Part 2: The Journey (Continued from last week)
Now, considering the trying circumstances under which Bitcoin was created and the substantial amount of thought and effort put in to launching this currency, you would think that the first transaction of Bitcoin - when the currency was actually used to buy something in the real world - would be a momentous occasion, and the product being bought would be of considerable importance. You would be wrong.
The first real-world transaction of Bitcoin was for 10,000 BTC in 2010 and it took place in Jacksonville, Florida when a programmer by the name of Laszlo Hanyecz used it to buy… pizza. At the time, the exchange rate for BTC to USD put the pizza around $25, but at the height of its price of $19,783.06 per 1 BTC in 2017, this particular pizza was worth $197,830,600. Imagine that.
Bitcoin was not, however, always used to buy such innocuous things as fast food. As the value of Bitcoin increased over the next few years and more people started to join the network, the people who conducted dubious business on the fringes of society also began to take notice of this currency.
One of the first of these was Ross Ulbricht, otherwise known as Dread Pirate Roberts, a drug trafficker - among other things – who founded Silk Road in 2011, a marketplace on the dark web. He worked on the simple ethos that people should be free to buy and sell whatever they want – regardless of minor complications such as legality. It is said that an estimated $1 billion worth of Bitcoin transactions took place on Silk Road before the FBI seized all the owner’s assets and shut down the website in 2013. And in doing so, the FBI allegedly became one of the wealthiest Bitcoin owners in the world! And this is simply one example of how Bitcoins are being used for criminal transactions.
Features
Much like any new invention on the planet, there are both good and bad uses of Bitcoin. But what allows this currency to be so versatile, so fluid? More to the point, how is it possible for criminals to use this currency for their transactions so easily, rather than, say, using dollars or euros. The answer may lie in the inherent features of Bitcoin.
There are a few major characteristics of Bitcoin that make people sit up and take notice. The first is that, as per its design, Bitcoin is decentralised. Satoshi Nakamoto built the Bitcoin network to be independent of any governing authorities, and it does exactly that by maintaining all of its transactions on a distributed ledger network - the Bitcoin blockchain - all over the world.
There is no Central Bank to control the system, and no government to shut it down. If all the nodes of the blockchain in a certain country were to be shut down, the rest of the nodes around the world would continue to keep the network running, thus making sure that the system doesn’t operate on the whims of the all-powerful.
Because of its decentralised nature, and the encryption methods used for recording transactions, Bitcoins are said to be more secure than fiat currency kept in a bank account. How so, you ask? Well, money in a bank account is on potentially precarious ground – theoretically, banks can be susceptible to theft, hacks, financial crisis or asset seizures by the government. Comparatively, Bitcoin is less susceptible to all of these dangers.
In today’s business landscape, banks and financial institutions would take pride in knowing all there is to know about their clients – their names, addresses, phone numbers, credit history, spending habits and more. But as privacy becomes a rare commodity in the present day and age, there emerges ever more frequently, the customers who are unhappy with this state of affairs.
Bitcoin was tailor-made for these people. The Bitcoin wallet - the address at which a person’s Bitcoins are kept - does not need to be linked to any sort of personal information, allowing users to remain anonymous.
The addresses are simply a bunch of complicated strings made out of numbers that are accessed using the owner’s private encryption key. And so, you can simply send or receive Bitcoins without revealing your identity. While this is useful for people who simply don’t want their finances to be tracked by banks, it has also become god’s gift to criminals, allowing them to engage in criminal activities without anyone being the wiser.
However, this anonymity only extends up to a certain level. Every single transaction ever performed on the Bitcoin network is recorded on the blockchain. Although it may not show personal information, it is theoretically possible to see every transaction that has occurred using a single Bitcoin address and to also see how much money is in a particular wallet at a given time. But, as intended, it is almost impossible to tell who a Bitcoin wallet belongs to. So, although anonymity has been achieved, transparency has also been built-in.
