Digital currency Bitcoin is the subject of this week's hype. And while I agree with Adam Cohen's analysis that it's likely a scam, I don't think it's inherently a scam and it's an interesting implementation of cryptoanarchy.

The basic idea of Bitcoin is you have a file on your hardrive that, through the magic of cryptography, is unique and unforgeable and says essentially "Nelson owns 5 bitcoins". Bitcoins can be created by users out of thin air but via more math magic there will only be 21 million bitcoins ever. Bitcoins can be traded and verified and double spending is preventable (math, is there nothing it can't do?). As long as people agree that Bitcoins can be exchanged for dollars then we have a new currency. (At current rates, a Bitcoin is worth about 7 USD).

The economics and politics of the Bitcoin idea are anarchic. The primary advantage of cryptocash is it exists outside the control of any government. Untraceable, unregulated currency, I wonder who benefits most from that? The history of previous electronic currencies like e-gold suggests the main use of a cryptocurrency will be fraud. It didn't have to be that way. Back in the mid 90s when Internet commerce was just taking off, e-cash had a real chance to be an alternative to credit card payments. If things had gone differently, maybe we'd be buying our socks on Amazon with DigiCash instead of Visa.

But the credit card networks are expensive, scalping roughly 2% of every transaction. There's legitimate value in having a cash-like system for the Internet. And the Bitcoin technology seems to be an honest implementation. I didn't spend the time to understand the protocols, but at its core it's a fully decentralized system with peers exchanging signed messages about the flow of money. I fully believe the math can be made to work (although Bitcoin's protocols no doubt have problems).

The implementation has some drawbacks. The default Bitcoin client is not suitable for casual users. And there's a lot of latency. Two hours later I'm still waiting for the data to synchronize. I claimed my free 0.02 bitcoins from the Bitcoin Faucet but it took over 10 minutes for the transaction to show up on BlockExplorer. And the money still haven't arrived.

One fascinating bit of the tech is Bitcoin mining. It takes weeks or months for a single system to generate Bitcoins, so long the mining option is being hidden. Instead people pool their efforts and use GPUs to do the math. A GPU is some 200 times faster at the crypto than a CPU, using OpenCL code like poclbm.

I expect Bitcoin itself will be forgotten in five years or else consigned to being a currency largely used for fraudulent transactions. (Here's an interesting bet: $1000 in Bitcoins against $1000 in gold, to be paid in 5 years.) But I hope the idea of cryptocash continues to be developed and improved; it'd be nice to have a cash equivalent for the Internet that wasn't PayPal.