Yeah! I got a double spread in the Sunday Economic Times today!
Who moved my Bitcoins…?
For a moment, imagine Arnab Goswami (the unstoppable News Anchor of Times Now) going ballistic about Bitcoins!
Picture him hollering, “India wants to know”, “the Nation wants to know” “Investors want to know” followed by his AK47 lethal volley of interrogative questions to rip apart anyone representing Bitcoins on his programme!
I thank the stars that no ‘scam’ has emerged linking Bitcoins to all of our illustrious political parties in India (so far). The day that happens, even God will switch on Times Now and stay riveted to see what will explode on her TV screen!
While Arnab may be busy playing Sherlock Holmes for the upcoming elections, let me conduct my own investigation into this really arcane, complicated and surreal Bitcoins business and dig up some facts for you that I am sure you always wanted to know, but never knew where to ask!
Q 1: What are Bitcoins?
Bitcoins is an invisible (virtual) currency that lets people do business with each other. Let’s assume that you want to motivate me into doing a sting operation on a political party that claims that they have eliminated corruption, but honestly have done nothing in the matter. I am well equipped to carry out the mission, but do not want to be traced to this sensitive operation at all. You obviously want to remain anonymous. What we both want is a secretly shot video that we will finally leak on youtube.com
How do we do business? Using Bitcoins!
You offer to pay me for my services via bitcoins and I accept the same. Why bitcoins? Because bitcoins are anonymous and are not traceable by anyone. They are the perfect way for people to do business with each other without revealing identities. They don’t leave any digital footprints like credit card records, bank transactions, etc.
So let’s say that we agree to a ‘deal’ and you agree to send me bitcoins in advance to pay me for my job. I set the price at 3 bitcoins for my work. While writing this article, the current rate is about Rs. 38,000 per bitcoin. So, you are paying me about Rs. 1.15 lacs for this covert operation.
Fact : Bitcoins is a real currency that fluctuates in price and which can be exchanged to conduct real business.
Q 2: So how does it work?
The genius of bitcoins is in the way it works. To verify that you actually own these 3 bitcoins you’ve promised to give me, we both need to trigger the bitcoin system to undergo an elaborate ‘verification’ process. This involves the entire community of Bitcoiners (also known as miners) who will go through complex coded algorithms and programmes to check that the 3 bitcoins you possess really exist and that they can be transferred to me.
The miners will be paid a fee for their service and will also earn bitcoins as a reward for executing these complex calculations! This earning of bitcoins is what creates new bitcoins in the system and introduces more currency into circulation. The process of verification is programmed to get harder and harder every passing day and that is how the ‘supply of new bitcoins’ into the general pool is limited.
Now, don't think these ‘miners’ are sitting in some controversial coalmines of the coalgate scam dishing out free coal! These miners are supercool geeks who have stacked up computers in far flung locations (remote parts of Finland) with cheap electricity and cool weather to perform these calculations!
Fact: The business of transacting bitcoins and earning bitcoins in return is really the nerve center of this esoteric currency, and this is what makes it unique, unlike any other currency.
Q 3: Who created Bitcoins?
A couple of weeks ago, a brave journalist in the US really took the bitcoins investigations to the last mile. She hunted down Bitcoin's secret inventor (pseudonym “Satoshi Nakamoto”) to a house in the suburbs of Los Angeles and knocked on his door repeatedly requesting that she be allowed to speak with him.
The spectacled, introverted, super shy Japanese gentleman who loves toy trains was the last person you could imagine to be the founder and father of this rocket science currency.
Satoshi Nakamoto when directly questioned about his involvement neither denied not complied with the investigation, but it became clear that he was most probably the ‘inventor’ of this supreme currency that other geniuses later contributed to.
Fact: Bitcoins is a work of not one but many geniuses. Satoshi Nakamoto may have been the chief blueprint architect whose master design many other super clever architects used to build on.
Q 4: Why are Bitcoins so valuable?
The absolute brilliance of bitcoins is that only 21 million bitcoins will ever be made available in the market. (So far 13 million are in circulation and 8 million more will be gradually released into the system by the end of 2140).
Given that the entire bitcoins currency is generated by algorithms, it is very easy to make sure that once the 21 million mark is reached there are no more bitcoins to be issued. Bitcoins, their issue and their maximum circulation have been pre-determined from the beginning and therein lies its innate value.
