To understand bit coin, let’s first brush up a few basics on the concept of money a.k.a currency.
Well, we all know trading started with some form of barter system in the beginning. The concept was simple. I have rice, you have wheat. I need wheat, you need rice so lets exchange.
Hurrah and the world was a happy place.
But what if I did not need wheat and instead needed x-box. The guy having x-box did not need rice but needed, lets say, a car. And no one knew where was this guy who sold cars so no one knew what he wanted.
What a bummer as everybody’s produce goes for a waste.
So the smarter folks felt that why don’t we create a common place where everyone can come and buy or sell what they want. Let’s call this common place as ‘market’. And let’s create this thing called ‘currency’. So instead of goods exchanging with goods, lets exchange goods with this ‘currency’ thing. The cumulative supply or demand will decide the exchange rate of a particular good or commodity. That in a nut shell formed the basis of fancy terms like ‘price discovery mechanism’. And there you go, I just explained how economics works.
So now that everybody agreed on this ‘market driven’ system, the next thing was to figure out who owns this currency? where does this come from? Who backs it i.e. what is the guarantee that it actually represents it’s value?
Now a simple concept started to become complex as now came in the concepts of government, monetary regulations and central banks who owned the supply of this currency and backed its value. Initially it was pegged to a natural resource like gold but because there is only a finite amount of gold in the world, which meant only a finite amount of currency could be printed, which meant nobody could become infinitely rich to be able to own private jets, holiday mansions or beautiful islands, the governments felt, ‘hell with this whole finite concept, let us just become the guarantors of the value associated with money. That way we can mint more when we need’.
As the concept of government was jurisdictional, the concept of currency also ended up jurisdictional and then came in further complication of inter-currency exchange rates. Newer forms of currency also started to show in form of cheques, promissory notes, credit cards, debit cards etc. But they were all controlled, monitored and regulated by these few central institutions like the government and the banks who controlled all these inter-currency exchanges and the value associated with the currency also as they had the power to infuse more currency in the system (or withdraw).
Anyways, this currency system enabled me to buy x-box by selling my rice but in the process I had to trust these middling central institutions and this enormously complex system that was potentially taking a cut in the process of my rice getting converted into x-box.
Now these intermediaries that we have to ‘trust’ are known to malfunction. Countries have gone bankrupt, governments have failed and their currency systems have fallen in the past. The very fact that the supply of currency or it’s exchange was controlled by handful of these institutions, made them immensely powerful. With great power comes great greed and every now and then we got a financial meltdown.
Enter ‘bitcoin’. The formal words to describe bitcoin is “an unregulated peer-to-peer digital currency”. But actually it is a great social, technological, philosophical and economic experiment. Sometime in the fall of 2008, someone named Satoshi Nakamoto published a paper called “Bitcoin: A peer to peer electronic cash system”. This led to the development of the open source software that led to realization of bitcoin. The beauty of the algorithm was that no one owned bitcoins. They were “mined”, like how gold is mined. One could participate in the bitcoin mining by being part of it’s network by donating computing power. Like no one owns ‘internet’, no one owns bitcoin network. Collectively these connected computers maintain the bit coin ledger, transactions and record, which is just book keeping of who owns how many bitcoins. Bitcoins are ‘mined’ or rewarded as a part of verification of these transactions to the users. Overall there can be only 21 million bit coins and it gets progressively harder to mine newer coins. At the current rate, it is expected that after 2140 no more bit coins will be generated. Underlying this bit coin network is a very strong system of cryptographic technologies which is all in public domain for anyone to view, validate, improvise and contribute.
Geeks around the world contributed (and are contributing) their hardware into the bitcoin network in the hope of getting rewarded. But what good is a money if you can’t spend it? So the first bitcoin use as money happened in middle of 2010 where in 10,000 bitcoins were exchanged for pizza worth USD 25. The transaction happened over internet. Bitcoins got transferred from one electronic account to another and pizza got delivered. This brought in the acceptance of bitcoin as a real world asset and very soon a bitcoin exchange called “Mt. Gox” was established in Japan. Bitcoins could be traded on the exchange for real world currency and from 10000 bitcoins being worth USD 25, the price of one bitcoin went as high as USD1240 in 2013. In 3 year, the pizza guy’s value would be 12.4 million. An entire economic ecosystem got developed around bitcoins with payment systems, exchanges, gateways and more and more merchants started to sign up for bitcoin as an accepted method of payments. It worked better than credit cards as the transaction fee was much lower. In the form of biticoin, a parallel peer-to-peer monetary system without the involvement of any corruptible middle institution got established.
Another interesting fact about bitcoin is that no one knows it’s founder. All the community knows is a Japanese name “Satoshi Nakamoto” but it’s just a pseudonym. It could be an individual or a group of individuals. The proficiency and usage of english phrases in his (if it is a ‘he’) email communication raises doubts on his being a Japanese. Furthermore, while there is an immense economic ecosystem being created around bitcoin today, he is no more actively involved. In a world where people scramble around to take credits for piddling things, someone choses to be anonymous for a new invention that can potentially make us relook at the very basis of civilization, is indeed incredible.
If anything the human history tells, then that is that no matter what, we WILL figure a way out of misusing any invention. Guns, automobiles, nuclear energy or social networking websites, no matter what, the criminal side of civilization will find a use of it. In the words of Agent Smith “as a species, human beings define their reality through suffering and misery”. We just can’t be happy with the good side of the coin and have to neutralize it by creating a bad side. So came out to be true for ‘bitcoin’. In no time, bitcoin became the currency of the illegal transactions on internet. Business of money laundering, drugs, prostitution, guns and what not started to adopt bitcoins as their currency of choice. The anonymity of it came as a boon to those who love being anonymous. Furthermore, ‘bitcoin’ is based on enormously large infrastructure of software. Despite what we may think, software really is not a secure infrastructure and it also has it’s wear and tears, that leave holes as vulnerabilities. These vulnerabilities provide the criminals an opening to exploit the software and use it for illegitimate gains. The hacker eventually broke into bitcoin as well as bitcoin exchange (MtGox) causing price fluctuations and artificial supply of bitcoin (Although real money is also subject to such vulnerabilities by means of robbery or fake currency). Hacking, coupled with the axe the law enforcement agencies swung on “legitimate” companies engaged in bitcoin economy (because somewhere some a-hole used bitcoins for illegal purposes) dented the reputation as well the price. Today the bitcoin is fluctuating at a price of around USD 300 (down nearly 80% from it’s peak).
Whatever the future of bitcoin might be, one thing that can not be taken away from it is the artistic novelty of the concept and the its un-institutionalized or headless realization. In a world where institutions are getting increasingly powerful, corrupt and control freaks, any such concept comes as breeze of fresh air.
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