Bitcoin: An Enigma?

Deputy Current Affairs Editor Aditi Udayabhaskar explores the cryptic currency that is bitcoin.

Only a hermit living in a dark cave could have missed the story that Bitcoin hit $10,000 in December. Many of us know precious little about the bitcoin – that it is a cryptocurrency, and pretty valuable at that, is common knowledge at this point. But do we know its history, and the origins of this mysterious form of money?

In 2007, a relatively unknown genius called Sakashi Nakamoto began work on the bitcoin, which is described as a person-to-person cashless payment system. So what is it, exactly? To put it simply, bitcoins are based on complex mathematical problems, which can be quite difficult to solve. Each time a problem is solved, a bitcoin is created – as there are a limited number of bitcoins that can be ‘mined’ (set by Nakamoto at 21 million), the finite supply of bitcoins keeps pushing up its value.

 

The issues of limited supply may beg the question of why other finite resources like silver, gold or diamonds are also priced highly, but never have reached the peaks that bitcoin has. What is so special about the cryptocurrency that allows it to be priced at the almost outrageous spike we all witnessed last December? This is where the concept of authority and control comes in.

Nakamoto’s premise in creating the bitcoin was that it would not be governed by any central bank, institution or authority – in being a cryptocurrency,

it is governed by all the users of bitcoin; a democracy of sorts.

Unlike the “gold standard” days of currency, where the worth of money was based on gold, today’s modern currencies (cryptocurrencies included) are “fiat money” – they are government-approved legal tender, but based on faith and market movements. What is crucial here is that when fluctuations get out of control, for instance given what happened before Christmas with the bitcoin hitting $10,000 and markets going berserk, there is no government or central bank to influence the supply or demand of the currency either through monetary policy or quantitative easing. Whilst this may be construed as a utopian win for free-market economists or anti-interventionists that believe in the notion of the “invisible hand”, it does create hyperactivity and super fluctuations that make it hard to determine the actual or ‘real’ value of a currency that is no stranger to both the peaks and troughs of the market.

In being a rather free and anonymous payment system, the bitcoin also won itself some unintended users. Silk Road, an online black marketplace, was established as a platform to peddle illegal drugs anonymously and without the fear of being caught. Based on the dark web, the bitcoin proved to be the perfect choice of currency; where credit card usage can be tracked, bitcoin ownership and transfer is completely anonymous, thereby giving Silk Road’s users a perfectly legal safety net to conduct their illegal activities online. The success of Silk Road was such that it took almost three years to fully shut down both Silk Road and its successors for good, ending an ugly era of the dark web. The incident highlighted the unconsidered applications of the bitcoin; an after-effect of the Silk Road episode was that the reputation of bitcoin was temporarily tarnished – nobody wanted to be associated with a currency that allowed the subterranean world of narcotics to flourish!

There is also as much mystery to Sakashi Nakamoto as there is to the bitcoin – nobody really knows who this genius is, and whether the name refers to an individual or a secret group of supremely talented people that came together to write the code for these bitcoins? We cannot be sure as to the identity of the inventor of bitcoin, but what we do know is this: the person(s) is supposedly of Japanese origin, based somewhere in the UK as they use British English and also have been known to post online in the GMT time zone.

Given all the secrecy of bitcoin and the relative instability when compared to other currencies, it is questionable that individuals still want to trade in bitcoin, and that it continues to surge in popularity can be perplexing to some. However, it is in the perceived negatives that the benefits of bitcoin reside: individuals who do not trust in the conventional authoritarian system of currency control find much-needed solace in the bitcoin. That there is no central bank to adjust for hyperinflation is seen as a merit of the bitcoin, rather than a drawback. Additionally, it enables those who wish to transact invisibly, or in a way that is hidden in some form, to do so freely and without fear of persecution.

So, is the rise in the value of bitcoin just another bubble, or is this for real? The Governor of the Reserve Bank of Australia said in 2017 that the bitcoin is

“very volatile, the number of payments that can currently be handled is very low, there are governance problems, the transaction cost involved in making a payment with bitcoin is very high and the estimates of the electricity used in the process of mining the coins are staggering”.

The point about electricity is noteworthy here – the amount of power used to be able to solve the computational problems that generate new bitcoins has been unanticipated, and many worry that this electricity could legitimately be better used elsewhere in the ecosystem. Climate-related issues aside, it definitely sounds as if this bitcoin frenzy is more a fad than a reality.

On the other hand, however, the limited supply of bitcoins in the market and the pre-determined cap on the number that can be mined has spiked the interest of big and powerful financial institutions; finally ready for the kill, the recent surge in the price of bitcoin has unleashed a chain-reaction that has further propelled the bitcoin anticipatory wave. Wall St is finally willing to work with bitcoin, and how! Citi, BNP Paribas, Deutsche and Barclays have reportedly agreed to accept bitcoin as legal tender, and the growing acceptance of the cryptocurrency by traditionalists is starting to change the currency game for good, at least in the Western world. China, on the other hand, has outright banned the trade of bitcoin on its markets, citing the phenomenon as a “ponzi scheme”, with no way to establish its legitimacy as a legal investment device.

Apart from those with the foresight to have invested in bitcoin when it didn’t cost an arm and a limb combined, has the bitcoin brought about any other side-effects? As it happens, the technology that supports bitcoin, known as blockchain, has gained serious momentum; fintech startups are all over it, trying to grab a piece of what may be the next crypto-revolution to take the world (and markets) by storm. Whilst research into blockchain has been ongoing for many years prior, it is highly likely that field will well and truly come into its own in light of the recent bitcoin brouhaha.

In the end, bubble or not, it is safe to say that this cryptocurrency is definitely cryptic, so say the least. Whether the bitcoin lives up to its perceived worth is a question that keeps the tongues busy wagging, but one thing is for sure: we may just be witnessing history as it happens, and when the new age of currency dawns upon us, we’ll be there to tell the tale of how one unknown, golden, virtual coin came to change the world as we know it.