Currency Of The Revolution, Or Tool For Online Vendors? The Many Faces Of Bitcoin [Feature]
It’s become an annual event: the fall of Bitcoin. You’ve probably read about it multiple times, and maybe even believe that the online, decentralized currency is already gone forever.
Created by a mysterious, anonymous entity back in 2009 – when the recession was at its worst – Bitcoin is a completely digital currency with no central servers. Transactions are distributed across the network of users, and developers claim counterfeiting to be impossible.
Anyone who wishes can mine Bitcoins by putting their computer to work solving complex math problems, but the total number of Bitcoins that can be created is capped. The currency is designed to increase in value as demand for Bitcoins go up, and it has – occasionally too quickly to be sustainable. By the summer of 2011, for example, one Bitcoin was worth as much as $30 USD. Within weeks it fell as low as $5 – just one incident the media has called the death of Bitcoin.
These spikes and drops – accelerated by speculators – haven’t stopped Bitcoin’s value from rising over time. Outliers aside, the currency’s been trending upwards since it’s creation in 2009. While I’m writing this a single Bitcoin is worth over $48 USD – the most it’s ever been worth. This just days after a glitch temporarily brought the price down to $37.
It’s unclear whether the current value will hold, but major online companies – including Reddit and WordPress – are starting to accept the currency, increasing its legitimacy.
Around the world organizations shut out by traditional merchant processors – Wikileaks, lulzsec and the creator of a 3D printable gun, for example – are turning to the digital currency for donations. And online casinos based entirely around Bitcoin are bringing in serious revenue. A vibrant community of developers, users and enthusiasts surround Bitcoin, and more than a few exchanges around the world allow anyone to trade a conventional currency for the digital one.
So yeah: Bitcoin’s not dead.
A Revolution, Or A Business Opportunity?
I was looking for someone to explain the basics of the currency to me, so I emailed the Bitcoin “press” mailing list. Two people responded: Jon Holmquist and Amir Taaki. Both see Bitcoin as a tool, but they differ greatly as to what that tool is for. Holmquist sees an effective tool for commerce; Taaki, for revolution.
The UK-based Taaki is a lot of things – an activist recently arrested for squatting in London, the pioneer of multiple open source projects, a video game developer. He’s even a former professional online poker player.
Right now he’s organizing, a Bitcoin conference in Vienna he says will bring together “anarchists, hackers, squatters and subversives.” He speaks of the conference, Bitcoin, and the world in far-sweeping terms.
“Bitcoin is powerful”, he tells me. “It’s tearing a hole in the fabric of society itself.”
When I ask how Bitcoin differs from cash, he responses with a list of things cash cannot do.
“How do I buy drugs online with cash?” he asks. “Or a WordPress install? Or donate to WikiLeaks, or lulzsec. Evade sanctions by hedging my money, buy anonymous services, gamble and play poker, pay for torrents or Megaupload accounts, exchange money at no cost?”
Jon Holmquist, meanwhile, sees Bitcoin primarily as a tool for business. The California man makes his entire living working with Bitcoin-based online retailers.
“For me it’s less about ideology and more about what works,” he tells me. “Bitcoin is a tool that works.”
To Holmquist Bitcoin is a game-changing technology for anyone who runs a business online. Direct payment means little or no processing fees – something any business owner can appreciate.
“A lot of places offer discounts for cash, even though that’s not allowed by their credit card licensing agreement,” he points out.
Bitcoin brings the advantages of cash to the online world, by eliminating the need for merchant processing services like PayPal.
“I read a lot of news about the payment industry and there’s nothing like Bitcoin,” he tells me. “It’s basically the next step forward for bank wires. It’s transferring value, but all online, without any banking structure.”
Holmquist runs a few retailers that use Bitcoin, including– which sells electronics – and Coinabul.com – which allows you to trade your Bitcoins for gold.
Taaki, meanwhile, tells me that to him Bitcoin is not a business opportunity: it’s a technology that helps people evade control.
“It’s a very human technology: it brings trade back to me and you,” he says. “Not as some merchant-client relationship – you are both a merchant and a client, producer and consumer.”
He tells me Bitcoin alone can’t change the world – that “you need the whole prescription to be taken holistically.” But Bitcoin, in his view, can help keep the Internet free.
“PayPal shuts projects down all the time,” says Taaki. “Bitcoin really busts the lid on a whole range of activities that were before limited or censored. Now we can kick those fuckers in the balls and do what we want.”
Taaki hopes his conference – which includes speakers like Cody Wilson, the man behind the 3-D printable gun, and Richard Stallman, the father of the open source movement – will show the possibilities of Bitcoin to a broader coalition of activists.
All Currencies Are Created
It’s easy to think of major currencies as having always existed, as something that always will exist. The truth is that currencies are created by people, and also occasionally disappear.
The world’s current foremost currency – the US dollar as we know it – came into existence as recently as 1864, when President Lincoln signed the National Banking Act. Through much of the early 1800’s, state charted banks issued bank notes, meaning travelers from New York had to exchange their money before they could use it in nearby Connecticut.
