There’s a new kind of money. It’s in the air, its electrical impulses flowing from your smartphone or your laptop to other smartphones or laptops. There are no fees, no banks, no regulators.
To an outsider or newbie, Bitcoin can sound shady and hard to define—particularly given the media attention surrounding its somewhat scandalous past, with lost and stolen Bitcoins, collapsing black-market ventures, and the currency’s unidentified creator, who goes by the name Satoshi Nakamoto. It’s true that the science behind this new digital currency—including the code that creates it and the market that drives it—is not something easily grasped with a casual Sunday morning read over coffee.
All the same, in the world of Bitcoin, users say there’s nothing that’s deliberately kept secret. Bitcoin.org calls the currency “the most transparent payment system in the world.”
Bitcoin’s origins remain mysterious. Nakamoto has managed to remain unidentified even after investigations by outlets like the New Yorker. Some suspect Nakamoto is a group, not an individual. No matter who is behind the name, Nakamoto’s creation has moved from abstraction into the real world. Part of that process has been facilitated by an unassuming Pioneer Valley 40-something named Gavin Andresen.
Andresen, now chief scientist at the non-profit Bitcoin Foundation, is surprisingly easy to reach for such a big name in a global money system. He works in a sparse office above Subway in downtown Amherst and lives in town. Andresen got interested in Bitcoin early on.
“As I got older, I developed an interest in economics and trying to learn about how does money work, thinking about politics and government and where does the money come from and where does it go to, and who benefits from the current money system and is that fair or not,” Andresen says, “Bitcoin certainly upends that world. It does things in a completely different way, which I find exciting.”
So how does Bitcoin actually function? You can watch the gears turning in Andresen’s head when he discusses the mechanics of the system. He compares the way Bitcoin works to gold mining. There’s a limited supply of Bitcoins. That can’t be changed, and it was determined by Nakamoto. Right now it sits at 21 million Bitcoins. Gold can’t be mined all at once. It’s also rare—we know the supply will eventually run out. That’s why we pay to get it.
“A gold miner invests a lot of money and digs up the gold, and once they have the gold, it can’t be counterfeited, and people make sure you’re not giving them some gold-covered metal,” he said. “Like a gold miner has to dig through a whole bunch of dirt, Bitcoin miners have to dig through a whole bunch of math.” The math takes the form of a difficult problem that, once dug through, removes the barrier for a small number of new Bitcoins to enter the network, another number that Nakamoto set in Bitcoin’s original design. That sum, originally set at 50 Bitcoins, gets sent to the successful miner. Every time another 210,000 problems are solved, the amount halves.
These math problems also work to verify transactions done with Bitcoin. The problems are attached to a bunch of pending Bitcoin transactions. Once the miner solves the problem tacked onto each group of transactions, their work and the transactions are verified by users in the network.
These problems aren’t two plus two. They’re structured so that even powerful computers have to spend a while getting them right. As more people mine, and their computers start solving problems faster, the program makes the problems harder.
These miners and their hardware drive Bitcoin at its base level. There’s no one on top running the show; if you want to mine, you can build a computer to do it, but as the math problems ramp up in difficulty, only more expensive computer hardware can handle the load.
For all they do, miners make up a small part of the Bitcoin world. Andresen estimates it’s probably 1 percent or less. “There’s probably 20 or 30 thousand people mining around the world,” he said, “there’s probably 3 or 4 or 5 million people around the world using Bitcoins.”
So who are the other 99 percent? I asked Andresen how much the rest of us need to know about Bitcoin in order to use it. He says people with any level of experience can, and should, start using the currency.
“I think it depends on what you’re good at and what you’re interested in doing. Certainly just having some Bitcoin and using Bitcoin and providing feedback to say, ‘This is a terrible experience. Here’s how you can fix it’—that kind of thing actually is helpful to hear,” adding, “The value really comes from all the people.”
While that’s true, searching online reveals articles about bigger and bigger investors in Bitcoin. The currency’s meteoric rise in the media has meant that its user base now includes technically-minded early adopters and now, well-funded speculators, skipping the average citizens in between. I asked Andresen if this rang true.
“It has, kind of. I think that’s because most people think that everyday brick and mortar transactions—buying something at the local store—that will be the last adopter of bitcoin. There’s all sorts of places to spend Bitcoins online. Yesterday I actually bought plane tickets to California using Bitcoin, because I have Bitcoins and it’s a convenient way to pay.”
In his mind, the problems that Bitcoin solves right now apply best to established, Internet-based companies.
“Local merchants don’t really have the same problems that online merchants do,” he said. “Part of the reason is that our whole credit card system and our cash system was designed for the in-person, brick and mortar transaction. We see huge data breaches and privacy breaches—it’s a system that wasn’t built for that environment. Bitcoin was.”
But Bitcoin is not free from problems. Though all transactions that take place with Bitcoin become visible to anybody, what shows up is the “wallet” address, not a name or telephone number. Certain sites, like Silk Road, took advantage of this to trade items illegally—things like drugs, weapons, and even child pornography. That got the attention of the U.S. government, which shut down the first version of Silk Road and seized 30,000 of the Bitcoins in trade there. Silk Road 2.0 brought the site back, before it was again targeted, this time by hackers who stole over $2 million in Bitcoins.
The collapse of Silk Road and the broader use of the black market by some in the Bitcoin community, Andresen says, is a problematic aspect of the currency, but not the defining aspect. It comes down to trust, and personal choice, not a flaw in the design.
