There’s a new currency taking root. It’s not the Yen, Euro, or, even, the U.S. Dollar. It’s Bitcoin. Bitcoin is a digitally enhanced money used the same way as currencies from other countries. It is mined from the digital blocks that make up the digital repository, and many financial institutions consider it safer than traditional paper or metallic money. But the usage hasn’t caught on in most cities.
Much of Europe, Asia, and other digitally advanced regions use Bitcoin. However, the United States, Canada, South America, and Africa still haven’t embraced the new way of paying for merchandise. This sample essay from the world class writers at Ultius gets to the bottom of the virtual currency.
What is Bitcoin?
Bitcoin is the new kid on the block and represents a fresh approach to business strategies and payment solutions, much like Uber did for transportations for hire. More than five years ago Satoshi Nakamoto invented a new finance system designed to provide a trustworthy, secure, easy-to-use, and open source payment solution to businesses and consumers. He published the release of his new system October 31, 2008. The new open source currency code was released to engineers, consumers, and businesses January, 2009 (Bitcoin.org, “What is Bitcoin?”). Bitcoin is often called the first cryptocurrency, but, rather, it claims to be the first decentralized digital currency (Bitcoin.org, “What is Bitcoin?”). And, while the payment system took longer to become popular – particularly in the United States – it has risen to stardom in recent years.
Secret identities: Who is the real Nakamoto?
While the technological side of Bitcoin confuses the average user – after all, it is called cryptocurrency – the identity of the person, or persons, who created it all is still one of the closest guarded secrets of the trade. The only information left behind in this puzzle is the name of the person or, some think, group of people. In fact, Bitcoin.org, the namesake of Nakamoto’s legacy, reports to visitors on its website that:
“Nakamoto left the project in late 2010 without revealing much about himself” (Bitcoin.org, “Who created Bitcoin?”).
Other than that, no one knows who the inventor is, whether the person is a she or a he, or, even, if it is a person at all (Coindesk, 2015).
The search continues
There have been many, high-profile and low, scientists and financial geniuses selected as potential candidates. However, each one was ruled out based on no concrete evidence and none of the people acknowledged being Nakamoto. In fact, just the opposite is true; all those thought to be the true inventor denied having anything to do with the project (Coindesk, 2015). Notable possibilities included:
- Finnish sociologist Vili Lehdonvirta
- Irish student Michael Clear
- Vladimir Oksman
- Charles Bry
- Ross William Ulbricht
- Hal Finney
- Dorian Nakamoto
Nick Szabo as a potential suspect
Four years after Nakamoto released his invention and welcomed the world to use hit Bitcoin code, blogger Skye Grey connected Nick Szabo to Bitcoin’s whitepaper using a stylometric analysis (Grey, 2013). Szabo, a decentralized currency researcher and writer, wrote a whitepaper on bit gold, the commonly accepted predecessor to Bitcoin, is considered an expert on decentralized currency, and is known for using several pseudonyms in the 1990s. Skye’s attempt to match Szabo with Nakamoto stems from a blog post in 2011. Szabo wrote in his blog, Unenumerated,
“Myself, Wei Dai, and Hal Finney were the only people I know of who liked the idea enough to pursue it to any significant extent until Nakamoto” (Szabo, 2011).
Techno-talk: How does Bitcoin work?
Considered a digital “cloud” currency and a product of cloud computing, Bitcoin is a monetary and payment system that uses the peer-to-peer consumer model. This means:
- The merchant accepts Bitcoin as a form of payment from the consumer.
- Consumers purchase, are paid, earn, or mine Bitcoin and stores them in a digital wallet (Bitcoin.org, “What is Bitcoin?”).
- Each transaction can take place without a third-party integration (i.e. PayPal, Square, Stripe, etc.).
This mode of payment not only saves the merchant from paying transaction fees. Merchants need only purchase and install equipment and verify the transaction using network nodes (Bitcoin.org, “What is Bitcoin?”).
Similarities to credit card transactions
These nodes act in a similar fashion to credit card verification. For example:
- A customer purchases a TV from Walmart and uses their credit card to pay for the merchandise
- Walmart’s credit card terminal will contact the bank or credit card company associated with the card and verify that funds are available
Bitcoin nodes function in a similar fashion:
- The customer uses their digital wallet to connect to the merchant’s terminal (like swiping a credit card)
- And the terminal verifies the amount is available by confirming the digital imprint of the wallet (like connecting to and verifying information with the bank or credit card company) (Nakamoto, 2008).
And using this method of payment can be customized to fit each merchant and consumer’s needs. Bitcoin is not controlled or owned by anyone, except for the actual currency. The Bitcoin.org Frequently Asked Questions (FAQs) page describes the universal usage:
Nobody owns the Bitcoin network much like no one owns the technology behind email. While developers are improving the software, they can’t force a change in the Bitcoin protocol because all users are free to choose what software and version they use. In order to stay compatible with each other, all users need to use software complying with the same rules. Bitcoin can only work correctly with a complete consensus among all users. (Bitcoin.org, Who controls the Bitcoin network?)
