Bitcoin: A Peer-to-Peer Electronic Cash System
What they are and how they work.
We hear more and more talk about cryptocurrency: we are talking about bitcoin and virtual currency.
They appeared in the international media shortly after the compulsory levy of 10% on Maltese bank accounts and since then, apart from a small peak down, they are still growing. Bitcoins have a quote of 950$, in 2010 you could buy them for 0.20$ each. We will try to understand where they are born, what needs they create, how to remain rational in this gold rush of the twenty-first century and how to the future market. This is not meant to be an article about “mining” (online you will find many articles explaining an expanding market and how to buy machinery to generate the cryptocurrency): it represents a starting point to understand how this market was created and has developed.
As we promote in the Visual Connexion method, we try to understand what motivates people beyond race, country or religion. In this case they are looking for new ways to achieve wealth, or a investment plan that guarantees large profits in a short time. This is just the tip of the bitcoin iceberg and like evetything we have to understand what moves below the first layer. Since we are talking about the Web, this below is everywhere. Starting from rational expectations, Panksepp identified seven neurocircuits that move the human research and play along with sexuality. They are the three main causes of pleasure in individuals.
These go to balance the other three neurocircuits that define negative feelings such as fear, anger and sadness. Starting from this initial analysis, we can better understand why people look for new ways to avoid the grip of the financial crisis.
We can expand our point of reflection starting from the most well-known motivational theory centered on needs, the Pyramid of needs developed by Maslow. Maslow has provided a categorization of the main human needs by placing them in a hierarchical structure, starting from immature and primitive needs and ending to characteristics of more mature and advanced civilizations. Maslow states that individuals meet their needs in ascending order. The hierarchical order of these needs also establishes the order of priority in their satisfaction, the practical implication of this view is that a given element can serve to motivate an individual only if he can meet the level that in the hierarchy are still unsatisfied. On this evidence was based the subsequent modification of the Maslow theory, the work of Alderfer, through his well-known theory ERC, which brings together the five levels of needs into three levels defined as “existential , “relational” and “concerning growth”. The first enclose the physiological and safety needs, the latter ones social belonging, the needs for growth, finally they include those of esteem and self-actualization. Since human beings are always looking for new ways, having a democratic alternative currency which takes advantage of the anonymity of the Web and the possibility of “mining” (ie possess the tools to create it) is certainly exciting, not only for hackers. In addition there is always the plus of not having intermediaries, as explained on the official website video.
What are the characteristics of Bitcoins?
As we can read from one of the official sites (bitcoin.org) these are the basic features of each network as Bitcoin:
- The Bitcoin can be transferred between arbitrary nodes on the network.
- The transactions are irreversible.
- The double-spending is prevented by the use of a blockchain. (Ie an encryption code).
- Transactions are transmitted in a few seconds and occurred within 10-60 minutes.
- The processing of transactions and the issuance of currency are made collectively through the process of mining.
- Transactions can be received at any time, regardless of whether the computer is on or off.
Moreover, unlike traditional currencies, the bitcoins have the characteristic that no one can control its value due to the decentralized nature of the method of creation of the currency (ie, every user can potentially create them). Among the amount of currency in circulation, bitcoins are restricted, they are predictable and therefore all their users know in advance with a limit of 21millions. Inflation from currency in circulation can not be used by a central agency to redistribute wealth among the users.
The logic of creation relies on the so called “mining pool”, a network of computers linked together to combine their energies for more power in solving computational blocks.
The transfers are defined as a change of ownership of the currency, and are carried out without the need of an external supervisor. This kind of interchange makes it impossible to cancel the transaction and then reclaim the coins that have changed ownership. The Bitcoin client transmits the transaction to its closest nodes, which propagate the payment through the network. Invalid or fraudulent transactions are rejected by the honest nodes. Transactions are basically free, but are expected to pay a fee in order to increase the priority of the transaction handling the various nodes.
When was this “bubble of the new millennium” or “free money” born?
The first signs of bitcoins may be spotted in 1998 by Wei Dai on the cypherpunks mailing list. Bitcoin is considered as a new form of money, meaning money for anything that is accepted as payment for goods and services and as repayment of debts in a given country or socio-economic context. Its special feature is the use of cryptographic techniques, without relying on central authorities to control the creation of new bitcoins and transaction control. But only in 2009 appears online, you’ll definitely have heard if you are keen on new trends, the name of Satoshi Nakamoto (nickname of the founding father of criptocurrency who then left the project, Nakamoto has also been added to The Verge 50 innovators in 2013). At this link you can see the original document written by Nakamoto about the birth of cryptocurrency. From 2010 onwards, bitcoins began their incredible climb aggregating multiple developers from all over the globe as the best technological traditions require.
The birth and growth of the market for cryptocurrency is definitely attributable to China, where investors are more likely to take risks and exchanging normal currencies with bitcoins because they know that, potentially, it can be endless. They are convinced that there will never be problems of inflation. Of course it is not true. Nevertheless, given the number of new digital millionaires, even the traditional market did not wait any longer and in recent months a Lamborghini and a Tesla were purchased with Bitcoin. In Finland, during the month of November, the value of virtual currency increased by 500% , with 12 million Bitcoins in the world, at least 15 billion dollars (you can see the chart of growth in real time on Bitcoin Charts or on Blockchain). A first cash machine for virtual coins was placed in the Helsinki Central Station and is now a tourist destination and the first installed in Europe, after the experiment of October in Vancouver. Thanks to these cash machines you can upload your own virtual portfolio, by introducing bills that are then converted into Bitcoin.
Wikileaks and other organizations used the Bitcoin for donations. The Electronic Frontier Foundation has started and then temporarily suspended the acceptance of cryptocurrency mentioning concerns about the lack of legal precedent on the new currency systems. The decision of the EFF was then amended in May 2013.
In October 2012, BitPay reported to have had over 1,000 merchants that accept Bitcoin as their payment system.
In February 2013, the payment processor based on Bitcoin Coinbase sold the equivalent of 1 million dollars in Bitcoins in one month to more than 22$ per Bitcoin. Recently some Silicon Valley startup instead of the company’s shares have provided a portion of the salary in Bitcoin.
But what are the limits and risks of Bitcoins?
It is not a form of long-term investment, but a good way to trade and accumulate small fortunes in no time.
The risks are the dropping in price and the large amount of hackers looking to steal your wallet (the digital wallet: if you lose your password you will not see even one euro).
One of the first banks for virtual currency in which you can create your own virtual wallet is Coinbase (if you live in the U.S.), but I can also mention Bistamp Bipsme (although it has recently been blocked to save the users portfolios due to a hacker attack). These attacks coincide with the closure of some “mines” and have led users and communities to generate other crypto virtual coins.
The most famous are the Litecoin (created by MIT and taken into consideration by Google for its virtual store). The numeric comparison: if the Bitcoin coming to 1000$ prices are gold, the younger siblings Litecoin, listed on the 54$ (two months ago they were at 35$) are silver.
This is the keystone of the new cyberwar of global finance. Think of a remarkable expansion in the market in 2010 in which you have invested a few dollars and a few months later you could be millionaires. Tempting, isn’t it? To give you an idea, if you had invested 80$ (thus having 10 bitcoins) a few days later you were with 2,540$, and if we did that with the current exchange rate that would be approximately 9,600$. Not bad at all.
A famous hacker understood the potentials in 2011: With minimal computer skills, you can create a black market completely invisible to the authorities. The Bitcoin can facilitate trade.
This blog is written by the members of the FBDA / GROUP team. Learn more on www.fbdagroup.org
