Understanding Bitcoin: fraud, or the future of money?

Is the digital currency a liberating innovation that helps consumers free themselves from punishing government regulations globally? Or, flipping the Bitcoin, is the online currency a grand delusion — even a move that benefits the world of crime?

Written by Praveen Swami | Updated: November 27, 2017 9:31 am
In 2009, the first block of that currency, known as Bitcoin, went online, with a message that explained why it exists: “The Times 03/January/2009 Chancellor on brink of second bailout for banks”.

Satoshi Nakamoto, as the man — or women, or men — who began it all called himself, was born in Japan on April 5, 1975. He might in fact be a Nick Szabo, Dorian Nakamoto, Hal Finney, Shinichi Mochizuki or Craig Wright, all computer scientists and mathematicians of eminence. Though many have investigated Satoshi Nakamoto’s identity, no one has settled the debate. Today, Nakamoto owns some $ 7.5 billion worth of the currency he invented, none of which has ever been spent.

In 2009, the first block of that currency, known as Bitcoin, went online, with a message that explained why it exists: “The Times 03/January/2009 Chancellor on brink of second bailout for banks”.

Today, with this strange digital currency at an all-time high, opinion is divided on whether its value is a sign of a growing rebellion against a monetary system controlled by corrupt, predatory governments, or, alternately, whether it is providing a haven for criminals. There are also those who believe that Bitcoin and other digital currencies that have since emerged are simply a giant, collective delusion. It’s clear, though, that Satoshi Nakamoto — whoever she or he might be — transformed our world.

Bitcoin’s emergence was organically linked to the implosion of the global financial system in 2007-08, which led some to lose faith in government-controlled currencies. Ideologically, Bitcoin appealed to a spectrum of libertarians and anarchists, who saw in it a kind of new gold — a commodity whose value would be determined purely by demand and supply, not by the actions of central banks.

Like all cryptocurrencies, Bitcoin functions in the same way as cash or gold, but it can also serve as a certificate or bond, a clearing house, a settlement layer. To its proponents, the principles underlying Bitcoin make it a democratic alternative to the commercial banking network, and even central banks.

In essence, Bitcoin uses cryptography to securely conduct a transaction between a sender and a recipient. The cryptographic technology means you don’t have to trust others on the network, as you might a bank or a clearing house.

To get a sense of the technology, imagine having banknotes protected by combination locks with over 100 digits — locks which, moreover, can’t be removed without destroying the note itself.

In addition, each confirmed transaction is recorded on a public ledger, called a blockchain. The blockchain is shared between all users of the Bitcoin network, and updated in real time. The underlying mathematics makes it impossible to make duplicate copies of Bitcoin, or use it for more than one transaction at a time. Each time a new block or set of transactions is consolidated into a block, it verifies all those before it. In general, six verifications mean a transaction is 99.99% likely to be genuine.

Like gold, Bitcoin is “mined”, though by giant, power-hungry computers, which are today thought to be collectively using more power than many European countries.

In essence, Bitcoin miners solve the complex mathematical problems needed to verify transactions and thus build the blockchain.

In return, they are issued a certain number of Bitcoin.

Eventually, when 21 million Bitcoin are in use — a target which experts estimate will be reached around 2040 — no more will be created. Then, the verification of blocks will be rewarded by fees paid by users on the network.

READ | Year after note ban, black money reborn as cyber-cash

To use Bitcoin, users have to first get a digital wallet, which can be used on computers or mobile devices. Every wallet can contain one or more unique addresses, which are like account numbers. An address — a string of characters like 17qK9JftEQoTzEeHxVwnRJLHZhG9k6ezaA — lets a user receive or buy Bitcoin. It is the only information you need to give out. In addition, every user has a private address, never shared with anyone else, which lets users send Bitcoin.

It is possible to send and receive any amount of money almost instantly anywhere in the world at any time — no borders, no limits imposed by governments, no holidays. Though technologies do exist to help law enforcement organisations link individuals to Bitcoin transactions, it is relatively simple to ensure the defeat of such efforts.

