A few years ago, if you had asked 10 random people what a bitcoin was, there’s a good chance that more than half wouldn’t have heard of it.
That was before the cryptocurrency found itself in the headlines and the focus of a lot of negative publicity.
From exchange bankruptcies and “lost” currencies to its links to dubious activities, the bitcoin has developed a slightly tarnished reputation. But the bitcoin is more than the sum of the negative press it has attracted in recent months. In fact, if its supporters are right, it could be the next revolution on the money market.
What is a bitcoin?
A bitcoin is cryptocurrency, a peer-to-peer digital currency that can be exchanged quickly and without the high fees associated with traditional payment methods.
The first bitcoin was “mined” in January 2009, which became known as the “genesis block”.
The US Treasury classes it as a decentralised virtual currency; the US’s Inland Revenue Service claims it is property rather than a currency as far as the tax system is concerned.
There’s no central authority or banks to oversee it. So if it’s decentralised, how exactly can it be controlled? It’s all in the peer-to-peer aspect of it.
Bitcoins work off a public ledger known as the block chain. Each transaction is recorded in this ledger, and a network of nodes communicate with each other to keep it up to date. Each of these nodes has its own copy of the ledger, allowing checks to stop coins being double-spent.
To use bitcoins, you need two things: the public key and the private key. The private key is what protects your bitcoin from being swiped by anyone else without your knowledge; to spend bitcoins, you have to sign the public transaction with the private key. Lose that private key and your bitcoin is also lost.
That's the lesson that early adopter James Howells learned when he threw away a hard drive that had 7,500 bitcoins on it. They were contained in his bitcoin wallet, which stores the digital credentials for the currency, and he had no back up. Worth more than €6 million at the bitcoin's height, it would be worth more than €1.5 million today – if, of course, Howells could unearth it from the landfill in which the hard drive ended up.
Howells’s story also acts as a cautionary tale for those who ignore the most basic security principle: always create a backup.
There’s a limited number of bitcoins available, with just fewer than 21 million available. There will never be any more, although the individual bitcoin can be divided to eight decimal places. Miners earn bitcoins by using their computer equipment to solve complex maths problems; this requires expensive equipment though, meaning it’s out of the reach of the average user.
Where did it come from?
The creator of the bitcoin is a bit of mystery. Going by the name Satoshi Nakamoto, there has been a lot of speculation about his or her true identity. In 2011, Nakamoto stepped back from the bitcoin and handed over development of the currency to Gavin Andresen.
In March last year, Newsweek ran a story outing what it claimed was the man behind the currency, Dorian Satoshi Nakamoto. It was a story that was vehemently denied by the then 64-year-old, a former engineer who said he had never heard of the bitcoin.
Other people who have been touted as the mysterious Nakamoto include Irish cryptography graduate Michael Clear. He has repeatedly denied the claims, which stemmed from a piece in the New Yorker that named him as the possible bitcoin creator, a denial he repeated at the Web Summit in 2013.
Whoever Nakamoto really is, he or she also has the distinction of becoming bitcoin’s first billionaire – or at least a billionaire back in 2013 when a bitcoin was worth more than $1,000. The price of the digital currency has since dropped and one bitcoin is now worth around €200.
The billionaire status was based on the number of bitcoins known to be created and the number that were changing hands, the assumption being that Nakamoto had the remainder.
Bitcoins may now be becoming more mainstream, but only a short time ago it was considered an underground currency, linked with the notorious Silk Road marketplace . The association may have been slightly unfair – supporters liken it to blaming the dollar for illegal activity carried out using that currency – but it’s not difficult to see why the currency appealed to the underground market.
There’s a certain degree of anonymity associated with bitcoins. However, users aren’t completely anonymous; given that the transactions are recorded on the internet, there’s a chance they can be traced back.
Part of the bitcoin’s appeal is its secure reputation. However, while the block chain is secure, some exchanges trading the currency have been hit with security problems.
The highest-profile incident was the collapse of Mt Gox a year ago, which was the largest bitcoin exchange. It emerged that up to 744,000 bitcoins were missing from the exchange, and work is still ongoing with creditors to recover them.
More recently, UK-based Bitstamp lost 19,000 bitcoins in a “hot wallet” hack, where some of its operational wallets were compromised.
Bitcoins in Ireland
So how widespread is its use in Ireland? Bitcoins may not be a mainstream currency just yet but work is ongoing to raise its profile here.
"It's like any new technology: it's going to take a few years to take off," says Alan Donohoe, one of the founders of the Bitcoin Foundation of Ireland. Donohoe compares it to the development of the internet and says the bitcoin is following a similar pattern.
Ireland’s first bitcoin ATM opened in GSM Solutions in March last year, and a small number of businesses accept it as payment.
But some form of regulation may be required before the currency can become mainstream in Ireland, Donohoe says.
“As soon as that comes in, it’s going to flourish,” he says. “This year, it’s starting to take off but without regulation it’s going to take some time before it really takes off.”
More recently, a group of TCD researchers announced that they were looking at ways to make the currency even more transparent, with a credit check database that would allow potential partners to do some research on each other while still maintaining some anonymity.
Hopes are high for the digital currency and what it will mean for the payments industry. Daily transaction volumes are comparable to Paypal’s, giving an indication of just how much business the bitcoin is attracting.
Donohoe says the digital currency will only become more popular as its benefits are recognised by larger institutions.
“Bitcoin is going to take over every money institution in the world. It’s just going to get bigger and bigger, and it’s not going to stop.”