitcoins are not only in finite supply, but they are increasingly difficult to mine.

In the end, the idea of Bitcoin is one of a self-stabilizing currency that cannot be tampered with by banks and governments. If the United States doesn't have enough money to pay its bills, it can simply print some more, but that results in economic instability that can lead to extreme deflation. A Bitcoin can never become unstable this way, at least in theory, and because Bitcoins are theoretically anonymous, they are a favored way of paying for goods and services by those who are distrustful of traditional financial institutions, such as libertarians and techno-anarchists.

Money is a collective hallucination of mankind that has allowed us to build a civilization upon the back of a concept that is, by its very nature, ephemeral. It's only worth what people think it's worth. What makes Bitcoin so interesting is that it is transparently ephemeral and openly hallucinatory. How appropriate, then, that someone finally designed a primer on the currency that is just as trippy. If you want to learn about Bitcoin, or just appreciate how phantasmagoric money is in general principle, watching Elms's video is three minutes well spent. Just be warned that Bitcoin is especially volatile right now, making some of Elms's exact figures a little out of date.

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  • bitbutter

    "the math problems Bitcoin asks computers to solve become more complicated roughly every 10 minutes,"

    This is false. The system 'difficulty' changes once every 2016 'solved' blocks. A block is solved on average once every ten minutes. The difficulty can go down as well as up. It varies in response to how long the entire network has been taking to confirm blocks (the system seeks to keep the average of ten minutes between solved blocks).

    "If the United States doesn't have enough money to pay its bills, it can simply print some more, but that results in economic instability that can lead to extreme deflation."

    I think you mean inflation (or hyperinflation).

  • TGderp

    This video is pretty, but it's technically inaccurate and doesn't answer some pressing questions that people have about the currency. If you want a true understanding of the system, I recommend you read original specification by Bitcoin's creator. It's technical, but very short.

    Think of Bitcoin as a giant ledger of transactions. This ledger knows the location of every existing unit of BTC (a.k.a. Bitcoins). This ledger exists on the computer of each participant. How do we ensure that this ledger is accurate and up-to-date? How do we prevent tampering?

    Bitcoin uses two well known and widely used cryptographic functions, called "hashing" and "signing".

    - Hashing is used to "mine" BTC. The input to this this hash algorithm is the existing ledger, plus some space for random data, known as a "nonce". The output looks like a random number, but is always the same, given the same input. When someone generates an output that is close enough to an agreed upon "target" number, then that participant gets a new batch of BTC. Of course, he shares his discovery with all other participants so that they can verify that his discovery is legitimate. Then, all participants update their ledgers and the process restarts!
    - So, hashing promotes the integrity of this ledger, and participants have incentive to participate since they may receive BTC in the process.
    - Signing is used to transfer BTC. Cryptographic signing is a widely used method of verifying that a certain user account sent a message. This signature can't be forged. So, when you want to transfer (spend) BTC, you just sign a transaction stating, "I am address ABC and am sending X BTC to address XYZ." You then broadcast this message to the rest of the Bitcoin network, so they can verify it and add it to their ledger.

    The system is incredibly elegant.

    Disclaimer: I own exactly 0 BTC. I just find the cryptographic applications fascinating.

  • Joey Lopez

    This didn't explain anything - there are three main pieces of the puzzle missing from this video:
    1. Who started BitCoin and/or where did it come from? Could they possibly still be in control of it?
    2. What "problems" are one's computer solving?, for what purpose?, If it is transaction analysis how did the first transactions start? (chicken/egg), is this economy literally driven by whomever has the most computers and processors at hand to mine? = the richest miners get the richest fasters by way of simply having many computers in a server farm?
    3. What gives the bitcoins currency value? why do they have any monetary value for that matter?
    One final observation on all of this: due to the decentralized nature of the currency, there is no way for anyone who might be robbed/hacked, to recover their money, nor for authorities to assist you, nor is there any kind of insurance (e.g. FDIC). It is a gambling game played in the ether, and the cashier is a random bunch of opportunists.

  • bitbutter

    1. 'Satoshi Nakamoto' (a pseudonym) and no.
    2. The miners are calculating hashes. They're doing this to provide 'Proof of work'. Roughly, it helps secure the network. More technically, this scheme provides the bitcoin network with a property called byzantine fault tolerance.

