Hash functions, block chains and mining: how the allure of cryptocurrency might give way to a new normal in buying and selling
— 4 minute read — By Sam Portillo
“What is Doge Coin?”
“It actually started on a joke from an Internet meme,” explained plucky financial expert Lloyd Ostertag on a Saturday Night Live skit last month. “But now it’s taking off in a very real way.”
Apart from the financial expert in question was not Lloyd Ostertag, but ‘very real’ billionaire entrepreneur Elon Musk. That the question ‘what is Doge Coin?’ – repeated five times over the two minute sketch – could form the basis of a joke on a primetime sketch show hints at both the confusion and perceived farce associated with cryptocurrencies in the present day.
But Bitcoin, ‘Doge’ and other digital monies warrant better attention than a passing glance or the comic relief bestowed upon it by SNL: those savvy enough to invest £1 in Bitcoin on, say, 1st January 2011, would have nurtured a fortune worth £87,000 by February 2021, the historic peak of Bitcoin’s value. Such is the awkward stubbornness of the British people, though, that despite Bitcoin’s astronomic growth in value, over 70 percent still dismiss the notion that they will ever invest themselves.
Security, openness and autonomy represent the underlying principles of the crypto revolution. In 1983, concerned about how easy it was for other parties to access personal information and payments online, American cryptographer David Chaum conceived the idea for an anonymous electronic money, where transactions were heavily encrypted at each end. Twelve years later, with the availability of better technology, he realised his idea with DigiCash: Blind Signatures for Untraceable Payments – untraceable by governments, untraceable by banks, anonymous for the users involved. The banks never warmed to this technology, though, and ten years later, the company filed for bankruptcy.
Japanese developer Satoshi Nakamoto launched Bitcoin in 2009, in so doing creating the world’s first decentralised cryptocurrency. With one unit of Bitcoin worth ten times more than a unit of the next most valued cryptocurrency, Bitcoin is still the leader of the pack today. New Bitcoins are rewarded to computers that perform the calculations needed to store and encrypt the records that keep the system functioning; in the industry, these people are known as ‘Bitcoin miners’. The reward for processing records – also known as ‘blocks’ – halves after certain milestones have been reached; it is through this process of squeezing supply (while demand inevitably rises) that gives the Coins more intrinsic value. According to current projections, the last Bitcoin will be ‘mined’ in 120 years.
Such is the hegemony of Bitcoin, that people sometimes refer to any other cryptocurrency – of which there are many – as ‘altcoins’. The second most popular cryptocurrency is Ethereum, which is worth almost £2,000 per unit. The high value of cryptocurrencies like Bitcoin and Ethereum mean that most investors own not one, nor ten, nor a hundred units, but often a mere fraction.
Litecoin, meanwhile – which, as the name suggests, was a creation inspired by Bitcoin – aims to process blocks at four times the rate of the original, allowing smaller, everyday transactions – such as buying coffee – to be confirmed faster.
For all the apprehension that the broader population hold about cryptocurrencies, the notion of their widespread use is an empowering one that would see power taken away from governments and banks, and democratised amongst the people that use it. The value of currencies change according to the natural amount of demand in the market, and are not manipulated by inflation or regulation, for example. In 2014, the UK Treasury was commissioned to begin a study into the possible roles for cryptocurrency in the national economy, and whether its potential should be harnessed, regulated, or rebuked.
Always inducive to new technologies, the Chinese government has run a number of trials with a digital version of the Yuan. The workings of the digital Yuan are markedly different from other cryptocurrencies, though, and would have profound consequences for the way that the government is able to monitor and control its people. Unlike Bitcoin, or any of the other decentralised cryptocurrencies, the Chinese government would control the generation of digital Yuan in the same way that governments and central banks across the world already dictate the printing of money. They would also be able to decide who can access the blockchain and programme lumps of money to expire, encouraging consumers to spend promptly.
A growing field of companies now accept Bitcoin as payments or donations, such as Microsoft, Wikipedia, and Etsy. Tesla, probably the biggest sponsor of the crypto revolution to date, recently suspended its acceptance of Bitcoin payments, citing worries over the less-than-eco-friendly way in which the currency is stored and processed on computers.
Maybe it is unsurprising that 70 percent of Britons are unreceptive towards the idea of buying crypto. The word was only recognised by the Oxford English Dictionary in 2014, and until 2018, just 3 percent of people in the country owned any. In the age of modern technology, products like the home gaming console, the personal computer and the smart speaker seem quick to penetrate the mass market. Services – just remember the long primitive age of the Internet – take longer.
Arguably, the case which best illustrates the shade of mystery staining crypto in the present day can be found in the origins of Bitcoin itself. The man attributed with inventing the groundbreaking currency, Satoshi Nakamoto, likely does not exist. His last communications were on an online forum in 2011 and it is believed that the name is but a pseudonym to protect their anonymity. In the past, Newsweek claimed they had identified a Dorian Nakamoto as the mystery inventor – they shared a surname, libertarian leanings and distrust of the government, and technical and engineering expertise. The Californian has vehemently denied the claims, though, telling the Associated Press: “I got nothing to do with it.”
Rooted in the fields of cryptography, computer science and economics, the topic of cryptocurrency still requires a helping hand or YouTube tutorial – if not a finance degree from Harvard – to comfortably understand. Perhaps, then, cryptocurrency won’t experience a wave of popularity until governments, like China’s, adopt it as the default, and it becomes the norm by force.