Bitcoin itself, Andresen says, stands as almost completely secure. There’s no practical way to hack into an account and remove Bitcoins without the user’s unique identifier and password. The danger, he says, comes when users trust third parties, including places like Silk Road, to hold their information.
“You don’t have to trust a credit card company or PayPal or a bank when you make a Bitcoin transaction, but you do have to trust the person you’re transacting with,” Andresen says. “So in the black market case, where everybody is anonymous, that gets hard.”
Bitcoin has survived the Silk Road and other high-profile shakeups and appears relatively stable. The core technology, Andresen says, has stood the test of time. “We’ve gotten past that level of trust, so now the geeks absolutely trust the core Bitcoin technology.”
Andresen says where Bitcoin heads now depends on those users, and the organizations they create to buy, store, manage and move the money.
“There needs to be trusted organizations built on top. I think it’s their responsibility to reassure people ‘You can trust us, and this is why.’”
A group of users in Western Massachusetts have taken the leap of faith. At the Dam Café in Holyoke, three Bitcoin users chat at a small round table near the counter. They call themselves Western Mass. Bitcoin, and they’re here to discuss the latest developments in their favorite currency.
Jesse Vanek is a non-profit fundraiser and the founder of Western Mass BTC. He won’t say how much he’s invested in Bitcoin, only that “it’s not as much as I wish I’d put in two years ago,” which gets nods and echoes from Joe Werner, a software consultant, and Ted Garner, a science and technology teacher from Wynden, Conn.
Vanek discusses the high-flying ideas that have been present since Bitcoin’s debut in 2010, when early adopters spread the idea that this currency would be world-changing. “It’s a vote against the current system,” he says. “In this country, I believe that how we spend our money counts for more than how we actually vote.”
The system he wants to see, and the one he says Bitcoin promotes, operates without government control and even banks. “You’re in charge of it, you control it. Nobody can take it away from you.”
Without that government control, Werner says, doing business worldwide becomes simpler. “Conducting transactions through Bitcoin can enable people in countries that don’t have freedom to do what they need to do without being under the controls of these regimes.”
So far, these three use Bitcoin on a smaller scale. Vanek used Bitcoins to buy a laptop from Overstock.com, and Garner bought about $350 worth of computer equipment through Tiger Direct. Those are the biggest Bitcoin purchases they’ve made.
The really cool thing, they say, is that these transactions avoided any credit card or bank fees. This aspect, Vanek says, represents one of the biggest and often-overlooked benefits of Bitcoin. “Anybody who does business over the Internet—there’s a huge opportunity to increase sales and reduce cost, he says. “[For] anybody who does a huge amount of credit card transactions, there’s a huge opportunity to reduce credit card costs.”
Speaking of credit, some say this comes as a big hitch for Bitcoin. Doug Cliggot, a lecturer in the UMass economics department, isn’t as quick to jump aboard the bandwagon. Cliggot said he thinks Bitcoin may never reach the mainstream. The biggest hurdle, he says is that most people aren’t using Bitcoin for much. Most users buy some and hang on, hoping to ride the Bitcoin value rollercoaster to success. In just four years, the value of a single Bitcoin has gone from pennies to over $1,000, with huge swings in between. It’s settled now at about $340.
This speculative aspect, Cliggot said, will last until Bitcoin makes use of credit. “Currency has very little to do with money and everything to do with credit,” he says. “Normal folks, without access to huge sums of money, are going to need to borrow in order to, say, afford UMass tuition in Bitcoins. When UMass starts accepting tuition in Bitcoin, that’s when you’ve got a currency.”
Before that can happen, Cliggot says, Bitcoin has another problem: confidence. “On any form of currency, you’ve got one side that says the unit of value and the other side has the symbol of the issuing authority,” he said. “They’re what make people feel comfortable borrowing dollars and owning dollars.”
He says without governments and strong banks to provide the guarantee that debt will be paid, he doubts Bitcoin will move beyond a curiosity.
Andresen is quick to point out that Bitcoin is still an experiment. He has seen Bitcoin grow, and as its user base expands, the community is already solving a lot of problems. “The Bitcoin network is doing two or three transactions per second, which is a whole lot more than when we started,” he says.
Whether it succeeds or fails, he says, now rests in the hands of the larger community that uses it.
“Whether Bitcoin grows into [a scenario in which] you walk to the store and you tap your phone against the cash register and that makes a payment happen, we’ll see. People are tackling that problem and trying to build that right now.”
I wanted to see just how much has been built, so I met Vanek again, at a cafe in Northampton. For an entirely new form of currency that’s attracted huge investors and created widespread debate about its impact on world commerce, setting up a wallet and getting access to some Bitcoins seems almost too easy. To store Bitcoins, users make use of a “wallet,” a website where, after putting in a user name and password, anyone can store Bitcoins for free. I visited a site called Blockchain, where a user enters a password and email and instantly receives a wallet. With each comes an address, a unique string of numbers and letters identifying your wallet.
From an app on his phone, Vanek sent 0.00455063 Bitcoins to my new account, about $2. Within a few minutes, it appeared on my screen. Visiting Blockchain’s homepage, anybody can see a real-time feed of every Bitcoin transaction happening. While I was watching, accounts performed transactions involving over 400 Bitcoins—almost $200,000. Most were much smaller, below one Bitcoin.
Andresen says he wants Bitcoin to be just a common, accepted alternative to other currencies, easy to use and almost boring. Until then, he’ll keep looking at its mechanics and working to make it better. “Eventually we’ll get to a world where you’ll just have a wallet on your phone and you’ll pay for stuff. Whether that wallet is dollars or Bitcoins or Euros, or all three, I don’t know. We’ll see.”•
