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LIKE ANY COIN, Bitcoin has two sides. The upside is privacy and convenience. Unfortunately, the downside is also privacy and convenience.
Bitcoin is both a boon and a threat, which, in this era of hyper-connectivity, we must understand either to leverage or avoid it. I would advise the latter.
While you can buy a pint in Dublin with your bitcoin wallet, one of our banks this week confirmed that they are unwilling to offer accounts that trade in bitcoin as it is an unregulated currency. As a peer-to-peer system, bitcoin is without central authority and it is this lack of sovereignty which makes it vulnerable to more than hackers.
Bitcoin was apparently introduced as open source software in 2009 by pseudonymous developer Satoshi Nakamoto.
No-one really knows if Satoshi is a real person. This may not have previously been important to currency holders who lost $473m last month when the largest Bitcoin exchange, Mt Gox, was hacked. However, I’d say that it is now.
That loss sent the Tokyo-based Bitcoin exchange (the world’s biggest) into bankruptcy.
Following the recent collapse of Mt Gox, Canada-based virtual currency exchange Flexcoin was forced to close down after flaws in its software code saw hackers make off with bitcoins worth around €440,000.
Despite being the darling of the tech frontier, surely we can now see that the red flags being waved around this “currency” are far from virtual.
To get started with bitcoin, you need a wallet – software that allows ownership of a balance so you can send and receive the currency.
Unlike many credit card transactions, bitcoin payments are irreversible. If you suffer from buyer’s remorse, your only alternative is persuading the seller to give you a refund. This shouldn’t apply when you are buying your pint, but think of the things that you mostly pay for online – they are generally the ones that won’t fit or have to be cancelled.
Bitcoin uses public-key cryptography, a system in which wallet access requires two keys, a public key to encrypt and a private key to decrypt. A transaction transfers ownership of bitcoins to a new address that contains both the correct public key and a digital signature proving possession of the associated private key. The “signature” is not a person’s name, but proof of the private key. In this sense, the transaction is anonymous – though not necessarily forever.
Your wallet needs bitcoins, which you acquire by accepting them as payment for goods or services or by buying them from a person or an exchange.
In theory, bitcoins cannot be counterfeited because each transaction is related to a shared public ledger called a block chain and each must balance with the ledger. Fraud is also theoretically impossible because the private key used to sign a transaction provides mathematical proof that a payment has come from the wallet’s owner.
Through a process called mining, nodes (behind which are people) on the bitcoin network independently confirm the legitimacy of each transaction in relation to the block chain. The “miners” receive new bitcoins for their work – which is how new bitcoins are added to the “money” supply.
Since bitcoins are mined rather than minted by centralised fiat, they are theoretically immune to inflation. However, in practice, prices are tremendously volatile.
While, bitcoin offers certain security advantages, your wallet, like anything else connected to the internet can be hacked. And if you misplace your private key password, your wallet and everything in it is lost forever.
Recently US Federal Reserve Chairperson Janet Yellen said that the Fed has no ability to control bitcoin as it falls outside the banking system.
The fact that we do not know who owns and manages the bitcoin exchanges is not the end of the world – most people still believe that the Federal Reserve is owned by the US government whilst in reality it is owned by a collection of private banks that get a 6 per cent return on their investment. However, the difference is that it is managed and regulated by Congress.
So, should we be worried that it is impossible to track down bitcoin owners?
Recently one of my staff downloaded a ransom virus called CryptoLocker, which is a Trojan horse ransomware programme that encrypts your files and then presents an offer to decrypt them for a ransom payable only in bitcoins.
As an additional incentive, the message includes a countdown timer to a deadline after which the private key – essential to decryption – will be destroyed and you will be forced to avail yourself of a “service” the extortionists offer at a much higher price than the original ransom.
Criminals love the new online currency that allows money to change hands without personal contact, a bank, or middlemen.
As an experimental medium of exchange, bitcoin is a mix of high potential, high risk, and unanswered questions. That means the bitcoins that were used to pay the ransom to unlock my colleague’s computer might be worth a lot more than the $300 spent – or a lot less. In short, bitcoin today is a high-risk proposition.
Finally, the anonymity of bitcoin is deceptive.
Transactions are stored publicly and permanently on the network. It is entirely possible that one day anyone will be able see the balance and transaction history associated with any bitcoin address.
What they cannot see is the identity of the user behind an address – unless it is revealed in some subsequent transaction outside the bitcoin universe. Then your bitcoin life becomes an open book.
That is why shady characters use it for shady things, including CryptoLocker extortion. This is the dark side of currency with no home, unbacked by the “full faith and credit” of any state.
Today, bitcoin remains an experiment with unpredictable outcomes.
