Making Sense of Bitcoin

Despite the various opinions on Bitcoin, there is no question as to its ultimate value: its ability to bypass government restrictions, including economic embargoes and capital controls, to transmit quasi-anonymous money to anyone anywhere.

Opinions differ as to what constitutes "money."

The English word "money" derives from the Latin word "moneta," which means to "mint." Historically, "money" was minted in the form of precious metals, most notably gold and silver. Minted metal was considered "money" because it possessed luster, was scarce, and had perceived intrinsic value. While the former two attributes cannot be disputed, the latter is generally not accepted by everyone. Critics have argued that precious metals have no more intrinsic value than any other medium of exchange.

Despite some of the various interpretations of the attributes of money, it is generally agreed that money is something that represents a generally accepted medium of exchange, has value, and can be used to make payments. Today, the most common form of money in the world is fiat paper currency. Fiat money is issued by a central authority, most often central banks or governments.

The definition of money, however, has become even more problematic with the advent of so-called "cryptocurrency."

Cryptocurrency is a nebulous word, but its meaning may be easy to decipher.

Cryptocurrency is composed of two words: "crypto" or "cryptography" and "currency." Cryptography is an amalgamation of two Greek words and in its most elemental form means a "secret writing." Today, cryptography has a more technologically advanced application. Cryptography may be defined as the enciphering and deciphering of information or communications in a secret language or code. Cryptography is used to secure communications between persons, organizations, businesses, and governments.

Currency may be defined as a medium of exchange in circulation.

Together, cryptocurrency may be defined as a peer-to-peer digital currency based on public and private keys, digital signatures, and encryption.

Essentially, the concept of cryptocurrency is based on the Internet. Similar to the Internet, cryptocurrency is a borderless technology of decentralized network infrastructure that transmits and interconnects information, communication, and data globally.

Origins of Cryptocurrency

The origins of cryptocurrency may date back some fifteen years, with some dating its origins well over twenty years. According to Bitcoin.org:

Bitcoin is one of the first implementations of a concept called crypto-currency, which was first described in 1998 by Wei Dai on the cypherpunks mailing list. Building upon the notion that money is any object, or any sort of record, accepted as payment for goods and services and repayment of debts in a given country or socio-economic context, Bitcoin is designed around the idea of a new form of money that uses cryptography to control its creation and transactions, rather than relying on central authorities.

Bitcoin is one of the first implementations of cryptocurrency and was developed in 2009 by a mysterious person, known only by the pseudonym Satoshi Nakamoto. Brilliant and persuasive, Satoshi Nakamoto argued that fiat currencies are faith-based and cannot be trusted. Instead, he envisioned a system of money that was without a central authority (i.e., decentralized) and founded on the principles of mathematics.

According to Nakamoto:

[Bitcoin is] completely decentralized, with no central server or trusted parties, because everything is based on crypto proof instead of trust. The root problem with conventional currency is all the trust that's required to make it work. The central bank must be trusted not to debase the currency, but the history of fiat currencies is full of breaches of that trust. Banks must be trusted to hold our money and transfer it electronically, but they lend it out in waves of credit bubbles with barely a fraction in reserve. We have to trust them with our privacy, trust them not to let identity thieves drain our accounts. Their massive overhead costs make micropayments impossible.

Like many great thinkers before him, Satoshi Nakamoto feared fractional reserve banking and warned that the system of banking founded on consumer trust and confidence was a farce. He understood that with the advent of strong encryption, trust was no longer warranted:

A generation ago, multi-user time-sharing computer systems had a similar problem. Before strong encryption, users had to rely on password protection to secure their files, placing trust in the system administrator to keep their information private. Privacy could always be overridden by the admin based on his judgment call weighing the principle of privacy against other concerns, or at the behest of his superiors. Then strong encryption became available to the masses, and trust was no longer required. Data could be secured in a way that was physically impossible for others to access, no matter for what reason, no matter how good the excuse, no matter what. It's time we had the same thing for money. With e-currency based on cryptographic proof, without the need to trust a third party middleman, money can be secure and transactions effortless.

Rumors abound as to the real identity of Satoshi Nakamoto, with some speculating that the Central Intelligence Agency (CIA) may be the true developer behind Bitcoin. Irrespective of his real identity, whether a person or an organization, Satoshi Nakamoto abruptly left the project sometime in late 2010, bequeathing his project and work for others to continue.

Bitcoin was founded as an open source application and is released under the MIT license. It is generally described as a "community driven project," and on September 27, 2012 the Bitcoin foundation was created "to standardize, protect, and promoteBitcoin." Since its initial development, Bitcoin has grown exponentially in value and popularity.

Defining Bitcoin

Bitcoin is a digital currency with no central authority. It is a quasi-anonymous peer-to-peer technology that can be used to send and receive money in what is commonly called a "wallet." Because of its decentralized stature, Bitcoin differs from most other digital currencies available on the Internet. Unlike other digital currencies and payment processors, for example, Bitcoin does not utilize accounts – no accounts are created, no personal information is demanded, and no identification is required. Instead, Bitcoin utilizes public and private keys and digital signatures, which are based on public key cryptography, to generate addresses from which bitcoins may be sent or received. According to one online resource, "a Bitcoin address is a 160-bit hash of the public portion of a public/private ECDSA keypair."

