Bitcoins, a self-generated hash-based peer-to-peer currency with no centralized regulating body, are on a stratospheric trajectory, will it replace traditional legal tender as the currency of choice for cyber-nastiness? First, a little background.
Bitcoins first surfaced in a white paper purportedly by Satoshi Nakamoto. While no one can trace his (her) exact identity, it seems the idea caught on. Early adopters started creating the currency using a computationally daunting task of making blocks of Bitcoins (BTC) using high powered processors churning out the millions of calculations needed, a practice called “mining.” Later they switched to dedicated machines running multiple GPU’s, sometimes cooled with dry ice, resulting in hefty power bills. To create a block of currency, millions of computational calculations are done, called hashes, which represent an amount of work, and form the basis for the BTC value.
The currency creation follows a curve (shown below), so as the supply increases, the difficulty of “mining” more BTC becomes increasingly difficult, as there is a fixed maximum number of 21,000,000 BTC to eventually be in circulation.
What is of interest is the collateral industries springing up offering such services as traditional currency exchanges, trading platforms of various sorts, and importantly, the rising number of traditional vendors willing to accept the currency for goods and services, paving the way for the meteoric rise in value Bitcoins have experienced, as The Wall Street Journal noted in a recent article.
Since this is an unregulated decentralized currency, it seems a natural shoe-in for purveyors of cyber nastiness. Think about it, here’s a currency that’s international, rising in value, unregulated and relatively anonymous and untraceable, easy to transact internationally and there are no fees for doing so. That’s quite a few checkmarks off the shopping list of a cyber criminal.
Some have alleged Bitcoins are a fancy techie Ponzi scheme, a process where later “investors” pay the earnings to the earlier “investors” out of the later “investment” from principle, but no true increase has occurred, thereby a zero sum game. In Bitcoins, however, new currency has been generated, and thereby can be privately traded by parties mutually agreeing on a value of whatever they’re exchanging, and using BTC as the denomination. Also, a fixed number of BTC’s are available, so deflation by supply saturation of BTC’s is difficult.
What remains to be seen is the regulatory stance if the value and popularity continues to rise. We know in the U.S. the FBI has recently shutdown a ring of traditional currency being minted, traded and circulated, citing a law prohibiting the creation of legal tender outside of the Federal Reserve. Recently there has also been a rise in bitcoins being utilized in narcotic circles. There have been numerous attempts by the recording industry to curb P2P music sharing, an activity that still thrives despite myriad legal volleys. Will currency follow a similar P2P trajectory, or will fatal flaws in the architecture stop it short? One thing to note, when the original Napster failed due to legal challenge, dozens more popped up in its place, cementing P2P file sharing in the public mindset as a method of private exchange which proved both valuable to many, and difficult to stymie.