Digital purses and wallets: Storing Bitcoin
As previously stated, Bitcoin is stored in digital wallets – a collection of ECDSA Keypairs. Keypairs include a public key and a private key which can be used to encrypt and sign different bits of data (Nakamoto, 2008):
- The public key is made public to everyone, and they can use this function to connect to the holders Bitcoin “purse” or “wallet”
- The public key also is used to communicate with private wallets and send financial information and receive funds from the account
- The private key may also be used to sign messages in such a way that anyone holding the public key may verify that the message truly came from you (Nakamoto, 2008)
Bitcoin uses another function to store transactions – blockchains (Nakamoto, 2008). The blockchain is a database of transaction information sent to and from all nodes in the system and network. Think of blockchains as a personal ledger and the public financial statements released by financial institutions every year:
- Blockchains are made up of individual blocks of digital information
- The database stores the actual Bitcoin in each block
- When a transaction occurs, the wallets sends the information to the blockchain
- The blockchain verifies the information and releases the funds back to the merchant
After the transaction is complete, all information is stored in the block with the Bitcoin (Nakamoto, 2008).
Investing in Bitcoin: Will it last?
Bitcoin’s future is unclear. Michael J. Casey and Paul Vigna, authors of The Age of Cryptocurrency, give a nod to the popularity of a digital coin in a digital age, but neither feel it will offer much security from cybercriminals in the future (Casey and Vigna, The Age of Cryptocurrency). The two cryptocurrency authors shared some of their findings with The Wall Street Journal and the results are surprising. Warren Buffet says:
“the idea that it has intrinsic value is a joke” (Vigna, 2014).
Buffet recommends consumers to stay as far away from Bitcoin as they can because he fears the currency will crash (Vigna, 2014).
Inherent security risks of Bitcoin
The reason for these worries is because Bitcoin can be a security risk to traders, merchants, government regulatory agencies, and consumers. Since Bitcoin released it first coin in 2009, the rate for fraudulent transaction (Bitcoin transactions only) increased 65 percent higher than other forms of currency during the same time period (Casey and Vigna, The Age of Cryptocurrency). In addition, there have been reports of hackers entering a merchant’s account and stealing the private keys and other information that is crucial to protecting the currency (Casey and Vigna, The Age of Cryptocurrency). Both authors liken the incidents to Android’s problems when it first released to the market. Android users experienced multiple hacking incidents, a storm of malware, viruses, and system malfunctions (Casey and Vigna, The Age of Cryptocurrency). The culprit behind the smartphone problems was the same thing that jumpstarted its success – open source technology. Bitcoin’s open source license are much to blame for its problems as well.
Restrictions and regulations resulting from Bitcoin
The concern for safety and security is so great, The State of New York has proposed several laws and regulations to restrict the open source code and regulate what can be implemented (Casey and Vigna, The Age of Cryptocurrency). And, while legislators declined to pass laws regulating the use of Bitcoin in New York citing net neutrality issues, the Department of Financial Services proposed changes to its internal administrative regulations (Department of Financial Services, 2014). Department leaders stated the state need a systematic approach to dealing with a new form of currency, and, since Bitcoin’s usage was increasing in their sate, administrators feared for the worse (Department of Financial Services, 2014).
Conclusion – Bringing it all home
Bitcoin’s success is undeniable. The increased consumption attests to that, but, before jumping in and getting both feet wet, investors, merchants, and consumers should stop and ask themselves three questions:
- Do I need digital currency?
- Am I willing and able to take the risks involved?
- In the likelihood Bitcoin succeeds and stays around for the next ten or twenty years, what will my investments bring home to me?
These questions may lead investors to more traditional and safer investments like stocks and bonds. Consumer may decide they don’t need or want the next cool, popular technology. And merchants may determine it is too much of a hassle to accept Bitcoin payments. At any rate, Bitcoin is a personal decision and meant for deep thought and contemplation.
Bitcoin.org. “Frequently Asked Questions: What is Bitcoin?” Bitcoin. N.d. Web. 20 March 2015.
— “Frequently Asked Questions: Who created Bitcoin?” Bitcoin. N.d. Web. 20 March 2015.
— “Frequently Asked Questions: Who controls the Bitcoin network?” Bitcoin. N.d. Web. 20 March 2015.
Casey, Michael J. and Paul Vigna. “Bitcoin and the Digital-Currency Revolution.” The Wall Street Journal. 23 Jan. 2015. Web. 20 March 2015.
Casey, Michael J. and Paul Vigna. The Age of Cryptocurrency: How Bitcoin and Digital Money Are Challenging the Global Economic Order. New York: St. Martin’s Press, 2015. Print.
Coindesk. Who is Satoshi Nakamoto? 20 March 2015. Web. 21 March 2015.
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