Bitcoin: Has the Currency Renaissance Begun?

3 10 2012

The first time I heard of a Bitcoin, I was sitting at my kitchen table when my boyfriend, who has his bachelors in Computer Science/Information Systems, said to me “so, have you ever heard of a Bitcoin? I think you’d find fascinating because your undergrad was International Relations and now you’re at Carnegie Mellon.” I brushed it off initially because the terms “hashes, blocking algorithms, SHA256, and Internet Relay Chat” were not yet part of my repertoire. After disregarding the topic, then arguing about malevolent uses of the currency, problems law enforcement must face, and the Silk Road (which I do not recommend to anyone, for the record.), I had realized that he was absolutely right. Just like I am making my transition into IT, the Bitcoin is making its transition into policy, and yes, I find it fascinating.

Crypto currency, sometimes referred to as digital currency, is a very exciting and relevant concept. Rooted in cryptology, mathematical algorithms, and open source software, creating digital money certainly finds its home in IT specialties, but its influence reaches into the social sciences and economics. The most popular crypto-currency is the Bitcoin, which allows anyone around the world to configure his or her machines to buy, sell, and trade digital cash. Those who have Bitcoins use them like cash in any traditional sense when buying a good or service; there is no paper trail, no confirmed identity of the buyer or seller, no using the same coin twice. The process is complex, which is why I would argue that it has not yet hit the critical mass needed to be successful.

Is it the next wave of how we view currency as a society? Maybe. If and when a crypto-currency does become easy and accessible, will it make an impact? Absolutely.

What are Bitcoins, and How Are They Created?

A man named Satoshi Nakamoto is acknowledged as the creator of the Bitcoin when he published a cryptology paper on an online database outlining a new, digital currency, which solves for the issues that many faced in the past. He insured that the information remains secure, one coin is not spent more than once, and a finite amount is created.[i]

To solve the problem of security, Nakamoto implemented asymmetric key cryptology that gives users a public and private key, which can be used to sign transactions, and maintain the integrity of the exchange. Additionally, the keys preserve the identity of the buyer/seller, and keep the information sent between the two confidential. The coin is hashed using a double SHA256 algorithm, and is transferred over the Internet using OpenSSL protocol[ii].

Users receive coins in two ways: they can be bought and sold on exchanges, or traded directly from person to person. The buyer or seller configures a virtual wallet, which houses the virtual coins, and registers on an exchange, the most popular being mtgox.com. In an exchange, Bitcoins are bought and sold by translating traditional currency into Bitcoin. To trade from wallet to wallet is trickier and requires a more tech-savvy user. Additionally, once a coin is spent, or traded from one wallet to another or over the exchange, it is broadcast across the network ensuring it cannot be spent again[iii].

Although the transaction and coin itself are encrypted, it is uncertain whether the wallet itself comes encrypted, too. From my understanding, a person must configure his or her own wallet to security settings that he or she chooses. This may be due to the tradeoff of functionality and security.[iv]

To maintain a finite number of coins, Nakamoto created a cryptographic, blocking algorithm that “mines;” for every time there is a solution to the algorithm, a miner, who can be any user with enough processing power, is awarded a batch of 50 coins. This algorithm causes the coins to reach a limit over time, and stops the production by 2030 at 21 million coins.[v]  These coins are pumped into the marketplace, and are bought and sold resembling a currency exchange for the other users to invest. The system is peer-to-peer and fully decentralized; it cuts out government and the banking system, the traditional places of where currency is created, lent, and traded.[vi]

Traditional Currency, How Does It Work?

