Bitcoin Forum

Trendspotter: Digital currency makes for immaterial world

What is money? On first glance (and to non-economists) the question can seem simple. It's the stuff in our wallets: we use it to pay for the things we buy. But think harder and the issue quickly becomes head-spinningly complex. Why do we freely exchange our possessions, our homes, our time for small pieces of paper or metal? How did we come to the agreement that money is valuable? And is that all that money is, in the end: a social agreement?

Recently, money has endured pretty bad press. The 2008 financial crisis may be too complicated for even economists to understand but most people think that a corrupt financial elite had a lot to do with it. Banks lusted after money and governments failed to regulate the supply of money: together they almost vaporised the global economy - and we, the ordinary citizens, must pay for the clean-up.

Now, a diverse bunch of cyber-utopians, coders and economists are seeking a new way of doing things. What about a currency that isn't backed and controlled by a government and central bank but is instead controlled by all of us? And that doesn't exist in messy, resource-consuming, inconvenient physical form, but is digital? Welcome to the virtual currency age.

The leading example of a virtual currency, Bitcoin (bitcoin.org), took a step closer recently to legitimacy by becoming a registered payment services provider under European law. Bitcoin-Central will now be able to send and receive transfers to and from other banks and issue debit cards to users. It's an amazing step forward for a project begun by the inscrutable Japanese coder Satoshi Nakamoto (not his real name) who, in 2008, published a paper on how a system of cryptography could give rise to a new online currency. The Bitcoin network came into existence in 2009.

Today, there are around 10.5 million Bitcoins in circulation and one Bitcoin is worth around £8.50 (Dh50). More than 1,000 merchants worldwide already accept them and the European registration is expected to help that number grow.

There is clear appeal in a new currency controlled by peer-to-peer networks of users. New Bitcoins are issued according to rules agreed to by the community and no central authority can change the money supply, requisition funds or set interest rates.

At its heart, Bitcoin is a reflection of the Californian, cyber-utopian dream of a borderless, decentralised, ground-up world in which ordinary people have been empowered by connectivity to take control of their own lives. But when it comes to utopia, there are always people with other plans. In June 2011, the largest Bitcoin online exchange was hacked and 400,000 Bitcoins - worth around US$9 million (Dh33m) - were stolen. The thief then flooded the market with stolen Bitcoins, causing the value of a single Bitcoin to fall to $0.01.

So will we all find ourselves earning and spending in Bitcoins soon? That sounds a bit premature. But in the meantime, there are plenty of other players helping forge the future of money and disrupt the staid banking industry. If you're hankering after a cashless existence, the smartphone payment system Square (squareup.com) - which lets you make or take payments with just a touch of your iPhone - may currently be your best bet.

In June 2011, the largest Bitcoin online exchange was hacked and 400,000 Bitcoins - worth around US$9 million (Dh33m) - were stolen. The thief then flooded the market with stolen Bitcoins, causing the value of a single Bitcoin to fall to $0.01.

*Faceplams* at the mtgox hack.

II. Bitcoin Sell-Off

On June 20th at approximately 3:00am JST (Japan Time), an unknown person logged in to the compromised admin account, and with the permissions of that account was able to arbitrarily assign himself a large number of Bitcoins, which he subsequently sold on the exchange, driving the price from $17.50 to $0.01 within the span of 30 minutes. With the price low, the thief was able to make a larger withdrawal (approximately 2000 BTC) before our security measures stopped further action.

We would like to note that the Bitcoins sold were not taken from other users’ accounts—they were simply numbers with no wallet backing. For a brief period, the number of Bitcoins in the Mt. Gox exchange vastly outnumbered the Bitcoins in our wallet. Normally, this should be impossible. Unfortunately, the 2000 BTC withdrawn did have real wallet backing and they will be replaced at Mt. Gox’s expense. Again, apart from the compromised admin account, no individual user’s account was manipulated in any way. All BTC and cash balances remain intact.

What about a currency that isn't backed and controlled by a government and central bank but is instead controlled by all of us? And that doesn't exist in messy, resource-consuming, inconvenient physical form, but is digital? Welcome to the virtual currency age.