I’m in a taxi with my friend Sascha (names unchanged to torment the guilty) at about 3 in the morning and the taxi driver somehow ends up talking to us about whether he should buy or invest in Bitcoin. Sascha pipes in first saying it’s a huge waste of time, it isn’t really worth anything and that anyone who buys Bitcoins should be thrown out of the taxi at high speed with their shirt off. I may be paraphrasing and taking liberties but the message was clear. He wasn’t pro-Bitcoin.
There’s no point in really going into what was said after that because let’s face it, we’d had a few. The point was, we had opposing opinions on the subject, as do so many people in the technology sector today. People brought up with similar backgrounds and education can’t seem to decide if Bitcoin makes sense or if it’s complete rubbish.
I’ll give you my take on it but first I’ll provide a brief high level description of what exactly it is. Keep in mind there are several dedicated podcasts about this technology so feel free to dig a bit deeper. To define Bitcoin, it helps to first understand currency and until the “Crypto” or “Digital” type came along there were largely only two types. There were commodities and fiat money. Commodities make sense. Gold is a commodity because while it can be traded like money, it has an intrinsic value beyond that. The same can be said for oil and silver. The other type of money, the one we use everyday is called fiat money, not to be confused with Italian cheap chic cars. Fiat money is money that has no intrinsic value but that has value because a government decreed that it does for that purpose. The word fiat is from the Latin word for “it shall be.” It’s money because we said so and that’s why. It’s really just paper and metal in solid form and just 1s and 0s in the bank. It’s symbolic. Bitcoin walks a line somewhere between both and before I get into that, I’ll describe how it came about.
Just prior to 2009, a mysterious chap called Satoshi Nakamoto offered up a clever paper outlining the issues we have with modern banking, the centralisation of it all, the need yet difficulty in attaining trust and the uncertainty that comes with all of that. Not to mention, banks tend to be greedy bastards. He proposed a mechanism of cryptographically proven trust via a distributed network allowing people or parties to transact directly with each other. This would be without the need for a centralised trusted third party but instead using the distributed network as a form of consensus trust. He also crafted the mechanism called “the blockchain” as a very practical way of executing this idea. A blockchain is quite simply a ledger like what a book keeper has. Without getting into the weeds of the blockchain, it’s sufficient to say it’s a way of using technologies like cryptography and hashing to ensure that entries into the ledger can never be changed and are properly timestamped. The idea of “cooking the books” is essentially impossible with a blockchain ledger.
“cooking the books” is essentially impossible
Adding a distributed trust system with an uncookable distributed book keeper means you have the backbone to create a highly secure currency exchange model free from any given nation or centralised management system. Power to the people! It’s pretty cool but how is this a “Coin” you might ask? Where is the currency coming in as this just sounds like an awesome accounting system?
That is a great question. The Bitcoin is the digital reward for participating in the distributed network. Keeping track of a cryptographically intense ledger is difficult. What is interesting about the Bitcoin blockchain (or ledger) is that in order to consider a block (or a page in the ledger) complete, those in the distributed network compete in a race to generate a unique hash or “signature” for the block before it goes into the chain. Essentially the page doesn’t go into the book until all parties agree it’s correct and a complex digital signature is calculated. That takes a heap ton of computing power and electricity. Once one of those contributing parties known as “miners” (a reference to gold as an early commodity that took a lot of work to acquire) completes the calculation they are rewarded with a certain quantity of Bitcoin.
Another question you might ask yourself was how it even got started because you can’t have bitcoin transactions to add to the ledger without Bitcoins existing right? There is a clear chicken or egg thing going on. Well, Satoshi was a smart guy and created something called the Genesis block which kicked it all off. The first block had 50 “free” Bitcoins and things started from there.
It’s probably worth noting that nobody knows who Satoshi Nakamoto is. He (or she) had a made up email address who contributed to a group called the “Cyberpunks” back in the 2000s’ but nobody ever met him and after this all kicked off, he just disappeared. Very strange and perhaps for the best, because in the early days, the United States liked to make examples of (imprison) innovators, especially ones who were creating technologies that disrupted and subverted the governmental status quo.
So… Bitcoin is a digital currency, generated by a huge network of distributed computers (miners) that keep track of an electronic ledger (blockchain), which is cryptographically guarded from tampering or hacking. Got it… excellent!
Returning to the drunken Bitcoin argument in the taxi… does it have any value and should anyone invest? We are now about 8 years on since the humble beginnings of Bitcoin when the first block generated the first 50. At the current value of over $5800 per Bitcoin, it would be great to have now wouldn’t it?! They started off being worth about 0.0001 USD back in June 2009. Which makes sense! Following the commodities model, do you think the first person who struck gold instantly decided it was worth a fortune? Gold likely went through a similar process of determining its rarity, gaining acceptance and becoming a commodity used by the global community.