Peter Casey is Founder and Executive Chairman of Claddagh Resources, an Irish-based global recruitment and search business that places high level executives with some of the world’s largest and most influential consulting and IT firms. He is a panellist on RTE’s Dragons Den and has written a book on the Tata Group – one of the world’s most successful multinational companies – which will shortly be published.
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Someday soon I hope to read an article on bitcoin and learn something new.
Two years using bitcoin and no trouble so far, have even made money on em
Bitcoins are “mined” similarly to gold, meaning there is a finite supply in the world.
Bitcoins hold a fictional value just as much as the piece of paper we hold with €50 written on it.
Bitcoin has democratised the process of creating currency. Once the exclusive preserve of the wealthy, powerful and politically connected.
A bitcoin exchange goes to the wall with loses of $375 million and some commentators are writing bitcoins obituary. The western banking system is seized with convulsions but no mention of the dysfunction of legal tender currencies.
Bitcoin is loved by criminals but no mention that this is dwarfed by the volume of criminality conducted in legal tender currencies.
Fiat currencies are debt based. Economic expansion cannot occur unless debt expansion occurs. Currency in turn ceases to exist once debt is extinguished. Bitcoin is created through online mining and continues to exist as long as it is accepted as a medium of exchange.
This is a banker-friendly article.
Bear-creature,
Does “mining” bitcoin generate money in the local community where the mining takes place? Are workers employed in the mining operation? Do they take paychecks home to their families which are spent in their communities and raise the standard of living for other families?
I’ll take that as a “no”.
whats a bitcoin?
Whats a what
They found that guy who invented bitcoin recently who is living in California, his brother said he’s an a$&hole and apparently most of his life has been a blank because he has been working with the us Air Force on secret projects.
He said he had no involvement in bitcoin anymore and invited one of the reporters who had set up camp outside the house to come buy him sushi!
If this guy is working on projects like that for them it makes me wonder who is linked with bitcoin architecture?
Just saying!
He was proven not to be the guy in question after the original user accounts that posted the bitcoin white paper and math were re-used after many years on the TOR network.
Can someone explain how a company can be bankrupt if what it owes people is of absolutely no legal value in the jurisdiction in question… These conceptual things are only worth something as long as you can persuade a bigger fool to buy them from you for more than you paid. They might as well be magic beans.
Admittedly gold is a chunk of pretty useless metal and diamonds carbon… But they’re physical things and there is 5 major global banks backing gold.
They had other debts beyond what was lost by exchange users (start up & development costs etc.) and without the exchange being operational they had no real way to maintain cash flows to service debts.
At any rate, nothing really has a “legal value” – markets dictate prices & values, not the law. BTCs do have a value, set by market through exchanges like MtGox. MtGox provided a service storing these valuable assets for their owners, and failed in their contracted duty, so would of course be liable to legal action from clients in the absence of bankruptcy protection. If share certificates were lost on your behalf by your broker, would you not expect to be able to pursue legal recourse? But markets, via stock exchanges, set their price too, not some legal entity, and the compensation you request will likely be associated with this market price – this is quite similar.
Yes it does have legal value… Look at a dollar bill it’s clearly printed ‘ legal tender for all debts both public and private’ there are laws in place in every country that says if I have agreed I owe you that $1 dollar for services and I hand you that $1 bill you cannot take me to court saying I have not paid that debt. What gives it it’s value is that legal protection it has…. Not what someone’s prepared to trade you for it.
A share certificate is legal ownership of a portion of a company… If you acquire more than 51% of the total shares I you can claim ownership of the company. The certificate itself is worthless beyond confirming you own that share of that legally incorporated business… It’s factories, inventory, patents, cash it has in the bank, any future earnings.
So how much is $1 worth legally then? And assuming there is a dispute on ownership of shares/a company, how will the courts decide how much the company or the shares in question are worth? Markets dictate prices, legal entities simply adopt these prices to determine actual value.
Btw, the answer to the first question is $1 is worth $1s worth of goods and services, whatever that may at any given time. Similarly, 1BTC is worth 1BTCs worth of (some) goods and services. The markets have dictated that BTCs have a value, for the courts to ignore this value would set a dangerous precedent – could art be deemed to have no real value, as its inherent value is far less than its market value for example. And just because something is not a physical entity or asset does not make it worthless – courts award great value to IP, and that’s basically putting value on a thought!
Beanie-babies. Star Wars figurines. McDonald’s toys. Comic books. Cabbage Patch dolls.
The dogs bark, but the caravan moves on…
It’s worth however much we agree is one dollars worth… If I sign a contract saying I will give you $1 for 5 widgets, my obligation of that legal contract is to provide you with $1… That doesn’t change if we come to a legally binding agreement for 5 widgets or 50. This legal protection is completely absent.
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