The European Union, of course, created a currency in 1999: the Euro. As with the US dollar, it replaced the local currencies of a large geographical area. Euro-skeptics predict that currency will break up, but it wouldn’t be the first currency union in Europe to do so. The Austrian-Hungarian Empire shared a currency until the First World War – the Krone. After the war the Krone broke into several other currencies, along with the empire itself.
When the Soviet Union fell in 1991 a variety of replacement currencies popped up to replace the Ruble.
It sounds absurd that programmers can create a bit of code that has value – code that can act as money. But every currency is created at some point.
Who Is Satoshi Nakamoto?
“We have proposed a system for electronic transactions without relying on trust,” wrote Satoshi Nakamoto in a 2009 research paper. Markets around the world were crashing at the time, but it’s not clear whether that was the primary motivation for Bitcoin’s release.
“”[Bitcoin is] very attractive to the libertarian viewpoint if we can explain it properly,” he once said. “I’m better with code than with words though.”
His code did speak, growing from a Windows-only program compiled in Visual Studio to the cross platform network it is today.
It’s unclear even now who Nakamoto is – an individual person or a group of people. At one point he claimed to be a Japanese male, but the first release of Bitcoin was not documented or labeled in the Japanese language. Some argue Nakamoto is American because of his spelling; others say he is British because of his formatting. The truth is no one knows Nakamoto’s identity – or whether he is an individual or an entire group of people.
His/her/their involvement in Bitcoin stopped completely in mid-2010: according to Wikipedia, he told a contributor he’s “moved on to other things”.
Today Nakamoto – who or whatever he was – is seen as the creator of Bitcoin. The smallest unit of Bitcoins (one hundred-millionth of a Bitcoin) is named a “satoshi” in his honor.
How Bitcoin Works
I ask Holmquist how he would explain to his grandmother how Bitcoin works. He started with a history lesson.
“There was an ancient civilization that, for currency, used giant stone wheels,” he tells me, referring to Rai Stones, used on the Micronesian island of Yap.
Mined from nearby Palau – an island where the currency was not used – these giant coins could weigh as much as 4 metric tons. Made of Limestone – which was rare on Yap – these stones were used in social transactions such as marriage or political deals. Their value was based on the idea of ownership – sometimes regardless of where the physical stone itself was.
“These people made it be known who owned which stones,” says Homlquist. “One day a stone was on a boat, and the boat sank. The stone was at the bottom of the ocean, so no one could check on the stone or see it. But everyone knew it was there, and people could still transfer the ownership of that stone to someone else.”
The culture used something they couldn’t see or touch – a stone wheel on the ocean floor – as currency. It worked because everyone in the community knew who owned it, Holmquist tells me.
“It was a small tribe, everyone knew who owned what,” he says.
Bitcoin works the same way, according to Holmquist: the peer to peer network means every computer connected to the online community helps keep track of every transaction.
“Everyone knows who owns which Bitcoins, and when you make a purchase that’s broadcasted and saved,” he tells me. “So everyone knows that another person owns a particular Bitcoin.”
Every Bitcoin is a complex, unique string of code, but that’s not what makes it impossible to counterfeit: you could copy and paste a Bitcoin wallet easily enough. No, it’s the fact that every exchange is known across the network – to use Holmquist’s metaphor: the fact that everyone in the village knows who owns which stone wheels – that makes each Bitcoin secure.
Because this system broadcasts every exchange across the network – and because most people don’t want all of their financial activity to be publicly trackable – Bitcoin transactions are anonymous.
“You don’t want your name tied to a public bank account,” says Holmquist, explaining that one famous property of Bitcoin –anonymity – is less a core feature and more a result of this transparency: if everyone’s transactions are going to be shared across the network, making those transactions anonymous is the only way the system can provide privacy for users.
“It was only meant to be anonymous as a result of necessity,” Homlquist tells me. “It was a side effect.”
There are down sides to the system, Holmquist says: security is almost entirely up to the end user, and there’s no safety net for users in case of fraud.
“Because of the system there is no centralized structure, so there is no centralized body to go to and say that you’ve lost your Bitcoins,” he says. “So there are good and bad things about this.”
But even this lack of security brings benefits, says Holmquist.
“There’s no charge-backs, so stores using Bitcoins can charge ridiculously low prices,” says Holmquist. Charge-backs occur when a consumer calls a credit card company to report fraud – the credit card company returns the money before working out the fraud themselves. Bitcoin, lacking a central structure, offers no such system.
The original Bitcoin client stores your currency on your hard drive – so without backups, your Bitcoins could disappear completely if your drive fails. It’s not known how many Bitcoins have already disappeared this way, but it’s for this reason a number of web-based Bitcoin clients have entered the market – consumers can use them to store their Bitcoins online. Right now it’s up to the user to determine who is and isn’t trustworthy.
“The end user really has to be secure with their Bitcoins,” says Holmquist.”That’s why a lot of people have been calling for increased infrastructure, a PayPal for Bitcoin.”
