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Overview | What are bitcoins, and why are people buying them? What makes currency valuable?

In this lesson, students explore the fundamental characteristics of currency by reading and researching about the bitcoin, the experimental and upstart digital commodity that has grabbed the attention of speculators, investors, bankers and regulators around the world.

Materials | Computers with Internet access

Warm-Up | Ask students to watch the above video about the bitcoin asking the question: What makes money — money? Then have students discuss the video, and their understanding of how money works. If you have additional time, students can work in small groups to invent a new currency. Groups should consider: What would your currency look like? How would they acquire it? What would they use it for? And how might it gain, or lose, value? Then groups can share before the class reads the related article.

Related | In his Op-Ed article “Much Ado About Bitcoin,” Adrian Chen, a journalist who helped bring the bitcoin mainstream attention, describes the basic premises of the digital currency:

Bitcoin is built on a weird mix of the most old-fashioned kind of speculative greed, bolstered by a contemporary utopian cyberlibertarian ideology. Boosters say that the bitcoin is the currency of the future. I’d argue that the phenomenon is a digital gold rush perfectly emblematic of the present. Some of the bitcoin’s appeal comes from the fact that it does not physically exist. Each bitcoin is just a string of numbers. Instead of a bank, a decentralized network of computers ensures the authenticity of the bitcoin and issues new ones by doing complex calculations. This allows the bitcoin to be traded peer to peer, bypassing credit card companies and payment processors. It’s digital cash, offering the same relative anonymity and freedom as a paper sack of bills.

Background Vocabulary | Read the entire article with your class, then answer the questions below.

Questions | For discussion and reading comprehension:

What is the bitcoin, and who created it? How did the author come to learn about the bitcoin? How much has the value of a bitcoin changed since the author first learned of the currency? According to the author, who uses the bitcoin? What are some of the reasons people would want to buy bitcoins? Does the author believe the bitcoin has a viable future? Why or why not? What do you think will happen with the bitcoin going forward? Will it be successful as a new currency? Why?

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Activity | Have students explore the fundamental characteristics of currency by reading and researching about the bitcoin. Begin with this short history of the bitcoin so that students can familiarize themselves with the currency’s origins and emergence into mainstream use. Then have groups of students choose some of the following aspects of the bitcoin to research and present on.

1. How is the bitcoin being used as a currency, and by whom?

One function of currency is to facilitate the exchange of goods and services. In order for that to occur, people must be willing to accept the currency for those goods and services. So, who accepts the bitcoin as payment? Rides on Virgin Galactic’s commercial spaceflights and black market deals may not be for everyone, but here’s someone who bought all their Christmas gifts with the bitcoin.

And who is buying the bitcoin? Read this article about how the bitcoin is catching on with speculators in China, and see a real-time map of how bitcoins are circulating around there world.

2. What value does the bitcoin have, and where does it get its value?

Bitcoin’s F.A.Q. page explains why the currency has value:



Bitcoins have value because they are useful as a form of money. Bitcoin has the characteristics of money (durability, portability, fungibility, scarcity, divisibility, and recognizability) based on the properties of mathematics rather than relying on physical properties (like gold and silver) or trust in central authorities (like fiat currencies). In short, the bitcoin is backed by mathematics. With these attributes, all that is required for a form of money to hold value is trust and adoption.

Yet a currency has limited value unless it is officially recognized by nations and institutions. Who recognizes the bitcoin as a legitimate payment method? Read about what federal officials in the United States think about the bitcoin. And while China’s Central Bank initially signaled approval for the digital currency, recent developments suggest they may have changed their mind.

Ideally, the value of a currency should be stable and predictable. So, how much is a bitcoin worth? You can track the value of a bitcoin in United States dollars or in other world currencies.

3. How are bitcoins created, and how are they kept secure?

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Most currencies have the property that new money can simply be printed, but where do the new bitcoins come from? They are “mined,” which has become a competitive business opportunity for participants. Paul Krugman describes this process of mining as “a drastic retrogression” that is as fundamentally foolish as relying on gold and silver was a century ago.

When someone “mines” a new bitcoin, what is its value? Use the current value of a bitcoin or the total value of all the bitcoins in circulation to find out.

Although the new bitcoins can be “mined,” the maximum number of bitcoins that can ever be issued is 21 million and the rate at which new bitcoins are issued automatically slows over time.

Another important feature of currency is that its security is guaranteed. Who guarantees the security of the bitcoin? Who watches over all of the transactions? Read up on how the bitcoin works, and how security in the system is managed. Then read about recent episodes of fraud involving the bitcoin, and the limits of current regulations to crack down on digital currency theft.

Going Further

Will the bitcoin succeed as a currency?

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Neil Irwin writes in The Washington Post that the bitcoin is useful for teaching a lesson about why money has value, but that it won’t work as an important alternative monetary system. The Nobel Prize-winning economist Paul Krugman agrees that the bitcoin’s reliance on a fixed money supply may possibly make it a good investment, but not a healthy currency. It leads to speculating and hoarding, which damages its usefulness as a currency. Read the above articles about these potential fundamental flaws in the bitcoin’s design, and decide whether you think the bitcoin will succeed?

What other digital currencies are on the market?

Bitcoin isn’t the only digital currency on the market. Read about the competition among currencies in this DealBook article, and check out the values of various virtual currencies. Do you think a different digital currency design, one that doesn’t rely on a fixed money supply, might ultimately be more successful than the bitcoin in the long term? Or, is it the finite supply of bitcoins that actually makes the currency so appealing to investors?