Bitcoin: A licence to print money or useless virtual currency?
A revolutionary electronic currency is shaking the global money tree. It began as a toy for geeks but is now making millions for investors – and criminals
What did you use to make your last purchase? Cash, credit, debit card? Maybe it was another late-night bid now, pay later spree on eBay? However you spent your hard-earned dosh, your transaction was certainly handled by a third party.
Visa, Mastercard, Lloyds, Barclays, PayPal, the list of middlemen goes on and on, but someone called Satoshi Nakamoto wants to change all that and give you the chance to become considerably richer, too.
If Nakamoto had been born a decade earlier it’s possible that the world’s current economic turmoil could have been avoided. No bankrupt countries, bail outs, austerity measures or rioting youths.
Nakamoto is the inventor of Bitcoin, the world’s first decentralised digital currency. Virtual money that doesn’t need a broker, bank or government, designed to let people buy and sell without the interference of anyone. It’s open-source currency, and it’s becoming very popular indeed.
Bitcoin began quietly in late 2008 when Nakamoto published a PDF outlining his concept to a cryptography (information security) email list, claiming that his brainchild would “allow online payments to be sent directly from one party to another without going through a financial institution”.
After outlining the agenda, the software, which could be used to exchange Bitcoins, was released on January 3 2009. Buried in the original block of code was a line taken from that day’s Times newspaper which read, “Chancellor on brink of second bailout for banks”.
“This was probably intended as a proprietorial date stamp for the software, but it was almost certainly also a swipe at the economic meltdown caused by irresponsible banking,” says Gavin Andresen, a software developer and Bitcoin’s technical lead.
“Bitcoin is unique in that it’s the first digital currency that doesn’t need a central bank to monitor transactions,” explains Jeff Garzik, a member of the core team of four developers who maintain Bitcoin’s immense security software. “Previous attempts like Beenz and Flooz all needed that monitoring because of ‘double-spending’.”
David Birch, director of Consult Hyperion, a consultancy firm specialising in electronic transactions, explains the concept of double-spending: “Digital products are non-rivalrous. That is to say, if you have a copy of an MP3 album, for example, and I take a copy, there’s still enough for everyone else who wants one.” Good news for music fans.
Not such good news if you’re trying to create a brand new online global currency. “What makes money work is that there’s a limited supply. If you use a quid at the pub today, you can’t go out and spend that same quid for a full English in the morning.”
It’s for this reason that a third party has always been needed to guarantee that the correct amount is taken from the payer’s account and added to the payee’s. Bitcoin solved the tricky double-spending dilemma by sharing the database of transactions across a peer-to-peer network.
“It’s shared trust technology and we have over 100,000 computers on the internet collectively working to verify every single Bitcoin transaction,” Garzik boasts. “This means that Bitcoin’s verification network is more powerful than the world’s largest supercomputers. In fact, there’s more technology dedicated to securing Bitcoin than you will find on the analysis of nuclear tests.”
The idea seemed flawless. Utopian ideas often do. But a new, more sinister purpose for Bitcoin has become apparent.