And there’s no reason such a service can’t exist. After all: Bitcoin is simply a currency. If people want to trust a third-party service to handle transactions with it, they can.
Why Bitcoins Are Worth Anything
“Money gets its value as a medium of exchange,” Taaki says to me. “Bitcoin is excellent for that.”
“There’s demand, there’s scarcity, it’s everything that cash or commodities need to be used as currency,” says Holmquist.
If you’re reading this odds are you have some money in your wallet, right now. Have you ever thought about why it’s worth anything? Probably not.
Go ahead and grab a bill; I’ll wait. Depending on where you are in the world it might be green, red or any number of colours. It might be made of paper or plastic; it might be transparent in places. It might feature dead presidents ($USD) or living monarchs (£); hypothetical [EZ1] architecture (€) or kids playing pond hockey ($CAD). But one thing is certain: there is a number on that bill, letting you know how much it’s worth.
Why does that work? Why does printing a number on a bill give it value? The object itself certainly isn’t worth as much as that number – $20 bills are made of the same stuff as $100 ones, and the material to make a bill almost always costs less than $1. No, the number on the bill is what gives it value, and it retains that value because people agree that it’s worth something. It’s all about belief.
Money is like the fairies in Peter Pan: if enough people say they don’t believe, it dies.
It sounds like magical thinking, but if everyone decided at once that a $100 bill wasn’t worth anything, it wouldn’t be. This isn’t hypothetical: it happened in Germany in the 1920s, and it happened in Zimbabwe just last decade [EZ2].
Zimbabwe’s dollar no longer exists. The African nation now uses various currencies – the US dollar, the Euro and the South African Rand, to name a few – because of inflation. Put simply: political turmoil caused people there to lose faith in the currency, which caused the currency to be worth less, which prompted the country to print more money – a cycle that continued until things got really crazy.
Before the end Zimbabwe was literally printing bills claiming to be worth one hundred trillion dollars – and people still had trouble buying things.
So money is nothing more than numbers that represent value, and those numbers have value because people believe they do.
Most of your money probably isn’t in your wallet – it’s in a bank. Your bank doesn’t have a vault with “your” money in it – it’s why you can deposit money in one branch and withdraw from another. And your bank almost certainly doesn’t have enough physical cash on hand for everyone who uses it to withdraw at once. When you deposit, then, your money ceases to have any physical form and becomes a number living in your bank’s database.
It becomes, in a word, code.
But if you’re like most people you’re not paid in cash – you’re paid with a check, or by direct deposit. In either case your money never really takes physical form at all – it’s just a number that moves from one bank to another. From one database to another.
So most money is just numbers in a database – just code. And it’s only worth anything because people believe it’s worth something. There are good reasons for this belief. Most countries have laws ensuring that money deposited in the bank belongs to you, even if the bank goes bankrupt. If the bank can’t give you your money the government will.
At one point – before 1971 – US currency could be traded for gold. It’s why Fort Knox was so well stocked with the stuff: the ability to trade dollars for gold is what gave it value. In 1971 President Nixon – responding to nations around the world trading their US reserves for gold – dropped the gold standard.
So currency is no longer backed by gold, and most currency today is only code. Hypothetically, then, anyone could make up a bit of code and assign it value. If people believed that code was worth something – and the system of exchanging that code was secure – that code would actually have value.
But this doesn’t have to be hypothetical, because Bitcoin exists – and people already believe it’s worth something.
Will It Die?
Head to BitcoinCharts.com – which shows you the prices offered for Bitcoins at various exchanges – and you can explore the consequences of this belief for yourself. As of early March 2013 the currency is rising at an unprecedented rate, a bump subsequent to major sites like Reddit and WordPress beginning to accept the currency.
“There are ways Bitcoin could die off,” said Holmquist in January. “But right now it hasn’t even gotten close to that.”
Third party services might end up being the way most people use Bitcoin, Holmquist tells me, but “it’s still a lot cheaper than any overlay you can put on current banking infrastructure.”
Taaki, for his part, has other things in mind: a changed world, where people don’t need to have jobs and corporate structures don’t need to exist.
“Me and my guys have been working on some calculations and we realized this whole boss and corporate business thing can be discarded,” Taaki tells me. “The results speak for themselves.”
Not everyone involved with Bitcoin agrees with comments like this – it’s part of the reason why there are two different Bitcoin conferences this year. The Bitcoin Foundation’s conference, in May, will focus on the currency itself – Taaki’s will reach beyond the currency, to activists only marginally involved with Bitcoin.
“I think the world looks at some of these projects and sees drugs, guns, pirates…and doesn’t see how cool they are,” he tells me. “Let’s make the world more fun.”
Taaki and Holmquist have different worldviews, and a different future in mind. But their combined effort – along with that of many others – makes Bitcoin what it is today.
Is another crash coming? Possibly. But if you read that Bitcoin has died try to remember: it’s not the first time someone said that happened, and it probably won’t be the last.
Affiliate Disclosure: By buying the products we recommend, you help keep the site alive. Read more.