The Promise of Bitcoin
In 2009, a computer programmer under the alias Satoshi Nakamoto released a white paper proposing a new type of digital currency called Bitcoin. In the paper, Nakamoto describes Bitcoin as a peer-to-peer electronic cash system where one party could send payments directly to another without going through a financial institution. This decentralized system of payment had never existed before; value could be exchanged over the internet from one person to another just like sending an email. This also gave Bitcoin the distinction of a currency without borders and without a government, bank or corporation in control of it. Nakamoto’s paper caused a frenzy among cryptographers, techies, and libertarians, many of whom have stated that they were unable to eat or sleep for days upon reading through Bitcoin’s protocol, realizing the significant potential of this technology. The general public, however, has had a difficult time grasping onto the concept of digital money, leading to confusion and skepticism. Hurdles in Bitcoin’s early years have also added to the atmosphere of distrust surrounding cryptocurrencies. While many have initially viewed Bitcoin negatively, society should feel optimistic about the revolutionary role cryptocurrencies can play in contributing to societal development around the world.
In order to fully understand Bitcoin and its benefits, one must have a general understanding of what money is. Taken completely off the gold standard in the Nixon era, the US dollar is not backed by anything anymore. The dollar is accepted as a medium of exchange because society trusts in its value. When people have a hard time wrapping their heads around a digital currency, they fail to realize that money is already digital. When one goes to the bank to deposit money, there is no physical representation of that money held in an account. Today’s fiat money is simply represented by a ledger of transactions verified by a trusted third-party mediator, to confirm that account A has sufficient funds to transfer over to account B. A mediator such as a bank keeps track of all transactions.
This is where Bitcoin comes in. Nakamoto writes, “What is needed is an electronic payment system based on cryptographic proof instead of trust, allowing any two willing parties to transact directly with each other without the need for a trusted third party.” Nakamoto may have felt the need for a decentralized currency in response to the 2008 financial crisis where the overdependence and fraudulent practices of banks were exposed. Nakamoto also points out the weaknesses of the current system due to high transaction fees that are needed to fund these intermediaries and the fraud associated with relying on third parties. To accomplish this, Nakamoto writes, “A peer-to-peer distributed timestamp server [will] generate computational proof of the chronological order of transactions.” What Nakamoto proposes is that in order to not rely on a third party, a timestamped and chronologically ordered ledger of all transactions from the very first transaction is necessary. The Bitcoin protocol distributes this ledger to every participating computer on the network. With these computers having the entire transactional history from the beginning, every computer is able to verify that the transactions are legitimate, and must reach consensus for the payment to go through. This system of ledgers is referred to as the Blockchain, which is the idea of distributed trust. So, Bitcoin relies on computational power to verify transactions rather than a central authority. This decentralization also makes Bitcoin tamper-proof, as a hacker would theoretically need to hack into thousands of computers at the same time to commit any sort of fraud.
Nakamoto also based Bitcoin off of gold, which has proven to be the best store of value over time. Gold has held increasing value over time because of its scarcity and inability to be reproduced, which is in contrast to the current fractional-reserve banking system where banks have the power to create money. Nakamoto explains, “The steady addition of a constant of amount of new coins is analogous to gold miners expending resources to add gold to the circulation. In our case, it is CPU [Central Processing Unit] time and electricity that is expended.” Like gold, there is only a finite number of Bitcoins that will be released into circulation via a system of digital mining, making it a deflationary currency. What may be important to note is that a full technical understanding may not be necessary. Similar to the average person that would not be able to explain exactly how a telephone works, society uses Bitcoin because it works.
One of the biggest benefits of Bitcoin is that anyone can download a wallet; all that is needed is an internet connection or a phone. However, early in Bitcoin’s development, criminals were quick to take advantage of this fact, which led to a couple of high-profile scandals. These events created a negative image that continues to follow Bitcoin. Yet a deeper look reveals misconceptions and shows that these events were necessary for the development of cryptocurrencies.
