Bitcoin: Fraud or Future?

In 1999, Nobel laureate and renowned economist Milton Friedman said, “I think that the Internet is going to be one of the major forces for reducing the role of government. The one thing that’s missing, but that will soon be developed, is a reliable e-cash, a method whereby on the Internet you can transfer funds from A to B, without A knowing B or B knowing A.”

And today, almost 20 years after his prediction and almost 10 years after his death, his forecast has finally been fulfilled: the digitized currency of bitcoin has garnered widespread attention for its revolutionary characteristics. Yet the world is still divided on whether bitcoin is truly the technology of the future, destined to revolutionize the finance and commerce industries, or merely an over-hyped fraud with no real purpose.

A LOOK AT THE HISTORY

In 2009, a mysterious person or organization identified only by the pseudonym “Satoshi Nakamoto” invented the protocol for bitcoin and published a paper outlining the general concepts and ideas behind it. Although the currency was plagued by setbacks including hacking and theft, by July 2012, popularity was on the rise, with several groups figuring out ways to popularize and legitimize the currency.

Yet it wasn’t until April 2013 that bitcoin really shot up in popularity, the value increasing 10-fold in just 2 months. The collective value of all bitcoin surpassed a billion dollars, garnering attention from several notable sources.

It’s important to note, though, that the primary use of the currency seemed to be illicit activity. In October 2013, one of bitcoin’s biggest users, a bitcoin-powered black market called Silk Road, was shut down by the F.B.I. The value of bitcoin continued to climb as months passed, although there have been some fluctuations. Today, one bitcoin is worth around $4,200– a far cry from the few pennies it would have been worth just a few years ago.

WHAT IS BITCOIN?

Bitcoin is a digital form of currency  –  a ledger with account numbers and balances that constantly update a user’s account balance as transactions occur. Since they aren’t government-backed or based on gold, the value of bitcoin comes from the belief that they are worth something- the users give it value by deciding to use it. Bitcoins are mathematically generated through difficult number-crunching tasks that a network executes in a process called “mining.” Yet just like mining gold, as more bitcoins are mined, the harder it becomes to find more.

The mechanics of bitcoin get pretty complex. Someone has to monitor the mining and transactions that are being made, but because there’s no company or government that runs bitcoin, no single entity can verify the communications.

As a solution to this, instead of a single individual or corporation monitoring the interactions, any member of the general public can participate in the verification process. When a transaction message is broadcasted, users around the world race to find a solution to a mathematical problem. Whoever finds the solution first and updates the log is awarded a certain amount of newly-generated bitcoins. Therefore, the log is always verified by users worldwide and up to date. This makes it nearly impossible to steal bitcoin or fake transactions.

 

A commercial bitcoin mining operation in Iceland. (Wikimedia Commons/ Marco Krohn)
A commercial bitcoin mining operation in Iceland. (Wikimedia Commons/ Marco Krohn)

WHAT MAKES BITCOIN SPECIAL?

Bitcoin is considered revolutionary for a few reasons. First of  all, it’s the first decentralized digital currency. Because it has no central management, it is stored in several places instead of a single central location, which means there’s no single point of failure. This makes it far more secure and reliable- if one server fails, the rest are still running.

Additionally, bitcoins don’t require a middle-man- they are transferred directly person to person. This dramatically cuts transaction fees that we generally have to pay when paying through a bank. There’s also a factor of anonymity that isn’t achievable through other means. Because it’s decentralized, you are the only one who knows your transaction history. And you’re the sole owner of your bitcoin, which means that companies can’t freeze your account.

But this isn’t to say that bitcoin is fault-free. Although some may consider anonymity to be a plus, it’s a feature that is highly valued among black markets and illegal transactions.

“Generally, it can be used for legal things,” math and computer science teacher Joe Kim said, “but a lot of illegal activity is associated with bitcoin because it’s almost impossible to track.”

The F.B.I. caught and shut down Silk Market, an online black market that almost exclusively used Bitcoin, and it has expressed concerns about the anonymity that enables criminals to operate covertly. Many countries, including Russia and China, have also started to crack down on bitcoin. Bitcoin also been hacked several times in the past; from users on bitcoin forums to the bitcoin service MtGox, millions of dollars of bitcoin have been stolen.

There are also more technical concerns about how Bitcoin will scale up over the next few years or decades. Because every single transaction is added to a collective ledger, it’s possible that the file will grow to an unscalable level in the future as transactions build up.

A GLIMPSE OF THE FUTURE

Because of the huge range of opinions surrounding bitcoin, it’s hard to tell what the future will bring. Some, like freshman Rikhil Konduru, an active investor in bitcoin, believe bitcoin can solve problems around the world. Konduru believes the fact that it has no central management could be what makes it so revolutionary.  

“In countries like Venezuela, with terrible money crises and inflation,” Konduru said, “this will replace the greed of people wanting to produce money in governments.”

It’s also a very secure network that is nearly impossible to steal from, as only the owner knows their address. The seller is protected,  as there’s no chance of a refund- every transaction is irreversible. Several investors, including billionaire Tim Draper, have invested millions in bitcoin due to its constant climb in value as well as future potential. These reasons make it a lucrative option for many finance or commerce companies as well as investors.

“I’m very excited about bitcoin and what it can do for the world. Bitcoin is as big a transformation to the finance and commerce industry as the internet was for information and communications,” Draper said in an interview with The Merkle.

Yet others don’t see huge potential for the general population. Right now, bitcoins are not widely accepted in most name brand stores. Since the valuation fluctuates, there’s no one constant value, which could cause problems with buying and selling items. Additionally, the buyer isn’t protected- if a buyer uses bitcoins to buy something and the seller refuses to give them the goods, the transaction can’t be reversed.

Others believe that there’s too much illegal and suspicious activity surrounding it for it to be accessible to the general population.

“I don’t think it’s going to impact me. It could impact me if it was more legitimate. But there is a lot of illegal activity, not just with the users, but the also the people behind it,” Kim said. “It seems like it’s going to be around, because those types of trades are going to exist. But whether it’s going to become more legitimate, to the point where you or I will use it, is unlikely.”

Kim also expresses doubt about whether it serves a real purpose.

“If I had the numbers somewhere, I don’t actually have to carry money… on the flipside, you can do that right now with places like Paypal,” he said. “They create a system where it’s online digital money, but people are already doing that.”