For many users, Bitcoin’s attraction is that it frees their money from the actions of government. In countries where inflation is high as a consequence of government policies, for example, Bitcoin allows individuals to insulate themselves. Argentinians, for instance, invested in Bitcoin to avoid rampant inflation, as did Cypriots during the country’s 2011 financial crisis.

For the same reason though, it is a useful tool for money laundering and tax evasion. Bitcoin, after all, records transactions only between digital addresses, not explicitly identified individuals. Since 2011, law enforcement agencies across the world have been increasingly concerned over the use of Bitcoin, and other cryptocurrencies, for crime.

That year, the Federal Bureau of Investigation (FBI) shut down the notorious dark web marketplace Silk Road, where encryption and cryptocurrency allowed narcotics, stolen credit cards and hacked passwords to be sold anonymously. Ross Ulbricht, Silk Road’s founder, is now serving a prison sentence — but other digital marketplaces like it continue to pop up. The misuse of cryptocurrencies by criminals means some major financial institutions will not touch it. But others see it as the future of money, and some countries like Russia are working to create officially-backed versions.

Even as the price of Bitcoin and other cryptocurrencies rise ever-higher, opinion remains divided on Bitcoin’s underlying fundamentals. For Jamie Dimon, the head of financial giant JPMorgan Chase & Co., Bitcoin is simply “a fraud”. Eric Posner, professor of law at the University of Chicago, has described it, alternately, as relying on “collective delusion”.

The numbers, however, show these prognoses aren’t cutting much ice with investors, increasingly fearful of a global financial system that seems irrevocably broken.


For all the latest Explained News, download Indian Express App

  1. H
    Nov 29, 2017 at 11:34 am
    Bitoin is a invension of the 21st century, this is going to stay for more time. Government should realise the benifits and come up with the regulations where possible so we can leverage on the technology innovations than to ban it and force people to go in the wrong/illigel way to be connected. Suggestion: Government need to make sure the bitcoin exchanges are regulated so they can help government to know what they want to know.
    1. D
      Nov 29, 2017 at 9:13 pm
      You can't ban or regulate bitcoins, because it is a cryptocurrency.
    2. P
      Prasann Singh
      Nov 27, 2017 at 10:04 pm
      Someone has said " illusion of knowledge, is biggest enemy of knowledge not ignorance". Bitcoin is virtual hacking of economy of world and we are helpless in monetizing it. Its just indication of future catastrophe of A.I in cyber world. Google, facebook, amazon etc are using A.I to read the customer mind and manipulating them on there fingers to buy there products. We are now really entered in the world of matrix. Time is not far, when human can also be hacked from distant by using and synchronise electromagnetic waves with human electromagnetic field. Welcome in the world of virtual matrix.
      1. R
        Nov 27, 2017 at 3:00 pm
        Your "experts" are wrong. Ask them to do their homework again. Blocks rewards halve after every 210000 blocks. All bitcoins won't be mined until 2100 AD. About the crime part- crime won't stop no matter what you do. Dictating control over people will make things worse. Work on reducing the number of criminals rather than channels used by criminals. Bitcoin challenges the government on one most important thing: you're rewarded for doing the right thing(mining). Why would you waste your resources hacking the network when you know it's close to impossible. Why would a person do a bad thing when doing good thing earns him more? Think.
        1. R
          Nov 27, 2017 at 8:21 pm
          "Why would you waste your resources hacking the network when you know it's close to impossible. Why would a person do a bad thing when doing good thing earns him more? Think." That's very naive. Why was etherum hacked then?
          1. D
            Nov 29, 2017 at 9:17 pm
            You are transactional. Not all are motivated by profit. The most brilliant minds do it for the challenge and the kick they get out of solving a challenge, the more difficult the better.
        2. S
          Nov 27, 2017 at 2:20 pm
          There's a good chance that I'll never understand the workig of crypto-currencies! Not at least till 2040!
          1. C
            Nov 27, 2017 at 7:55 am
            Bitcoin is causing the largest redistribution of wealth (and by implication, power) that the world has ever seen. It will need new conceptions for social organization to replace nation states since states will invariably be weakened by this technology.
            1. Load More Comments