    "is this economy literally driven by whomever has the most computers and processors at hand to mine?"

    Depends on what you mean by 'literally driven'. Miners are crucial to how the bitcoin system works though.

    "What gives the bitcoins currency value?"

    Value is imputed to goods (such as gold, or bitcoin) according to the goods' expected serviceability in satisfying wants.

    Individual bitcoins are imputed value because they are the only means of transacting on the bitcoin network. The network has particular qualities that help people satisfy their wants such as: Very low cost global transactions. Peer to peer digital transactions with no counter-party risk (this is a big deal, and totally new). Fixed supply cap guarantees scarcity and means no worry of devaluation through inflation.

    "It is a gambling game played in the ether, and the cashier is a random bunch of opportunists."

    No more than holding fiat cash is a 'gambling game'.

  • dirtjockey

    "This didn't explain anything" - really? - I though it was a great overview, and that was what it was, an overview, the author never claimed it to be a comprehensive and detailed explanation.

    Having said that, clearly you are not bright enough to realise that, and, instead want to complain about someone else's hard work - so why don't you get in, do your own research and come up with the answer to your "missing pieces of the puzzle".

    Once you've done that - why don't you try and put together a nice animated video to describe it - but I'll bet it would not come close to being as clean and professional as this one.

  • Joey

    I know your only point in replying to Joey Lopez was to be a jerk, but I agree. Before you start insulting the man's intelligence, take note of the title "The insanity of Bitcoin Explained". It wasn't explained. It was told how people are using it, and that people use it, but not why its worth anything, etc.

  • dirtjockey

    Hmm - because I do not agree with something that someone has written (according to you) that makes me a jerk - so then based on that assessment that must make you a jerk because you don't agree with what I've written, and then the next person that is going to write against what you've written against me will then also be a jerk - oh my goodness the world is full of jerks.

    So to clarify - I replied simply because I did not agree with Joey's Lopez's determination, it certainly was not my aim to be antagonistic, and rereading my post it was inappropriate to write "clearly you are not bright enough to realise that"

    So to sum up my assessment - I believe the explanation was well written and executed in a movie that to a reasonable person would give them a good understanding of what Bitcoins are, anything beyond that is purely subjective.

    So guess what, I don't agree with you either.

  • Joey

    "...clearly you are not bright enough..."
    That's the part I was referring to.

    So yes, you missed those 6 words in your post when re-reading, and then wrote 3 paragraphs because of that error.

  • Ingmars Lazdiņš

    What are those Math Problems? I remember the SETI program, but all this Bitcoin shiz sounds more like "help us crack this encryption algorithm so that we can create more sophisticated malware to steal from innocent". Anti-Robin-Hood so to speak.

  • Tony

    It's just a hashing problem that is used to make sure no one can create fake bitcoins. Nothing to do with malwares. Bitcoin is open source software, anyone can read the code.

  • GoodNPlenty333

    "the math problems Bitcoin asks computers to solve become more complicated roughly every 10 minutes"

    This is not true. New blocks are found on average every 10 minutes or so, but the difficulty of finding those blocks is adjusted by the network around every two weeks.

  • nik5ter

    "If the United States doesn't have enough money to pay its bills, it can simply print some more, but that results in economic instability that can lead to extreme deflation."

    This is false. All else equal, more dollars chasing after the same goods will result in inflation. Dollars = inflationary. Bitcoin = deflationary.

  • jurrens

    it's in reference to the dollar "deflating" as in losing value. Not the concept of inflation and deflation that you're thinking of

  • jurrens

    ... which is called deflation... deflation refers to "price dropping" where inflation is "price rising." so when the dollar loses value, it itself is deflating, where the consumer is facing inflation.

  • Ben Brown

    You have it backwards.

    Using the word "deflation" when discussing currencies does not mean devaluing, it means the opposite. So using it in that context is incorrect and misleading.

    When a currency is facing deflation, its value increases, not decreases.

  • jurrens

    I'm a financial analyst, so sorry for getting technical on you. What you (Ben) and Marty are saying is correct, but there is more than one use of deflation in finance and currencies. So, you may think it "misleading," but it is a proper use and can be confusing at times.