Bitcoins have been hailed as everything between a new international currency and a bubble waiting to burst. You can earn these virtual coins and you can use them to buy real-life items such as cars. But where did they come from? How are they being used? Do you want them? Let’s see whether we can answer any of these questions.
Bitcoins originated in 2009 following a 2008 concept paper that was published on the Internet by a person or persons calling themselves Satoshi Nakamoto. Nothing is really known about this person. Bitcoins address the issue of a third party needing to validate online payments. If I purchase an item from company X using my credit card, bank Y has to validate the security of the exchange and manage any conflicts or irregularities. With Bitcoins, security is entrusted to a global cloud of networked computers that use very sophisticated cryptography – so no third party is involved. This leads to another advantage of Bitcoins – that they are cheaper to transact because there is a much lower cost overhead.
So how do you get Bitcoins? Well, you ‘mine’ them. And that involves solving complex algorithms across an open source network. These algorithms are based on ‘proof of work’ – that means a computer will have to do a lot of work to actually solve the algorithm – it has a 64-digit solution. Tucked away on the Internet are ‘blocks’ that can be ‘mined’ (or in reality, solved) to release their ‘bounty’. Bitcoins come in different units from a Bitcoin itself (1BTC) down to milli-Bitcoins (0.00000001BTC). They are usually stored in a digital wallet, but they can be printed! The printed version comes in two parts – a QR code and a 51 alphanumeric digit private key that begins with a 5. A wallet is a collection of addresses and their associated private keys. It’s been estimated that there are about 3,600 new Bitcoins mined every day and there are currently about 12 million Bitcoins in existence.
How do you spend your Bitcoins? You find a vendor who sets the price for an item in Bitcoins. You would then send the price of the item in Bitcoins through an online wallet to the retailer’s Bitcoin address. (This is a 27-34 alphanumeric string of characters beginning with 1 or 3.) Since there is no registry of these addresses, people can use them to protect their anonymity when making transactions. The addresses are stored in Bitcoin wallets, which are used to manage savings. So, if the data is lost, so are the Bitcoins owned – and that’s what happened to one unlucky individual who threw away a hard drive containing his data a couple of weeks ago!
Recently China has banned its banks from handling transactions involving Bitcoins. Bitcoins were a “virtual good”, had no legal status, and should not be used as a currency, said the People's Bank of China (PBOC). It is also planning to step up its efforts to curb the use of Bitcoins to launder cash. It seems that individuals are still free to trade in Bitcoins, but should be aware of the risks involved, warned the PBOC, adding that it planned to formalize the regulation of exchanges that dealt in digital cash. It’s believed that some Chinese nationals were heavily involved in trading Bitcoins, because it helps them avoid controls on trade in the yuan.
There’s better news from Lamborghini, which has added itself to that list of companies accepting Bitcoins. A Tesla Model S starts from £49,900 in the UK, which is around 81 Bitcoins. So, on that calculation, a Bitcoin would be worth about US$1007 or UK£616. Other sources suggest that Bitcoins reached $1,240, but following the news from China dropped to around $870. Other things you can buy with Bitcoins range from T-shirts to apartments.
One issue for crime prevention and detection agencies is that Bitcoin exchanges are completely private. And so they are the ideal currency for buying drugs and hiring hit men and just about any other criminal activity. Apparently, the FBI has recently closed down a Web site called the Silk Road that was used for such criminal actions. And they seized tens of millions of dollars’ worth of Bitcoins. Using TOR (The Onion Relay) criminals were able to relay messages through at least three different servers – and make it very difficult to track a user’s identity.
Clearly bankers don’t like Bitcoins because they are completely out of their control. This has led various banks to condemn Bitcoins and prophesy that they are like a bubble and the bubble will burst – so anyone buying into Bitcoins will lose all their money. Law enforcement officers don’t like Bitcoins because it’s hard to track transactions and identify the bad guys. But for ordinary people across the globe it’s perhaps the same bet as keeping some notes under the mattress. Most currencies have experienced a run against them at some stage in their life. A Google search will show people asking to be paid in Bitcoins or doing all their Christmas shopping with Bitcoins. It’s a shame we know so little about Satoshi Nakamoto amd the originators of the currency. I imagine we’ll be hearing a lot more about Bitcoins in 2014.