[kamaal]

Sorry for asking a noob question.

But what really is a bit coin? I mean in physical existence. Is it just a file(plain text) with some data/metadata?

And stealing it means copying those files, and then deleting the source?

Which in case how is this any different than traditional bank account. My money in the bank is basically DB record. And that can be stolen.

The bank can then just say to every one 'look this transaction from db such and such is no longer valid'.

Can't bit coin do the same? I guess I'm missing something fundamental.

Can somebody explain this?

[coopdog]

A 'bit coin' is a space on a block chain that everyone has a copy of. You lock the coin with a cryptographpic key, which you need to store. Whoever has a copy of the key can unlock the bitcoin and re lock it with a different key, such that now only the new owner has a copy of the key. Everyone can still see the entire block chain, but only one account (that no one knows the owner of) has the ability to move that coin.

So they got access to these peoples keys and transferred ownership of the coins.

Most money supplies are regulated, but bitcoin isn't regulated. No one has the ability to say 'reverse that transaction', but it also makes the currency safe from inflation and interference by money printing governments and privacy snoops.

[chalst]

makes the currency safe from inflation

There's an economic myth that inflexible supply of a commodity gives that commodity when treated as money, stability. It does not, as looking at this graph of US inflation/deflation time shows (1944 is when the dollar stopped being gold convertible):

http://en.wikipedia.org/wiki/File:US_Historical_Inflation_An...

A few points:

1. The money supply around a currency not only contains the mined/minted instances of that currency, but also liquid currency-denominated assets, like customer bank balances. So money supply is not necessarily bounded.

2. Inflation/deflation can be considered measures of the change in demand for the currency. In times of deflation, holding money is valuable because it becomes more valuable.

3. From the above graph, you see that during the gold standard, inflation tended to be mostly balanced out by deflation in the long-term, so long-term inflation was low. But in the short term, prices were very unstable as inflation jumped all over the place, and far more unstable even than fiat money in the past three turbulent years that we've seen.

4. From the point of view of an economy, inflation and deflation are not symmetric; because of the value of sitting on money during periods of deflation, savers do not tend to invest their money but move money from investments to cash savings. This undermines economic activity. But in an economy with a rich range of investment opportunities, moderate inflation does not penalise acquisition of money and does encourage investment.

If you want a non-performing store of value and don't mind big fluctuations in value, gold is there and we know how to secure gold rather well. Bitcoins are another non-performing store of value with far more drastic fluctuations in value, and securing it involves the double vulnerability: physical security of storage media, information security of computations involving bitcoins. And it is much easier to accidentally lose bitcoins than gold, pirate tales notwithstanding.

[stuhood]

> physical security of storage media, information security of computations involving bitcoins

Only funds that you have daily access to need be vulnerable to the latter point, as physical security (air-gapping) is sufficient when you do not need to -send- funds.

> And it is much easier to accidentally lose bitcoins than gold, pirate tales notwithstanding.

Strongly disagree. Can you keep N redundant copies of your gold? Combined with secret splitting, you could require that at least K of N secure locations be accessed.

[chalst]

> Only funds that you have daily access to need be vulnerable to the latter point

I'm talking about protocol risk: e.g., the software that implements the protocol on some machine is flawed, so the cryptography can be effectively breached. Or there is some issue with the protocol, like but worse than the issue Kaminsky found with anonymity.

>Can you keep N redundant copies of your gold?

Have you ever found that your backups didn't contain what they were supposed to contain?

Gold gets stolen, but besides such things as costume jewellery, I think it doesn't often get lost.