The Age of Cryptocurrency

How Bitcoin and digital money are challenging the global economic order

Book by Paul Vigna and Michael J. Casey

Article and Review by GlobalMacroForex

Written by two Wall St Journal reporters, this book has a surprising edge to the mainstream financial system.  There are so many issues to touch on relating to Bitcoin, but in this article, I will focus on:

·      What is the point of Bitcoin?

·      Bitcoin’s origins

·      How Bitcoin works

·      Privacy issues

·      Initial problems

·      Bitcoin’s Future

Let’s dig right in…

Bitcoin’s origins

Bitcoin’s creator is a mystery.  While he/she goes by the alias Satoshi Nakamoto, nobody knows if it’s even a real person or an entire organization.  While some people find this to be a reason not to trust Bitcoin’s payment system, but it could legitimately be for safety reasons as Bitcoin creates many enemies. 

Nakamoto was a member of the group Cypherpunks, a radical anarchy leaning political group that stood for using cryptography and privacy-enhancing technologies to enhance personal and economic freedom.

The Cypherpunks initially even had Julian Assange as a member.  Going around the Cypherpunks’ email blast, were programmers interested in making a decentralized currency free from government control.  Building upon the ideas of Wei Dai’s b-money and Nick Szabo’s bit-gold, Satoshi Nakamoto wrote a white paper on Bitcoin that solved some of the problems of his/her predecessor’s currency systems.

How Bitcoin Works

Bitcoin runs on a decentralized system, meaning no central clearinghouse controls it.  It essentially brings money back to its original origins of a ledger of who owes who what. 

Bitcoin literally has a ledger which is a public tally of who has how many coins.  The ledger is updated through a technology called ‘blockchain’ which is a decentralized system for updating information in blocks. 

Bitcoin’s blockchain specifically works by requiring miners to solve a math puzzle in return for getting bitcoins.  By having these computers solve math problems, they also update the ledger with the accounts of who owes who how many bitcoins.

Bitcoin users have a public and private key to their wallet, which is a digital storage space for Bitcoins.  The public key is what goes on the ledger and lets everyone know that the coins are owned by you and where to send them, like an email address.  The private key is like your personal password to get into your public key’s coins. 

Bitcoin’s ledger is validated by a consensus vote among the miners (the ones who update the system and solve math problems to keep them busy in return for Bitcoins). 

Theoretically, if a single person took control of 51% of the miners, he could update the ledger to say whatever he wanted.  The control against this is that it would reduce his own Bitcoin value if he ruins the system and secondly it’s very difficult to get that kind of computing power.

Initial problems

Bitcoin had many problems along the way in its development.  First, many people didn’t understand the point.  But that value proposition was solidified in April of 2013 when Cyprus had a banking and political crisis.  Bank accounts were frozen and it immediately let people realize the power governments had over their wealth to seize it.

However, that initial euphoria was crushed in later in 2013 when the FBI shut down the website Silk Road and seized 26,000 bitcoins then worth $3.6 million.  Silk Road was an anonymous drug trafficking website designed to be like the eBay of narcotics functioning off Bitcoin’s payment system.  Once the FBI shut it down, it shot a blow to Bitcoin’s price as Silk Road was initially driving the price up.

Then on October 26, 2013, the FBI announced it had seized an additional 144,000 bitcoins, worth $28 million.  It seemed like the problems kept unfolding when in February 2014, the largest Bitcoin exchange service, Mt. Gox in Japan, was having hacker related security issues and shut down. 

Both Silk Road and Mt. Gox closing down had crushing effects on Bitcoin’s price but it has rebounded since.

The Future of Bitcoin

Now Bitcoin’s price has rocketed up above 4.5 thousand per coin.  Its gaining mainstream media attention and more online retailers are accepting the currency.  Will regulators in western countries allow it to continue its rise and displace fiat money?  Nobody knows for sure.  But I hope so.  For the sake of world peace and global prosperity, free from oppression and tyranny, I think we all should follow the path laid out by Satoshi Nakamoto, even if he is only an idea.