Money Shiny New Coins

The digital currency that could replace the shekel.

Chen Brand
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Chen Brand

When Satoshi Nakamura published an article he had written on an old encryption forum, nobody knew who he was. A search for his name did not yield any results, his e-mail address was on a free German service and there was no trace of his website. Nevertheless, he proposed a solution to a problem that cryptography experts have been trying to solve for decades - digital currency, or as Nakamura called it, the Bitcoin.

Nakamura proposed a smart, elegant solution to the problem of supporting the mining of digital coins - which exist only as software and are not tangible - and trading in them. In January 2009, about a year after the initial publication, Nakamura issued his software to the world as an open-source code. Nakamura's code offered the user complete transparency, so that anyone could ensure there would be no acts of fraud or unexpected activity.

The Bitcoin differs from ordinary currencies in several ways. It is entirely digital and is traded only via the Internet. The Bitcoin is transferred from one person to another without the mediation of banks, so that commission fees for the transaction, if any, are significantly lower than those for "tangible" currency. The digital currency can be transferred freely between any two countries, with no regulatory restrictions on maintaining an account.

The coins are mined in a process conducted all over the Internet, by anyone interested in participating, through a program called the Bitcoin Miner. Centralized inspection ensures that the coins are mined at a pace determined in advance. The principle of mining ensures that the currency will never suffer from inflation. The quantity of coins is limited and supervised by a central agency. An inflexible limit of about 21 million coins has been set, which will be reached around the year 2140.

Economic freedom

Above all, explains Amir Taaki, chairman of Bitcoin Consultancy and one of the leading developers, the system is decentralized. In other words, the money belongs to the user, and no government or commercial body can take it from him. As an example, Taaki mentions an Iranian friend whose contributions to open-source nonprofit organizations were rejected because of the U.S. embargo. "Nobody will tell me not to send money to someone in Iran when I use Bitcoin," says Taaki.

Another example offered by Taaki explains the advantages of Bitcoin over PayPal. Someone who organized a hackers' convention and raised money through PayPal received a notice that the account would be canceled because the convention looked suspicious. This led to the cancellation of the convention as well as a wait of several months for the money to be returned.

With PayPal, the ease of canceling transactions and the demand for delivery confirmation, even for a digital asset that requires no delivery such as designing a website, makes it a very problematic service. With Bitcoin, this problem does not exist, and control of the user's money is his exclusive responsibility, to the point where there is no option of canceling payment. Bitcoin, as Taaki put it, is the cash of the Internet.

Nakamura himself mined the first 50 coins, dubbed the "genesis block," at the beginning of 2009. For about a year the Bitcoin was restricted to a limited community of cryptography fans; later it was discovered by other users all over the world who shared the community spirit.

In what Bitcoin users call the "first real-world Bitcoin transaction" a programmer from Florida sent 10,000 Bitcoins to a volunteer in England, who bought two pizzas for him via a transatlantic credit card order. The first business to accept Bitcoin as a means of payment was a Massachusetts farmer who sold alpaca wool socks for a modest number of coins.

Ups and downs

Until early 2010 the Bitcoin had no real value, and even when it began to be traded on the Bitcoin Market in April of that year, it maintained a low value of 14 cents to the Bitcoin. The major step forward came in the summer of 2010, after it went viral for an unexplained reason, and in November of that year its value stabilized at 29 cents. In February 2011 the coin was worth a dollar, and in the spring of 2011, after the publication of an article in Forbes magazine about the new "encrypted coin," the Bitcoin's value rose to almost $9. The peak came last June, after the magazine Gawker published an article about the popularity of the coin among online drug dealers because it was anonymous and free. That month the coin's value rose to an all-time high of $29 per Bitcoin - so that the sum the programmer from Florida had paid for the first two pizzas was worth about $290,000.

But shortly after the success of the Bitcoin came the major crash. Ten days after the peak rate of the coin, its largest exchange, Mt. Gox, was hacked, and user accounts leaked onto the Internet. The attack on Bitcoin continued with the hacking of the MyBitcoin website, which provides an online wallet for Bitcoin, and around $250,000 was stolen from user accounts. A series of catastrophes continued to plague Bitcoin users, in what looked like a coordinated attack designed to destroy the project. Accounts were hacked, viruses attacked users and the Bitcoin dream seemed on the verge of collapse.

During those difficult moments, the Bitcoin community turned to its founder and creator, Nakamura, from whom they had last heard in April 2011, before the hack. When he refused to reveal himself, the conspiracy theories were not long in coming. Nakamura was suspected of belonging to some government organization, and of being the Bernie Madoff of the new Ponzi scheme: the Bitcoin. He was accused of mining coins when they had no value, in order to redeem them with complete anonymity later on.

Despite the bursting bubble and the speculators who lost a lot of money, the system remained stable. When this article was written, the rate was about $3 per Bitcoin. More and more businesses the world over are adopting the Bitcoin as a legitimate means of payment, and there are even websites through which you can purchase any item on Amazon with Bitcoin, and even a credit card that uses Bitcoin, which is accepted by many businesses.

There is apparently no justification for the stain on Bitcoin's reputation. When the website of Citibank, one of the largest banks in the United States, was hacked and about 2 percent of the credit information was stolen, or when the hacking of PSN (the Sony PlayStation website ) led to the theft of 77 million credit cards, it was not the dollar that was blamed as a currency and an institution, but rather Citibank and Sony that were negligent about security.

We should recall that the open-source system that operates Bitcoin has never been hacked, and the same is true of most of the exchanges that trade in it. Taaki says that even the hack that enabled the fiasco at Mt. Gox was discovered by his team three days earlier, but despite the warning, the site did not take care of the problem.

There is no question that the motivation behind Bitcoin is ideological, and the goal is to create a currency that is not affected by vested interests. But we cannot ignore the practical consequences that are likely to develop from it and influence commerce. Just as various countries such as Iran and Syria are closing their gates to foreigners and the commissions charged by various banks and intermediaries are particularly high, Bitcoin should definitely be considered a legitimate option for commerce.

The project has tremendous potential, and there are many and varied ways to derive benefit from Nakamura's brilliant planning. Now, after the sharp fluctuations in the rate of the Bitcoin have become more moderate and most of the speculators have left the playing field, the coin can continue in its attempt to create a genuine fair trade alternative and change the patterns of online consumption.

Taaki predicts that the Bitcoin will have considerable influence worldwide. "I believe that the Bitcoin will do for money what BitTorrent did for copyrights. The Bitcoin is democratic money, a transparent system that religiously guards privacy and prevents corruption."

A counterfeit 10 shekel coin (illustrative)Credit: Moran Maayan



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