Bitcoin is one of the world’s best-performing currencies, but its inception, rapid ascent and future are shrouded in legend and uncertainty. As a concept, Bitcoin challenges us to fundamentally question the idea of monetary value.
Despite a series of press rumours and false revelations, the identity of Bitcoin’s original developer is known only as a pseudonym: Satoshi Nakamoto. A few years after the crypto-currency emerged, Nakamoto disappeared entirely, ceasing to respond even to other developers’ messages. But Bitcoin had already taken on a life of its own.
Now, with many pondering replacements for our crisis-prone, bank-dependent monetary system, could digital currencies such as Bitcoin eventually supplant national ones? And is the crypto-currency system really so different from the status quo?
“Incredible genius”: the peer-to-peer revolution
When the idea of a digital currency first surfaced in notes on cryptographer mailing lists back in the 1990s, there were two major technical obstacles standing in the way. First was the question of how to stop inevitable attempts at fraudulent duplication of the digital tokens; second was the challenge of keeping an accurate record of the movement of money.
For the answer to both, Bitcoin creator Satoshi Nakamoto looked to peer-to-peer technology. The main draw of peer-to-peer was that there would be no need for a centralized authority—no equivalent of a holding bank—but rather a network of Bitcoin users that would act at once as owners of the currency and as ledger keepers for it. This group ‘ledger’ came to be known as the blockchain.
Rather than data being kept by a third party, records of Bitcoin transactions take the form of digital nodes that are tracked by every member of the ecosystem. It’s like having unique GPS-chipped money on a big, interconnected map; the blockchain records the Bitcoins that exist in Location A (my wallet) and will track any that move to Location B (your wallet), and vice versa.
“That means if you try to ‘double-spend’ and give the same Bitcoins to two different people at the same time, everybody notices and one or the other of those transactions is considered valid and the other is just ignored”, explained Gavin Andreson, one of Bitcoin’s earliest lead developers. “Solving this double-spend problem was the key technical breakthrough that made Bitcoin possible.”
It’s a little like peer-to-peer file sharing, where there’s no central bank for the millions of films or TV programmes, but rather a network of individual file owners who participate in instant peer-to-peer transactions, such as downloading or uploading files from other users. But unlike music files, Bitcoins can’t be duplicated, because the same coin cannot exist in more than one ‘map’ location at the same time.
“Bitcoin answers another question in a magical way”, said Peter Vessenes, head of the Bitcoin foundation. “Could a bunch of people who don’t trust each other all agree on when something happened so precisely that you could use it to transfer value? People who’ve never met each other and who will never meet, just by passing messages.
“The immediate answer to that is: no way. It’s incredible genius.”
Capping Bitcoin: 21 million by 2040
Bitcoins are running out. There are currently almost 16 million units in circulation, with 25 new ones created—or “mined”—every ten minutes. Much like ordinary national currencies, Bitcoin involves the regular production of new coins, but unlike ordinary currencies, there’s no state-led ‘quantitative easing’; no large-scale money-printing initiatives to boost the economy.
Instead, dedicated Bitcoin miners search for new Bitcoin ‘blocks’ using complicated mathematical software. To prevent an overwhelming influx of coins entering the market along with a spate of new miners, the process involves solving complex maths problems of variable difficulty. These problems take precisely ten minutes to solve, with miners earning a transaction fee as well as a share of new coins as a reward—currently 25.
These available ‘rewards’ for miners are halved each time 210,000 new blocks are discovered, meaning that the Bitcoin production will effectively cease in 2040 when there are 21 million total coins in circulation. At present, we’re about 72 percent of the way there.
Once all the Bitcoins have been distributed, transactions on the blockchain will continue, with miners incentivized to work for transaction fees. With a finite number of coins, developers believe the value of Bitcoin will increase exponentially, making facilitating transactions (with, say, a fee of 1.5 percent) more and more lucrative.
Mining could once be done relatively easy with an ‘ordinary’ computer, but it quickly developed into a much more intensive process requiring specialized equipment and the constant monitoring of temperatures. Jason Gantt, an early Bitcoin adopter who started a mining operation with his father, told the online news platform Coindesk that the process was akin to babysitting—with a few causalities in the early months due to processors overheating.
Most of the early miners and buyers of Bitcoin were interested in the intellectual and political potential of the project more than its monetary value. Now, of course, there’s an added benefit: Bitcoins are increasingly spendable.
Moving into mainstream consumer culture
Much like its anonymous founder, Bitcoin once seemed as if it would be permanently mired in the shadowy world of the deep web; used only by faceless hacktivists and self-professed cypherpunks. Then, in recent years, the currency almost imperceptibly started to move outside of its original environment and into the wider mainstream.