There is a great story about the first purchase with Bitcoin. I don’t know how true it is but apparently in 2010, two Papa John’s pizzas were purchased by Laszlo Hanyecz from another bitcoin enthusiast for 10000 Bitcoin. That would be around $40,000,000 today. I hope it was good pizza. It might taste a little sour now.
That would be around $40,000,000 today.
Why is Bitcoin worth anything? It’s a bit like the notion of fiat currency where the government says a bank note is worth X, so it is. In the case of Bitcoin, it’s a combination of supply and demand (like gold) with the distributed network of people using it deciding in consensus that it’s worth something and, so it is. As is it designed as a decentralised currency, tracked via a decentralised ledger called a blockchain, the determination of value is also decentralised.
It’s not too crazy an idea to see why it has value, not just because it’s a valid “store of value” or currency but because it’s effectively “sticking it to the man”. People really like to stick it to the man!
It’s also worth noting that the algorithm for issuing Bitcoin mining rewards is capped. Only 21 million Bitcoins can exist, so that really completes the equation. A viable currency must have durability, portability, divisibility, uniformity, limited supply and acceptability. Bitcoin fits the bill (pun intended) for all of these requirements.
Before I wrap up, I need to address the elephant in the room and that is the Dark Web and Bitcoin’s association with that part of the internet. For now it’s enough to say that the Dark Web is a largely misunderstood place on the internet known for its infamous original marketplace, the Silk Road. The “bad guy Amazon” where you could purchase anything from drugs and hackers for hire, to even, allegedly, an assassination. Yes, assassins can be early adopters of technology too. All of this was paid for in Bitcoin and this gave it a somewhat bad reputation.
Bitcoin’s benefits of privacy were being surreptitiously employed for a new and, to an extent, expected purpose. Good old fashioned crime! One of Bitcoin’s founding fathers Nick Szabo (also suspected to be the founder Satoshi Nakamoto) got in legal hot water in the early days simply by selling Bitcoin to somebody who used it for illegal transactions. That might seem justified, but let’s draw a comparison between Bitcoin and its closest rival in the private currency crime spectrum, cash money.
Remember that traditional fiat currency used by old school drug lords, organised crime and extortionists? All of the same things that Bitcoin is criticised for, cash is also guilty of. Cash is pretty close to anonymous and you can use it to buy all of those same terrible things as well. If we were all locked up because the money we used for buying stuff eventually ended up as part of some criminal activity, there wouldn’t be many free people left.
Finally, it’s worth addressing how Bitcoin and other digital currencies are disrupting banking, if that isn’t clear already. If you’ve noticed any banking trends lately, it’s been to eliminate cash and move to card only transactions. Contactless payment is a great innovation in this direction. Quite simply, data is control and control is power and power is money. If the banks can move even simple transactions to work electronically, just think about how much data that will provide them. Far more detailed spending habits are just the beginning.
Unfortunately for them, Bitcoin’s decentralised model brings together digital only transactions but in a peer-to-peer way. This means the banks no longer reap the transaction fee benefits of being the intermediary for all transactions, nor, the vast buyer trend data and that’s one big expensive hiccup for them. Naturally, banks and governments are retaliating with regulations, litigation and bureaucracy (what they do best) to somehow reestablish themselves as a key player in the new cryptocurrency era. We’ll have to wait and see how that plays out.
We’ve recently entered into a phase of Bitcoin as of 2017 where many other innovators, entrepreneurs and even companies have jumped onto the bandwagon and copied the idea. And why not? Bitcoin at its heart is just software. Even Burger King launched the WhopperCoin in Russia. While many other versions are present and competing now for cryptocurrency supremecy, Bitcoin still remains on top, mainly because it was there first and has the largest user base. Litecoin and Ethereum are nibbling at its heels though. Ethereum is a rather clever and more advanced implementation of the same blockchain concept for managing something called “smart contracts”. That’s something for another podcast though.
Bitcoin isn’t perfect but for the next 2-5 years or so it will likely continue to flourish and mature. If you were looking for a retirement fund, you might not want to drop your life savings into Bitcoin. If you like a bit of anarchic techo-investment fun, Bitcoin does look pretty good for the medium term as speculators are predicting its value could settle somewhere between $40,000 per coin and $400,000 per coin. That’s a pretty big spread but, that’s Bitcoin at the moment. If you wanted to get involved, I used an exchange called Coinbase that has an extremely solid reputation for security. Plenty of other equally good exchanges and investment platforms are available as well.
By the way, I did manage to convince Sascha that Bitcoin wasn’t so bad.
Bitcoin still remains on top