Every coin must have two sides. Consider the coins that are jingling away in your pocket or purse. The material they are made of is usually worth far less than the worth they command in the market. This is all the more true of the paper currency that is prevalent for the higher denominations of most, if not all, national currencies. Despite the myriad uses this so-called “standard money” can be put to, and the many things that can be purchased with them, they are completely dependent on the corresponding government and central bank for their worth. The banks or other financial institutions where they are deposited are responsible for their safety and liquidity. In the words of one man (or many; no one is certain) known to the world only as Satoshi Nakamoto,
The root problem with conventional currency is all the trust that’s required to make it work. The central bank must be trusted not to debase the currency, but the history of fiat currencies is full of breaches of that trust. Banks must be trusted to hold our money and transfer it electronically, but they lend it out in waves of credit bubbles with barely a fraction in reserve. We have to trust them with our privacy, trust them not to let identity thieves drain our accounts
With almost all forms of conventional currency and investment, we trust someone, and thereby, open ourselves to risk and manipulation. The currency we hold may be devalued at any time, changing us from prince to pauper in the blink of an eye. The government we live under may decide to seize our assets, or portions thereof. Banks may reinvest our money in questionable investments, destroying their own profitability, and in the worst of cases, losing our money. None of this might have ever happened to you, or me, but it has certainly happened before, and definitely will again.
It was this problem that Nakamoto sought to address, and he did so by creating a decentralized virtual cryptocurrency known as the bitcoin. Each bitcoin is a string of data which contains the history of all transactions it has undergone to date. Bitcoins can be stored on your computer using a freely-available, open-source software known as a wallet, can be bought, sold, or transferred online, and can also used for any number of transactions in many online marketplaces. New bitcoins can only be generated by solving complicated mathematical puzzles, but the system has been designed so as to continually increase the complexity of the puzzles, thereby decreasing the number of bitcoins generated each year, year-on-year, finally coming to a stop when exactly 21 million bitcoins have entered circulation.
If one side of the coin that is currency shows our trust in banks, the other shows the stability and security this grants us, for with every right comes a duty or responsibility. We can rest easy, or at least relatively so, in the knowledge that the banks or other intermediaries are responsible for the security of our money. We know that the government and the central bank are responsible for the stability of the economy, and that they will not arbitrarily seize assets or issue fresh currency. On the other hand, this is the flipside of the bitcoin-based economy.
All bitcoins are stored in a cryptographically secured wallet on the owner’s computer. This brings up a wide range of security concerns, the simplest of which is the chance of theft, in case said computer is left connected to the internet. Any hacker who can force his way through the layers of security on your wallet is free to make off with its contents. Due to the very nature of bitcoins, such thefts cannot be reversed, traced, or prosecuted. This makes the owner of the bitcoins their sole guardian, which is a rather heavy burden for any one person.
The puzzles that must be solved to obtain new bitcoins have grown complex enough to require the use of specialized equipment with high computing power. This means that it is becoming increasingly difficult to “mine” bitcoins. This can be expected to have two effects. First, there is always the potential that some technocrat or group might be able to build a system powerful enough to corner a large share of the bitcoins that are yet to be distributed. This would put the stability of the entire economy at his mercy.
Second, as the direct route to acquiring bitcoins increases in difficulty, people lured by prospective riches are likely to turn to other avenues of acquiring a slice of this pie. Apart from the theft-by-hacking route mentioned above, this is also likely to affect trade in and using bitcoins. Already, thanks to its very nature, the bitcoin is the currency of choice amongst denizens of what has come to be known as the “dark web”, a collection of secret, semi-anonymous marketplaces dealing in black-market and other illicit goods. These marketplaces are not indexed by standard search engines, and are only accessible through certain special software that hides the identity and location of the users involved. Access to these marketplaces, such as the Silk Road 2.0, is strictly controlled for reasons of security. The goods on offer range from stolen items to drugs and weapons. There are even marketplaces that deal in mercenary services and assassination requests. The very nature of the bitcoin makes it impossible to regulate its use for such purposes.
Governments and central banks that had been opposed to the very existence of the bitcoin as a currency outside the control of any authority now have an excuse to crack down on its usage. Silk Road, the first successful underground e-marketplace and the predecessor to Silk Road 2.0, was recently broken up by the FBI, also resulting in the seizure of a few thousand bitcoins (worth about $4 million). This led to a very severe fluctuation in the USD/Bitcoin exchange rate, which subsided only when some of the seized bitcoins were resold. Indirectly, then, the bitcoin is still at the mercy of governments to a certain extent.
All in all, this suggests that, despite the anonymity it confers, bitcoins are neither very secure, nor stable, as a currency. Every coin must have two sides. Conventional currency, unlike the bitcoin, is easy to acquire and use, and relatively stable and secure. On the other hand, bitcoins do not require trust in a central authority. It is up to us to choose. Heads or tails?