Anything in the world that is valuable and restricted in supply constantly grows in value! This single-handedly explains the old adage of never going wrong investing in real estate because “land is the kinda stuff that just doesn't grow”.
I would credit Satoshi Nakamoto for blending technological and economic brilliance in his invention of Bitcoins. The currency, its rapid adoption, its growing value (of course with gyrations) teach all of us the Zen lesson “Less is More”.
Fact: Bitcoins will get harder and harder to earn. Hence they will only keep growing in value as the years roll by.
Q 5: What are the risks associated with Bitcoins?
In February of this year, the largest and most active Bitcoin exchange in the world – Mt. Gox went bankrupt.
Mt. Gox (don't be tempted to think that the place is a mountain) was started up in 2010 and quickly became the largest Bitcoin exchange in the world, accounting for almost 70% of total traded volumes of bitcoins in 2013.
Now, any ‘exchange’ that involves humans, machines and algorithms is prone to fraud, technical glitches and botch-ups.
The bankruptcy of Mt. Gox was partially because 850,000 bitcoins belonging to its members and its own treasury worth $450 million at that time (since then, the value of bitcoins has appreciated!) had gone ‘missing’.
How can a digital currency that is supposed to be verified and cross verified go missing? The assurance of bitcoins, as I explained earlier, is that the currency is completely code-driven and every bitcoin ever generated, exchanged and used is always recorded. So even if the bitcoins got stolen, shouldn’t they show up on some terminal somewhere?
This is like saying that even if you somehow manage to steal a Van Gogh painting from a highly guarded museum in Europe, what will do with it? After all, Van Goghs cost millions and its buyers are usually museums and globally recognized art collectors.
The fact is that Van Goghs do go missing and never get found. That is because there is an underground, grey market for everything – bitcoins included.
Fact: Bitcoins are vulnerable despite being proclaimed as a digital currency with a permanent trace. But their theft only points to the fact that bitcoins are potentially very valuable; who steals rubbish anyway?
Q 6: Is Bitcoins just another scam, albeit a hi-tech one?
I don't think so. Bitcoins is a revolution, just like currencies that came into being to represent ‘stored value’. Can you imagine what we would be doing today if we were still stuck to the barter system? If you ordered a Television from Flipkart, what you would give the Goods on Delivery (not COD) guy in return? Some potatoes you had grown in the backyard?
Rumour has it that Satoshi Nakamoto was highly frustrated by the ‘expensive’ friction caused by intermediaries when people wanted to exchange cash. Read – He was not appreciative of the process of swiping credit cards or complexities of bank transfers and the fees that they involve.
Bitcoins has moved beyond the ‘geeky’ gamer type currency image. Multiple ATMs of Bitcoins have opened in the USA and larger commercial establishments have begun accepting bitcoins in payments, such as the Virgin Galactic flights (that take you to the edge of space) and cost Rs. 1.50 crores per journey.
Fact: Bitcoins is here to stay. It may have its share of hiccups and troubles, but the concept, its acceptability and adoption is growing leaps and bounds. The moment RBI allows Indians to own a bitcoin, you should get 1 bitcoin for yourself at least! Who knows, that may be the ‘Van Gogh’ of the next century?
While watching the reports on the discovery of Satoshi Nakamoto and how the lady journalist tried to talk him into revealing his identity, I was struck by how similar the scene was to the one in the movie Kill Bill (1) when Uma Thurman “The Bride” walks into that small saké bar in Okinawa and makes silly conversation with the barman until she finally says that she there to meet “Hattori Hanzo”. When he hears that word, the entire scene changes and they talk ‘business’.
After a month, when Hattori Hanzo gives The (blonde) Bride the sword, he says, “Yellow-haired warrior. Go.”
I wonder what Satoshi Namamoto said when he finished the last piece of code on Bitcoins and launched it into the world? I would love to hear it directly from him…
Another read by me on Bitcoins - What Entrepreneurs can learn from Bitcoins
Few Questions / Curosities from my end...
1.) Will not the limited release of just 21 millions make it more of a SPECULATIVE CURRENCY. ( More of Demand vis-a-vis Supply)
2.) Will not the hoarding of Currency as a hobby / Antique collection -defeat the very purpose of the Currency - i.e Monetary Exchange.
3.) Isn't tampering of the data by the Owner/ Exchange - lead to a big Scam of future.