Payment is made when one address owner sends (i.e., digitally signs) bitcoins to another address. Bitcoin addresses begin with the numbers "1" or "3" and are generally between twenty-seven and thirty-four alphanumeric characters in length. A Bitcoin address is similar to a PayPal email address. However, unlike PayPal addresses, a Bitcoin wallet may generate unlimited addresses. Ownership of addresses are never in question – generated addresses have at least one secret number, known as a private key, and are stored locally in a Bitcoin wallet. It is this secret embedded private key which assigns ownership of Bitcoin addresses. Because ownership rests in the secret private key, it is imperative to back up the Bitcoin wallet data.

Here are some additional things to consider:

• The Bitcoin currency is abbreviated as "BTC."
• Bitcoins may be procured by mining, buying, or selling goods or services in BTC.
• Bitcoins are mined by solving complex mathematical equations.
• Bitcoin is "inflation proof." Only 21 million bitcoins can be mined and thus "minted."
• There are over 11 million bitcoins currently minted in circulation.
• Bitcoin transactions are irreversible.
• It is recommended to use an escrow service for large business transactions in bitcoins. 
• Bitcoin transactions are instantaneous and can be verified in as little as ten minutes.
• Transaction fees are modest.
• It is recommended to generate a new Bitcoin address for every new transaction.
• All Bitcoin transactions are recorded in a "block chain."
• The block chain prevents duplicate transactions.
• Bitcoin transactions are not entirely anonymous by default.
• To anonymize Bitcoin transactions, it is recommended to use anonymization services, like Tor.
• Always encrypt a Bitcoin wallet with a strong password or strong encryption.

Bitcoins may be traded online for other digital currencies, redeemed for precious metals, or exchanged for fiat currencies. While the block chain may publish all Bitcoin transactions, it cannot easily compromise anonymity. Perhaps the greatest threat to Bitcoin anonymity are third party exchangers. Most digital currency exchangers are registered Money Services Businesses (MSBs) and follow the "know your customer" (KYC) reporting rule followed by virtually all financial institutions. This requirement forces anonymous Bitcoin users out of the dark – though there are some legal and not so legal ways around identification. Some exchangers do not require identification – but oftentimes place a predefined pecuniary cap on transactions. Exchangers' fees vary, and the methods of payment vary, as well – though bank wire, Western Union, prepaid debit cards, money orders, and PayPal are the most popular.

More recently, with the advent of Bitcoin debit cards, physical bitcoins, and various other Bitcoin services, it is becoming easier than ever to use bitcoins virtually anywhere in the world – online and offline. No-name prepaid debit cards also add considerably more privacy to Bitcoin transactions, especially when exchanging bitcoins for fiat currency. In most instances, this may be one of the best methods of exchanging bitcoins for fiat currency, principally due to the inherent privacy of no-name prepaid cards and the high reloading capacities of some prepaid debit cards.

The Future of Bitcoin

Bitcoin popularity has grown exponentially in the last few years. While bitcoins have no intrinsic value, they are considered valuable because they "are useful and because they are scarce." Although not everyone agrees Bitcoin is money, they do not all agree for the same reasons. Establishment economists reject Bitcoin because it lacks a central authority. Others reject it because it has no intrinsic value. But virtually everyone agrees that Bitcoin is to some extent a "bubble," similar to other currencies, in that it booms and busts. But unlike fiat currencies, which generally have no protective measure against inflation, bitcoins are inflation-proof.

Despite the various opinions on Bitcoin, there is no question as to its ultimate value: the ability to bypass government restrictions, including economic embargoes and capital controls, to transmit money quasi-anonymously to anyone anywhere virtually instantaneously irrespective of geopolitical restrictions. While virtually all digital currencies can more or less do the same, no other currency offers an equal combination of peer-to-peer transactions, strong encryption, anonymity, and liquidity that Bitcoin has possessed up to this point.

In the Islamic Republic of Iran, a state particularly hard hit by US sanctions, for example, the value and interest of Bitcoin is rapidly rising. According to Business Week:

Under sanctions imposed by the US and its allies, dollars are hard to come by in Iran. The rial fell from 20,160 against the greenback on the street market in August to 36,500 rials to the dollar in October. It's settled, for now, around 27,000. The central bank's fixed official rate is 12,260. Yet there's one currency in Iran that has kept its value and can be used to purchase goods from abroad: bitcoins, the online-only currency.

Iranians are buying and selling goods and services nationally and internationally with bitcoins. The Iranians are not alone, however. The perceived value and importance of Bitcoin is growing everywhere, especially in Europe. After the so-called "Cyprus haircut," whereby the European Troika purloined the savings of the people of Cyprus, more and more people are sensing the value of a peer-to-peer cryptocurrency, free from the control of governments and central banks.

Because bitcoins offer strong privacy; can be used to bypass government restrictions and regulations; can be used to send money anonymously instantaneously anywhere in the world; can be used for so-called "money laundering"; and can be used to purchase so-called "illegal goods and services" anywhere in the world, there is some indication that in the very near future the Bitcoin may become more regulated under the Financial Crime Enforcement Network (FinCEN). This would not come as a surprise. However, it seems that for the present, only exchangers have to register as Money Services Businesses (MSBs).

While Bitcoin is by no means the only digital currency or peer-to-peer cryptocurrency, it is at the moment by far the most private, popular, and best implemented.

There is no indication that this will change anytime in the foreseeable future.

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James Black is the author of The Privacy Book. For more information, please visit www.sovereignpress.org