Monetary policy is a study all in its own, and takes many years to fully understand it, but this is how currency works at a very high, broad level. In a nutshell, traditional currency as we know it is called “fiat,” which is Latin for “let it be so.” This means that the value of currency is not backed by a valued piece of metal, like gold, or some other object; rather, it is backed by the will of the people and their governments who believe it to be valuable. Governments will create more money given the demand, take money out of the market if there is too much supply, and set an interest rate for lending money, all of which controls currency from a central location.  Banks, on the other hand, act as the middleman between the governments and the people. They have the ability to give loans, and set their own interest rates, which can be very high at times for the layman. [vii]

Bitcoin’s Implications on Traditional Currency

Many around the world are unhappy with the centralized system of money creation. Governments have a hand in inflation rates, which causes the currency for countries to be worth less; therefore, it costs more to buy goods and services. The Bitcoin cuts out banks as the middleman. Since they can be transferred on an exchange or from wallet to wallet, there is not an interest rate on the money. If the Bitcoin gains popularity, banks can no more make money from money. As for its impact on governments, aside from the initial investment of cash from various countries, fiat money does not need to be used as frequently, which insulates users of the Bitcoin from inflation fluxes of their own currency. [viii]

Putting It All Together

For the study of Information Security, the Bitcoin is a current, relevant event happening in the real world instead of in a classroom. There are security vulnerabilities to patch or exploit depending on the camp of understanding. The system is not 100% fool proof. The exchanges are hacked, digital wallets are stolen, coins have the potential to be mined in excess, and users who do not know the intricacies can perpetuate these problems, and leave themselves at risk for malicious attacks. Furthermore, given the nature of the Bitcoin’s anonymity and decentralization, many use it for underground, illegal purchases to evade law enforcement.

So what is the impact and value that can be gained from this? Like the Internet, which was an experiment of its own, the Bitcoin is a test. It highlights the edges that people are willing to go to connect to one another, especially when large amounts of money are involved. It is a succession of what we already know about the Internet- that it is free from cultures and boarders; it has its flaws, and people may use it for malicious attacks, but it was created with good intentions. The Bitcoin is the same, it is transcendent, inherently benevolent, and illuminates the creativity and ingenuity of the human mind.

Whether the currency renaissance has started is a question left up to each individual when examining crypto-currency; but I would argue that our traditional notions of money are about to be changed.


[i] Wallace, Benjamin. “The Rise and Fall of Bitcoin.” Wired.com. Conde Nast Digital, 23 Nov. 2011. Web. 02 Oct. 2012. <http://www.wired.com/magazine/2011/11/mf_bitcoin/&gt;.

[ii] Yang, Edward Z. “The Cryptography of Bitcoin.” The Cryptography of Bitcoin :. Inside 206-105, n.d. Web. 01 Oct. 2012. <http://blog.ezyang.com/2011/06/the-cryptography-of-bitcoin/&gt;.

[iii] “Everything You Want to Know About Bitcoin, the Digital Currency Worth More Than the Dollar.” Discovery Magazine. N.p., n.d. Web. 02 Oct. 2012. <http://blogs.discovermagazine.com/80beats/2011/06/10/everything-you-want-to-know-about-bitcoin-the-digital-currency-worth-more-than-the-dollar/&gt;.

[iv] Yang, Edward Z. “The Cryptography of Bitcoin.” The Cryptography of Bitcoin :. N.p., n.d. Web. 02 Oct. 2012. <http://blog.ezyang.com/2011/06/the-cryptography-of-bitcoin/&gt;.

[v] Ball, James. “Bitcoins: What Are They, and How Do They Work?” The Guardian. Guardian News and Media, 22 June 2011. Web. 02 Oct. 2012. <http://www.guardian.co.uk/technology/2011/jun/22/bitcoins-how-do-they-work&gt;.

[vi] “What Is a Good Way to Explain Bitcoin?” Questions and Answers. N.p., n.d. Web. 02 Oct. 2012. <http://www.weusecoins.com/questions.php&gt;.

[vii] Bade, Robin, and Michael Parkin. Foundations of Macroeconomics. Boston: Pearson Addison Wesley, 2009. Print

[viii] “Bitcoin, Gold, and Competitive Currencies.” James Turk Interview with Economist and Trader Félix Moreno De La Cova. N.p., n.d. Web. 02 Oct. 2012. <http://themonetaryfuture.blogspot.com/2012/09/bitcoin-gold-and-competitive-currencies.html&gt;.

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