4.) How will a non- expert identify the difference between 2 Bit Coins fake (look like Original) and Original
As founder of zebpay, a bitcoin wallet app aimed at non geeks, taking the liberty to reply to your Qs :)
1) Limited supply is not a factor to increase speculation. Speculative trading happens with our regular (FIAT) money and precious commodities like oil, gold, etc. and will happen with bitcoin also.
2) Before our current money system called FIAT money, the world used gold as money for more almost 5,000 years. Hoarding of gold did not defeats its purpose as a currency. There will be people who do not need to spend and can hoard in anticipation of the value going up and there will be people in the market who need to spend bitcoins to buy something.
3) If Gmail or your individual account gets hacked, that does not mean the email system has got hacked. Similarly, all the hacks in bitcoins have been either at an individual user's wallet being compromised or the wallet of a bitcoin company getting compromised. Nothing prevents from future such scams or hacks from happening but the bitcoin community has rapidly learnt from each such incident in the early stages of bitcoin and companies are putting best practices in place to avoid future such incidents.
4) If you use any popular bitcoin wallet, for example like zebpay, if you receive bitcoins, they are real. If the sender does not have the bitcoins or has fake bitcoins, those bitcoins won't reach your wallet. The bitcoin network / the bitcoin backend takes care of this so you don't have to.
The picture links to the Declaration of the Satoshi Nakamoto
Bitcoin still remains FANTAStical!! :D The Story continues... No Retirement yet!!
1. "You offer to pay me for my services via bitcoins and I accept the same. Why bitcoins? Because bitcoins are anonymous and are not traceable by anyone. They are the perfect way for people to do business with each other without revealing identities. They don’t leave any digital footprints like credit card records, bank transactions, etc. "
This would be a fallacy in a way. A large number of crimes have been cracked due to the use of Bitcoin. The currency is the single most traceable form of transaction of value in the history of mankind. This is due to the fact that anyone can see where the cash went at the end of the day and figure what the money was used for. Due to this nature, the currency is very useful for accounting and transparency within organizations.
Following are some articles explaining how a government official in America was busted for using Bitcoin for all the wrong things
In addition in the example mentioned, shall you choose to release the video via youtube, you already leave a digital footprint. The smart thing to do would be to upload it via torrents. Decentralization, peer to peer, remember ? These fundamental natures of the technology should cover your tracks better than google's servers :)
2. "Fact: The business of transacting bitcoins and earning bitcoins in return is really the nerve center of this esoteric currency, and this is what makes it unique, unlike any other currency. "
I found this a bit misleading. Those who "transact" a bitcoin won't be "earning" a bitcoin.
Lets look at it this way.
You are sending me 15,000 rupees ( 1 bitcoin). Your account see's a subtraction of Bitcoin and mine see's an addition of 14,985 Rupees - or maybe even 14998.5 rupees- depending on how low a miner fee you pay. That 15 rupees to .15 rupees goes to the miner. In this case the remitter (you) doesn't "earn" bitcoin in the process
3". Bitcoins is a work of not one but many geniuses. Satoshi Nakamoto may have been the chief blueprint architect whose master design many other super clever architects used to build on"
Except for Nakamoto, none of the lead architects are actually unknown. The lead engineers have been the public face of Bitcoin since 2010.
4. "Given that the entire bitcoins currency is generated by algorithms, it is very easy to make sure that once the 21 million mark is reached there are no more bitcoins to be issued. Bitcoins, their issue and their maximum circulation have been pre-determined from the beginning and therein lies its innate value."
I love this analysis by you. Having that said, the currency is not "generated" by algorithms, but rather "limited in release".
A good example I can give you is the Federal Bank in America. They do print money and often its backing is questionable in nature, in the case of Bitcoin - the release is limited, so random printing of money and thereby inflation is avoided :)
5. "The bankruptcy of Mt. Gox was partially because 850,000 bitcoins belonging to its members and its own treasury worth $450 million at that time (since then, the value of bitcoins has appreciated!) had gone ‘missing’. "
Some allege, the Mt Gox incident was an inside job. I am not going to speculate, but I think the price hike in september 2013 had a direct correlation to the Silk Road bust
Here's a report on the bot's activities
The truth is, the price of the coin had massively depreciated post the incident at the exchange. It went from 1.1k to 800-600 USD around the time you wrote this article last year so as a matter of fact , it depreciated :) .
Just wanted to drop by and share my thoughts :)