Random Digital Madness: The Money Problem and the Rise of Cryptocurrency (Part 1)

By Bill Harp
Reader Columnist

Money: It has its problems, and I’m not talking about never having enough of it. 

First off, paper money has no actual value like gold does. Governments create their national currency by fiat (decree) and hope the rest of the world takes them seriously. For example, the U.S. says the dollar is backed by the “full faith and credit of the U.S. Government.” But the one-dollar bill is printed on the same paper as a 100-dollar bill. Based on confidence in the U.S. economy and government, the world accepts the difference and trusts in their value. Not so, for example, with the Venezuelan bolivar.

In addition, money requires a huge network of banks and financial institutions to make a money system work. As history has painfully shown, thieves can access computerized financial enterprises and create havoc.

Fiat money 

National fiat currencies have several downsides:

•The value of fiat money can change due to bad decisions of governments and financial institutions. The economic meltdown of 2008 showed how easy it is to cause a global crisis. National governments can also manipulate money and destroy its value. For example, a government that prints too much paper money can trigger inflation that makes its currency worthless. This has been the fate of almost ever fiat currency system in history. Venezuela is a modern example of how a government destroyed a healthy national economy through hyperinflation. Venezuela has renamed its currency twice in the last decade (the “strong bolivar” and “sovereign bolivar”) as it tries to control extreme devaluations.

•The fiat financial system can be computer hacked in a variety of ingenious ways. We are all vulnerable to identity theft and its twin, bank account and credit card theft.   

•Electronic money transactions can be tracked: governments, financial institutions or even Google can potentially keep track of every single transaction you make. Cash used to be relatively anonymous, but large cash transactions now attract attention and suspicion. Many organizations will not accept cash payments, and some countries are even trying to outlaw the use of cash (for example, India and most of Europe). In the U.S., banks have to report large cash deposits or withdrawals to the government.  

Enter Cryptocurrency 

It’s surprising that our money system has survived so long, right? Well, there’s a new game in town. Enter cryptocurrency. CC is actually a software system with a new concept of money exchange that solves a litany of problems with traditional fiat money. CC has experienced a meteoric rise in global use and:

•is a secure system that requires no banking or financial infrastructure 

•does not depend on governments to assign its value; the global market decides its value 

•can be sent anywhere in the world where there is an internet network connection

•enables peer-to-peer transactions that are secure, permanent, relatively anonymous and cannot be intercepted

•cannot be counterfeited. 

CC is perhaps the most revolutionary financial innovation of the decade. One of the first- and best-known portfolios of global CC is “bitcoin.”

A historical chart of the recent rise of Bitcoin. Courtesy image.

Enter bitcoin

Bitcoin is really a secure software system that just happens to have money as its objective and product. Reliability of the bitcoin is based on ironclad, secure and encrypted software that distributes and tracks bitcoin transactions. The amount of bitcoin to be made available is finite (21 million) and the total number of bitcoin in circulation is slowly increasing towards this target circulation. Estimates say more than 16 million bitcoin have been issued so far. 

Bitcoin origins and the role of open source projects

In early 2009 the bitcoin ecosystem was introduced as open source software by Satoshi Nakamoto, a name thought to be a pseudonym for the inventor(s).  “Open source” refers to something people can modify and share because its design is publicly accessible. Open source software cannot be copyrighted or patented.  

As a result, anyone can download the bitcoin software and review it, creating complete transparency as to how it works. The bitcoin ecosystem, then, is run by independent collaborators, and any skilled programmer can participate in the system’s modifications. No corporate entity or government controls the system or its use.  

The genius of open-source projects is they are designed to solve specific user problems, and not designed to meet the revenues objectives of a company. This leads to innovation in designing optimal solutions. Usefulness and global popularity are the measurement of success.  

Some of the greatest inventions in technology were built with an open-source model. That includes Android phones and Chrome OS, both derived from Linux, one of the most famous open-source software projects.

The bitcoin software ecosystem   

No one entity is responsible for the bitcoin tracking and security system. Instead, an army of volunteers maintains a protective web that keeps the bitcoin system working. Volunteers are motivated by a reward system that pays them in bitcoin.

As a result, bitcoin value has increased since its introduction in early 2009 despite huge swings in value that make it quite volatile. For example, in June, value of one bitcoin was $6,544 – down from an all-time high near $20,000 just six months earlier. Some early adopters who paid just a few dollars for one bitcoin became “bitcoin millionaires” when their hundreds-of-dollars investments increased to millions in less than a decade.  

How to use bitcoin

On the surface, bitcoin use is quite simple. The user doesn’t have to think about the complex operations going on behind the scenes.  

First, download the bitcoin-wallet software for your computer’s operating system at the bitcoin.org website. You will create a personal wallet that gives you a unique bitcoin address.   

Then go to one of the many bitcoin exchanges, such as Coinbase, and buy bitcoin using a credit card or any other standard means of sending money such as a bank wire. The exchange will credit your bitcoin to your bitcoin address.

You can now spend your bitcoin with merchants who accept bitcoin, and that number is growing every day.  

Conclusion

In Part 2, next week, we will examine some of the core technology behind the CC movement and how CC is creating a revolution in both technology and the economy. Stay tuned.

Bill Harp is a technologist, geospatial analyst and cultural anthropologist.  He was director of technology (emeritus) of Bonner County and has a long career in defense and intelligence.

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