Bitcoin ATMs have recently brought the digital currency to the streets of major cities from London to Los Angeles, while brick-and-mortar casinos and bookmakers have joined their digital counterparts in accepting the currency for gambling. Hundreds of online retailers and businesses now accept Bitcoin, from travel sites to crowd-funding platforms, and in June 2016 Bitcoin received a further boost after Paypal agreed to partner with Coinbase—a virtual currency wallet and exchange—to allow its users to cash-out Bitcoins using their accounts.
The Isle of Man, a region with a strong online gambling and financial services contingent, has been actively working on Bitcoin-friendly regulation over the past few years. But while the government’s policies are in rapid development, Brian Donegan, head of operations at the island’s eBusiness division, admits that they’ve been set back by the UK banks’ unwillingness to engage with the currency.
“It’s really about the banks”, he said. “We’ve got a strong proposition, growing businesses around the blockchain space, but we’re looking forward to the day the UK banks open up for Bitcoin exchanges, and iGaming can connect with the exchange ecosystem and offer their services to their clients online.”
The transactional nature of iGaming—online slot machines, for example—makes it an ideal partner for crypto-currencies. Rather than collecting money from players, and handing out the winnings later, the blockchain means that operators are spared costly and time-consuming monetary transfers. Players can bet sums of money and the ecosystem will simply acknowledge the rising and falling credit of the operator and consumer, determined by the game in real time.
A post-Paris crackdown
The rise of Bitcoin has not been without controversy. The core factor that initially attracted swathes of users and miners to the project—a lack of third-party control from governments or banks—has increasingly been put under scrutiny as nations strive to tighten counter-terrorism measures.
In the aftermath of the shootings that left 129 dead in Paris on 13 November 2015, one anti-terrorism hacktivist group revealed that they had uncovered a series of Bitcoin wallets linked to Islamic State. Talking to News BTC, an anonymous member of Ghost Security Group said he had hacked one ISIS-linked wallet containing 3 million US-Dollars worth of Bitcoins.
“Most of the Bitcoin funding sites utilized by the Islamic State are on the deep web and we have managed to uncover several and successfully shut them down in order to limit the funding extremists receive through the use of cryptocurrencies”, he said. “Most of the evidence we have seen thus far indicates that Bitcoin is their prime form of cryptocurrency. It is currently unknown if they have the capability to mine Bitcoin, but they do receive donations on a regular basis.”
As governments rushed to pen a series of new, wide-reaching surveillance bills, EU member states gathered in Brussels for a crisis meeting to discuss the links between digital currencies and terrorism. By the start of July 2016, the European Commission was proposing bringing “virtual currency exchange platforms and custodian wallet providers under the scope of the Anti-Money Laundering Directive”—forcing these organizations to perform identity checks and share information with government authorities.
The EU won’t be alone in this. Earlier in 2016, the Australian government also put forward proposals to bring Bitcoin and other digital currencies within the scope of anti-money laundering laws, following calls from AUSTRAC, the nation’s financial intelligence agency. “I think it’s important to regulate where there is a potential risk of abuse of money laundering and terrorism financing”, Brad Brown, AUSTRAC’s policy manager, said at the time.
In a climate of increased international tension, the borderless currency is set to face even greater scrutiny; however, global uncertainty could also be Bitcoin’s biggest opportunity.
The future of Bitcoin: a financial ‘safe haven’?
As the world awoke on November 9, 2016 and stared with disbelief at the unlikely President-elect of the United States, Bitcoin owners and miners were celebrating a stock of currency that had sky-rocketed in value overnight. Donald Trump’s last-minute swing to victory had sent shock-waves through the market, and Bitcoin had been one of its greatest benefactors.
“People turn to Bitcoin as what I like to call a ‘disaster hedge’ due to its non-correlation with the capital markets”, Christopher Burniske, Bitcoin Products Lead at ARK Investment, said of the surge. “The Futures plummeted and Bitcoin spiked.”
Perhaps because of its resilience to national government policies, Bitcoin has been the best-performing currency in the world in five out of the last six years. In late 2011, Bitcoins could be bought for under two euros. Today, a single Bitcoin sells for around 650 Euro.
According to Burniske, Bitcoin looks set to continue its so-called “non-correlation with traditional market assets”, making it a prime contender to take the place of stocks such as gold in investor portfolios. “Investors are waking up to it as a haven in the context of modern portfolio theory”, he explained. “If you put an asset into your portfolio that’s not correlated with the other assets it can actually draw down the volatility of the portfolio at large.”
Due to its high performance and this “non-correlation”, there’s an increasing chance of the crypto-currency moving from one shadowy territory into the next. Its decentralized, stateless nature had once appealed to anarchists and hackers. Now—coupled with high liquidity and portability—they have become two of the most irresistible factors for wealthy investors.
Increasingly, Bitcoin is replacing the Swiss bank account as the ideal ‘safe asset’, free from burdensome regulation and taxation. As the creation of new coins nears completion, it seems like the future will hinge on this issue. Will Bitcoin continue to be a democratized currency, or will it become the preserve of wealthy investors and technical experts? And with nobody in charge, who will steer the course of these developments to come?