The Silk Road site led many to associate Bitcoin with drug dealers, money launderers, and hackers. This notorious site facilitated the sale of $1 billion in illegal drugs using Bitcoin as payment. John Bohannon of Science Magazine explains, “Bitcoin’s anonymity is a powerful tool for financing crime: The virtual money can keep shady transactions a secret.” However, Bohannon continues, “The paradox of cryptocurrency is that its associated data create a forensic trail that can suddenly make your entire financial history public information.” Here, Bohannon exposes one of Bitcoin’s biggest misconceptions. Bitcoin is not totally anonymous; it is pseudonymous with users behind a cryptographic set of numbers. Although identities are not attached to a Bitcoin address, all transactions are transparent on an open public ledger. Because of this, detectives are able to track down a wallet address and follow the flow of money. They are able to prosecute by connecting the Internet Protocol (IP) address of the computers used for the transactions. So what was initially thought as an untraceable method to conduct illegal activity, criminals and prosecutors alike quickly found that Bitcoin was actually a useful tool for prosecution. This is how Silk Road creator Ross Ulbricht was caught, and the site was shut down. In a surprising twist of events, this transparency also led to the arrest of two federal agents assigned to the Silk Road case who were caught siphoning money off of Ulbricht and the site. One can argue that, for a criminal, cash is still a better facilitator for illegal activity than Bitcoin. As cryptography expert Sarah Meiklejohn explains, “If you catch a dealer with drugs and cash on the street, you’ve caught them committing one crime, but if you catch people using something like Silk Road, you’ve uncovered their whole criminal history” (qtd. in Bohannon). The Bitcoin network enables prosecutors to sentence offenders to the full extent of their crimes. Although this scandal caused many to question the role of Bitcoin, the outcome was vital in understanding more about cryptocurrencies and contributed to overall development. Silk Road may not have been the ideal scenario, but this marketplace was Bitcoin’s first major use case, legitimizing digital currencies to buy hard goods. This case was also important for law enforcement to learn that Bitcoin was not an elusive concept to make their jobs harder, but in fact easier.
In addition, the collapse of Bitcoin exchange Mt. Gox led many to believe that cryptocurrencies are fraudulent and vulnerable to hackers. In early 2014, Mt. Gox reported that approximately 850,000 Bitcoins worth about $460 million went missing. Mt. Gox was Bitcoin’s first exchange, where one could sign up for an account and exchange fiat currency for Bitcoin and vice versa. In a response to the hack, cybersecurity expert Andreas Antonopoulos writes:
Gox represents the failure of a poorly managed exchange that had full centralized control of customer funds, in custodial accounts, off the bitcoin blockchain. By keeping the funds off the blockchain, Gox removed the protections of transparency and end-user control and replicated the model of a centralized bank without any of the controls and oversight such institutions require.
In other words, this hack had nothing to do with Bitcoin and its core protocol, and everything to do with a poorly run centralized exchange. This was in itself contradictory to Bitcoin’s core values. It is easy to see how the uninformed would mistake this as a hack on Bitcoin itself, but Bitcoin’s protocol was never compromised. In his book, The Internet of Money, Antonopoulos further explains the events of Mt. Gox as typical of any new technology making its way into society in what he says leads to an “infrastructure inversion.” According to Antonopoulos, “Every time you have a new technology that is disruptive, in the first few years of its adoption it has to be carried by the existing technology that it is disrupting.” So, in Mt. Gox’s case, the new decentralized technology of Bitcoin was carried by the only known infrastructure of a centralized exchange. But with time, new infrastructure can take hold to accommodate new applications while still allowing the old technology to exist. In a way, Mt. Gox played a part in the development of cryptocurrencies as can be evidenced by newer and safer ways to store Bitcoin, such as owning a Trezor, an offline wallet. With exchanges becoming more sophisticated with added security layers, it is really hard to imagine a situation like Mt. Gox happening today.
Negative image aside, Bitcoin supporters believe in the revolutionary role cryptocurrencies can play to reach the 2 billion people around the world who do not have a bank account or do not have access to a bank. Many believe the greatest impact will be felt in areas in sub-Saharan Africa. Dr. Saifedean Ammous, Professor of Economics at Adnan Kassar School of Business, writes:
The high cost of financial intermediation makes the world’s poor unattractive to financial institutions […] Bitcoin offers the intriguing possibility that developing countries could sidestep the development of a traditional financial system and move to mass adoption of international online digital currency. Bitcoin’s influence in developing countries could be similar to that of cell phones.
Ammous explains that the world’s unbanked do not have access to financial services because the poor in rural areas are not profitable business for financial institutions. But Ammous sees how Bitcoin can change that by its ability to completely bypass the conventional banking system just as the mobile phone revolution has bypassed the conventional telecommunications infrastructure. In my own experience in Rwanda and Kenya, I remember being struck by the number of people in extreme poverty with mobile phones. I have since learned about the telecommunications boom happening in Africa supported by CNN’s findings: “In Africa, less than one in three people have a proper drainage system, half of the population live in areas without paved roads, and only 63% have access to piped water. Yet, 93% of Africans have cell phone service” (Parke). The timing of Bitcoin seems to be perfect with this mobile phone revolution. Anyone can download a digital wallet; all one needs is the ability to send a text message to be able to send and receive money on their mobile phones. Economic freedom is crucial to the development and growth of any society, and this is the chance for billions to finally be a part of a global financial network.
