Money is changing as electronic and mobile communication devices have become a new interface for storing, spending, paying and keeping track of transactions. We are heading to a new era of digital non-state currencies. Amongst the most promising online currencies feature the Bitcoin, which is unlike anything we have ever seen before. The digital currency most fervent supporters celebrate it as something akin to a monetary messiah, a mean of exchange that will let you buy anything, anytime without nasty roadblocks, like banks or law enforcement. Although some of the enthusiasm for Bitcoin is driven by a distrust of state-issued currency, it is hard to imagine a world where the main currency is based on an extremely complex code understood by only a few and controlled by even fewer; without accountability, arbitration, or recourse.
Bitcoin is an electronic money created by Satoshi Nakamoto, which relies on a network of computers, a well-meaning community willing to lend their machine’s processing power to keep it alive. Together, they would partake in a system that verifies transactions and “mines” for new bitcoins, producing electronic tokens at a steady rate. The key to the entire system is “block-chain,” an innovative approach that simultaneously verifies transaction, keeps a log of them, and creates new segments called blocks. Those blocks would house publicly viewable information about recent transactions. A solved block would produce a unique code, or hash, that forms the foundation for the next block.
Differences between “Hot Wallet” and “Cold Storage”
Bitcoin’s public/private key system is secure, but only if you keep your private key secret.
- A hot wallet means that your public and private keys are stored on a device that is connected to the Internet or an online service like a Bitcoin trading exchange.
- Cold storage keeps the public and private keys stored offline. There is no chance a hacker can spy on you.
- The best ways to acquire Bitcoins are either through buying from someone you know in person, the online exchange, or from a Bitcoin ATM.
Bitcoins do not require central banks that control the money supply and are not subject to inflation. Gone banks, payment card networks, and financial wire services, like the Western Union, which takes a cut of the transactions. However, it is important to bear in mind that banks and credit card payment companies form a buffer protecting most of us from fraud, siding squarely with consumers against merchants anytime there is a disagreement about a transaction.
The Dark Side of Bitcoins
- The biggest hit to the Bitcoin-fuelled online black market came on a Tuesday afternoon, October 1, 2013, on the quiet second floor of a small library in San Francisco.
- Silk Road, a former online black-market and the first modern dark-net used the Bitcoin payment facility to add a layer of secrecy so buyers and sellers can execute their transactions without ever knowing each other.
- Hence, Bitcoin is free of the power of states, but it is also outside of their protection.
How Governments are responding?
Most governments have refrained from giving their blessings to the digital currency. They paint it as dangerous and unreliable, with some going so far as to characterise it as a predatory moneymaking scheme. As of early 2014, only Iceland and Vietnam had gone that far outlawing the digital currency. Also, China is one of the only governments with the most aggressive anti-Bitcoin stance that hasn’t formally legalised it. Like Mexico, it has found a roundabout way to clamp down on the currency. Banks and payment companies cannot mingle with the currency, and that includes clearing transactions and making trades. That cuts off the role that banks play as back-end processors, especially the way they work with credit cards.
Bitcoin’s dual personality disorder does not help. Speculative investors who treat it as a commodity make it too volatile to be a stable unit of value. Also, the software that supports the entire protocol can be easily replicated. Also, the system that Bitcoin uses has no inherent competitive advantage over any other digital currency. However, it deserves a chance. Satoshi Nakamoto created something that is sheer genius. And in turn, those who continue to build on that idea are doing an excellent service to the financial and investment communities.