As we can see, Bitcoin is a bit of a contradiction: it appears to be anonymous, yet its transactions are transparent for the world to see; the network’s transactions are decentralised and stored in multiple locations around the world yet all of those transactions remain completely secure. Now at this point, if you were to be asked whether Bitcoin was a bad bet or the next best thing since sliced bread, I imagine it would be a little difficult to answer. We simply don’t know enough - yet. But perhaps it would be helpful to list down some of the pros and cons of this cryptocurrency…. Let’s begin:
Pro: Satoshi Nakamoto built Bitcoin with freedom in mind. Freedom from governing authorities, imposed fees and forced methods of transaction. I believe it is safe to say that Bitcoin has achieved this objective of freeing the people. Perhaps it has been a little too successful in this attempt since some dark web marketplaces will only accept Bitcoins as payment in order to keep the authorities unaware as to the questionable nature of their business transactions. Is this the kind of freedom that Satoshi had in mind when creating Bitcoin? Perhaps not.
Con: Legality has often been an issue that has plagued Bitcoin since its inception. The precise lack of a central authority which gives Bitcoin its freedom, also creates this issue of legality, since there really is no authority in the world to claim it as its own thereby legitimizing its existence and its rights as a currency.
Because of this fact, different countries around the world have been taking wildly differing stances on Bitcoin throughout the years. Some countries allow and encourage the use of Bitcoin while some have banned it and its entire community. The fact that Bitcoin appears to have a special appeal to the criminal classes is also a point that favors the factions who believe Bitcoin should be disallowed and outlawed.
Pro: Owning a Bitcoin wallet means absolutely no one can steal your money from your wallet without you knowing it, which promises safety for your funds. As a user, you can also take steps to protect your money with backup copies and encryption algorithms. This means that you, the user, is in control.
Con: However, being secure in the knowledge that the 1,000 BTC in your wallet today will also be there tomorrow, will mean nothing if you can’t ensure the value of those 1,000 coins. And this decision is not up to the user - it depends on so many minute variables. Now, this may be true of other currencies as well – most currencies do display some form of ups and downs, but the sheer breadth of volatility displayed by Bitcoin during the past few years has made even the most risk-taking investors take a step back and think twice about their decisions.
The price of Bitcoin has had a rollercoaster ride, going to all new heights simply to plummet almost to the ground straight afterwards and such volatility is simply not a desirable trait in a currency looking to make its mark on the global economy.
Pro: Fiat currencies have always enjoyed portability but Bitcoin has taken it to a new level entirely. Since it is a digital format of money, users can place as many Bitcoins as they would like on a flash drive and simply carry it around wherever they go or even store it online.
Con: No matter how portable your money is, it’s rarely useful if the money is not recognized wherever you’re going. And this is Bitcoin’s next biggest problem. A huge majority of the businesses in the world are still completely ignorant of the existence of Bitcoin and hence has no concept of exchanging their goods or services for a cryptocurrency.
Pro: As we’ve seen earlier, double spending is not an issue for Bitcoin, so counterfeiting the currency is a non-issue. Therefore, users can rest assured that they are not being fooled into accepting money that has already been spent elsewhere.
Con: Although your money is secure, it is only spendable so long as you have the key to your wallet.
The keys, which are basically unique alphanumeric passwords to the Bitcoin wallets are essential for the smooth operations of the wallet. Lose that and you’ve basically lost your wallet.
So, here we are, complete with a history lesson of how Bitcoin came to be and how it’s been doing so far. We’ve talked about the good, the bad, and the ugly. So then, back to my question: is Bitcoin a bad bet or the next best thing since sliced bread? If you still don’t know the answer to that question, well, you’re not alone. It’s been more than a decade since Bitcoin was introduced to the world and we still can’t seem to agree – is it good or is it bad; is it black or is it white. But, like most things in life, Bitcoin falls somewhere in the grey. It is what you make of it. What we can be sure of is that Bitcoin is a currency of the people, by the people, and for the people. We must simply understand how to use it wisely.
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The writer is an Assistant Director at the Central Bank of Sri Lanka.
The views expressed in this article are those of the writer and do not necessarily reflect those of the Central Bank of Sri Lanka.