In addition, Bitcoin is serving as an important tool for those living in volatile economic climates. According to Jim Epstein of Reason, “[In Venezuela], a country lacking food and basic health care, there is nothing theoretical about it. Bitcoin is helping to keep pantry shelves full and medicine cabinets stocked making life tolerable-if not always easy- in the midst of a socialist hell.” Here, Epstein shows how Bitcoin is serving as a lifeline to those suffering under government controls in Venezuela. In a country experiencing extreme hyperinflation, citizens are only able to take out $2 worth of money from their bank accounts a day. Venezuelans are turning to Bitcoin to buy Amazon gift cards to import food and other basic necessities from its Prime Pantry service. Many other Venezuelans have put their savings in Bitcoin as a store of value, as a hedge against their own currency.
Perhaps the biggest use case of Bitcoin is for remittances. Epstein writes about Maria, a 32-year-old who left Venezuela to Brazil three years ago. According to Epstein, Maria initially relied on a human courier to bring money across the border to her parents. Although dangerous and inefficient, she chose this method over services like MoneyGram because of their excess paper work, low remittance limits and high fees. Epstein writes that with Bitcoin, Maria is able to send $350 home each month without a hassle. Maria is not alone. According to The World Bank, remittances to the developing world amounted to $431 billion dollars in 2015. Western Union and MoneyGram have a monopoly on this market charging up to 10% on transfers (“Remittances to Developing Countries”). Millions of families around the world rely on remittances from family members as a source of income, and Bitcoin allows for all their hard earned money to be kept with transfers happening instantaneously. Especially in a country like Venezuela, Bitcoin is proving to be essential.
Still others feel positive about the cultural change Bitcoin is promoting in traditional patriarchal societies. In many war-torn areas in the Middle East, women are not allowed to have bank accounts. If any money is earned, the money goes into the father or brother’s account to where she would have no control over it. In The Age of Cryptocurrency, journalists Paul Vigna and Michael Casey write about The Women’s Annex in Afghanistan, founded by Francesco Rulli and one of Time Magazine’s 100 most influential people, Roya Mahboob. The Women’s Annex is a digital literacy program where Afghani women can learn, contribute content to the site as bloggers, and get paid in Bitcoin. Rulli states:
I am against welfare, we’re teaching them to be their own businesspeople. My logic is, how can I make sure the girls are safe? …[If she’s making money,] she is more likely to be protected by her brothers because she’s an asset to the family instead of a second-class citizen. Then eventually the family’s priority is not only to protect her but also to invest in her. (qtd. in Vigna and Casey)
Rulli and Mahboob have seen a cultural shift take place through their program which is garnering increasing support from society and enabling women to become drivers of their own destiny. The beauty of Bitcoin is that it does not discriminate. It does not matter whether one is a woman or what age, race, or credit history one has to set up a wallet and take part in this financial system.
A trending theme throughout is the idea of empowerment that Bitcoin provides. Bitcoin gives power and control back to the people instead of the ones who govern or the circumstances they are under. Whether one does not have access to a bank account, lives under corrupt government practices, or experiences cultural limitations, anyone can be a part and benefit. Just as the internet was the democratization of information, Bitcoin can be seen as the democratization of money.
Most living in developed countries are not affected by the issues stated above, and use Bitcoin mainly as a speculative investment or as a cheap way to send money. However, many are exploring new applications made possible through Bitcoin’s technology. A practical application that is being developed is the ability for micro transactions. According to internet pioneer Marc Andreessen, “Micropayments have never been feasible, despite 20 years of attempts, because it is not cost effective to run small payments (think $1 and below, down to pennies or fractions of a penny) through the existing credit/debit and banking systems.” Bitcoin makes micropayments possible because it can be broken down to eight places after the decimal point and has a near free transaction cost, only the electricity needed to send the money. Andreessen sees this as a useful application to monetize digital content. He explains:
One reason media businesses such as newspapers struggle […] is because they need to charge either all (pay the entire subscription fee for all the content) or nothing. All of a sudden, with Bitcoin, there is an economically viable way to charge arbitrarily small amounts of money per article, or per section, or per hour, or per video play, or per archive access, or per news alert.
