by Dan Cash
Since the first day that the internet was used as a marketing and sales platform rather than an information and advertising resource there have been schemes to introduce some kind of internet currency. So far none of the innovations have really taken off, for many reasons, there’s a lack of trust and security, it’s not ‘real’ money and there was no uniformity, no-one accepted all of them and there was no consistency concerning exchange rates either between the differing e-currencies and sovereign currency.
In 2001 corporations who were responsible for administering internet currencies were shut down. People who’d invested in prepaid debit cards could use the funds in specific stores and sites. Others who’d bought Flooze found that they had 4 days to dispose of their credit or lose it for good as the company behind it shut down.
This kind of chequered history means that any new internet money is going to face an up-hill struggle to gain recognition, let alone acceptance. This struggle is something that Bitcoin is prepared to face.
Created in open source in 2009 by Satoshi Nakamoto, Bitcoin can be traded for real cash and they can be used to buy goods and services online which will then be shipped to you. Beyond avoiding exchange taxes and rates it’s not immediately obvious what problem this new currency is designed to overcome. But bitcoin is tied to real currencies and people are trusting it enough to trade in it and use it to provide and accept payment; there are escrow services who accept Bitcoin as do groups such as the Electronic Frontier Foundation.
Not being directly linked to or dependent on any national treasury or governmental authority surely means that it’s simply afloat and drifting. What stops Satoshi from simply trousering the real cash and chipping off to somewhere hot with no extradition treaty?
The answer to that is trust and security. It’s all that’s required to make any currency work. If you look at any form of currency it’s just a token that’s given in return for labour, money, especially paper money has no value of its own; we simply trust that the bank will honour the promise that the token represents. And what’s Bitcoin’s uniquely secure USP?
Bitcoin is based on some cryptography that makes it totally secure (apparently, it is based on open source after all) and it’s a limited quantity; only 21million Bitcoins will ever be produced. Like gold and any other precious material it’s scarcity that lends it its value. Currently there’s only about as much gold in the entire world to produce a cube of about 25 meters diameter. If there were suddenly to be caches of gold found of equal size then the value of gold would plummet because it’s so much more easily available.
The cryptology behind Bitcoin protects its integrity, like the water mark in cash or the digital security that credit and debit cards use of multiplying two large prime numbers to produce a cipher. As computers become more powerful this kind of encryption becomes more risky, indeed some computer know-alls say they could take all the money out of the banking system any time they like because their computers can sail through the current encryption employed internationally. Bitcoin adopts a block-chain method of cryptography, when a transaction is made the data is broken up and spread out. It’s then collected by nodes which decrypt a segment of the information, each node adding its own signature feeds that data back as a block. These blocks are hard enough to crack but when they’re put in a chain which has to be delivered in a particular order then the problem of unravelling the code increases exponentially. Eventually the blocks are archived and compressed. The protracted process means that the code should be as secure as possible and it also prevents people from using a counterfeited Bitcoin or using the same one for multiple transactions simultaneously.
To account for inflation every four years value will be added to the Bitcoins, half of the remaining value of the Bitcoins in circulation will be introduced back into the system.
In addition to these advantages over other forms of online currency transfer it also doesn’t rely on any single currency, government administration or central bank which might cause instability within it. Since there are no political, administrative or ideological ties Bitcoin is free to operate as a natural form of payment.