This seems like a great alternative to the current bombardment of advertisements on websites. There are micropayment solutions already being integrated into web browsers, where one could choose a certain amount, say $5 a month, in a wallet and automatically send payments to sites by the amount of time spent on them. It will be interesting to see the different ways micropayments will be implemented in business models and individual content creators.
But beyond currency transactions, what really excites futurists all around the world is the underlying technology Bitcoin runs on called the Blockchain. As mentioned previously, the Blockchain is the breakthrough technology of distributed trust by a network of computers. In essence, the Blockchain is the operating system that makes cryptocurrency transactions possible. Technologists have realized that Bitcoin the currency is just one application of the Blockchain. The Blockchain has the ability to store, move and track anything of value including contracts, medical records, and identification documents.
Of the numerous ideas on how Bitcoin’s technology can transform industries, the inefficient system of healthcare is a hot topic amongst many. Blockchain experts Philip Francis and Scott Roudebush explain, “Accessing [Electronic Health Records] across different hospitals, insurance providers, and doctors can be a vexatious task. Adding to the inefficiencies is the cost to maintain the databases. [The Blockchain] leads to a major reduction in human error as the redundant act of rekeying information is virtually eliminated.” Many agree with Francis and Roudebush on the redundancies and inefficiencies of filling out paperwork with every doctor’s visit. Especially with industries evolving and progressing with technology, managing health records have stayed relatively unchanged. Maintaining databases have become increasingly vulnerable to hackers as well, with Francis and Roudebush pointing out the recent Anthem Insurance hack where 80 million patients’ records were lost. Medical records in the hands of a hacker lead to devastating results, including billing fraud and identity theft. Putting all information on the Blockchain with the user in control would streamline the whole operation. The impact of this technology goes beyond healthcare, but to any industry that uses databases. Nakamoto’s genius Bitcoin protocol inadvertently led to a whole new realm of applications, offering efficiency and security.
Bitcoin has proven to be resilient in its early years with an ever increasing number of supporters and enthusiasts coming together bonded by the underlying feeling that they are a part of something big. With the world becoming more interconnected through technology, major adoption of a global digital currency does not seem like a far out idea. In fact, it could just be the natural evolution of money. Growth can be seen in every measurable way: wallet downloads, ATM locations, price, number of transactions, number of merchants accepting Bitcoin, and the amount of funding for applications by venture capital firms. Bitcoin has come a long way, but still has ways to go. What is needed for mainstream use are easy to use interfaces, which many are already working on with the full support of major venture capital firms. This in turn will help to create a network effect, where Bitcoin will be more valuable and stable as more people use it. It is apparent that Bitcoin means something different to people all around the world. Whether someone can finally be a part of a financial system, take protection against an unstable economy, break through cultural limitations, or dare to dream up the next big technological application, all can agree that Bitcoin has the potential to fundamentally change the world for the better.
Ammous, Saifedean. “Economics beyond financial intermediation: digital currencies’ possibilities for growth, poverty alleviation, and international development.” Journal of Private Enterprise, vol. 30, no. 3, 2015. Academic OneFile. Accessed 27 Mar. 2017.
Andreessen, Marc. “Why Bitcoin Matters.” The New York Times, 21 Jan. 2014, https://dealbook.nytimes.com/2014/01/21/why-bitcoin-matters/. Accessed 10 Apr. 2017.
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Antonopoulos, Andreas. The Internet of Money. First ed., Merkle Bloom LLC, 2016.
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Epstein, Jim. “The secret dangerous world of Venezuelan bitcoin mining: how cryptocurrency is turning socialism against itself.” Reason, vol. 48, no. 8, Jan. 2017, pp. 27+. Academic OneFile. Accessed 27 Mar. 2017.
Francis, Philip, and Scott Roudebush. “How Blockchain Is Coming To Save Healthcare.” Global Health and Diplomacy, 2016, : 19 pars. Accessed 25 Mar. 2017.
Nakamoto, Satoshi. “Bitcoin: A Peer-to-Peer Electronic Cash System.” . , https://bitcoin.org/bitcoin.pdf. Accessed 25 Mar. 2017.
Parke, Phoebe. “More Africans have access to cell phone service than piped water.” CNN, 19 Jan. 2016, www.cnn.com/2016/01/19/africa/africa-afrobarometer-infrastructure-report/. Accessed 16 Apr. 2017.
“Remittances to Developing Countries Decline for Second Consecutive Year.” The World Bank, 21 Apr. 2017. Accessed 30 Apr. 2017.
Vigna, Paul, and Michael J. Casey. The Age of Cryptocurrency. First ed., New York, St. Martin’s Press, 2016.