1. 86 GlobeAsia July 2013
Technology
or the uninitiated, Bitcoin
is a virtual currency created
in 2009 that has of late
exploded in popularity
worldwide. Created by
a person or group of people known
collectively under the pseudonym
Satoshi Nakamoto, Bitcoins are slowly
increasing in circulation and now have
a market cap of over $2 billion.
While introducing currency had
previously been the purview of nations,
now it’s being taken over by a rag-tag
group of monetary enthusiasts who
refuse to let their government tell
them what money is worth. Bitcoin
effectively democratizes money, as
anybody with a computer and an
internet connection can create and
spend their own Bitcoins.
Since the currency is free from
any governing authority, it cannot
be artificially manipulated. Recent
occurrences such as the United States
bank bailout, the LIBOR scandal or
the crisis in Cyprus have left many
questioning whether the governments
and banking institutions in those
cases are making prudent decisions.
Considering the massive debt in the US
and the instability in Europe as the EU
struggles to stay solvent, it’s easy to see
why Bitcoins have become so popular.
Bitcoin is different
One of the main ways central
governments create money is by
manipulating interest rates. The Federal
Reserve, for example, routinely adjusts
the interest rates in the US. When rates
are lowered, banks are incentivized to
borrow money from the Fed, which
creates that money out of thin air.
Ever since the US got off the gold
standard in 1971, there is nothing
substantial that backs this money. The
bank in turn lends that money to its
customers, thus increasing the total
money supply.
While lowered interest rates are a
boon to people looking for cheap loans,
they are a nightmare for those living
on savings who just saw the interest on
those savings slashed. The only reason
the Federal Reserve is able to raise
and lower rates at will is because it has
a monopoly on issuing money that’s
considered legal tender in the US.
Bitcoin, on the other hand, is
very different. Bitcoins are created
when a so-called Bitcoin “miner” or
a team of miners are able to use their
computer processing power to decode
an unknown 64 byte number, at which
point 25 Bitcoins are released into the
system.
The software code that governs
the creation of Bitcoins ensures
each successive block of Bitcoins is
mathematically more complex to create
Bitcoin and the future
of money
2. July 2013 GlobeAsia 87
By Jason Fernandes
then the last, and also that there will
never be more than 21 billion Bitcoins
in the entire system.
While like many other currencies
there is again nothing that backs
Bitcoin, its method of creation provides
a built-in safety net for its value. Unlike
the US dollar whose supply can be
increased by $1 million or $10 million
just as easily at the stroke of a pen, each
additional Bitcoin mined requires a
steadily increasing amount of actual
real world resources, such as time and
processing power, to produce.
Why Bitcoin is the answer
Lately there is an increased concern
that governments and large banking
institutions have betrayed the public’s
trust. Those following the crisis
in Cyprus may be aware that the
government there has essentially
gone into people’s bank accounts
and taken a portion of their money
away. That which would have seemed
inconceivable a few short years ago is
now a reality these people must live
with.
This is far from an isolated incident.
The inter-connectedness of financial
institutions worldwide and the US
dollar’s status as a reserve currency
have often led to ripple effects globally.
The US bank bail-outs, for example,
resulted in the influx of billions of
dollars into the banking system and a
downgrade of the US credit rating.
While the original rationale for
the bank bailout was that the banking
institutions were “too big to fail,”
the banks have grown even bigger
since the bail-out. In the three years
immediately after the bail-out, the five
major banking institutions have gone
from managing $6.1 trillion in assets to
$8.5 trillion – an increase amounting to
13% of the entire US economic output.
One shudders to think what
would happen the next time one
of them makes a bad decision. The
ramifications on the global scale could
be catastrophic.
The US cannot be singled out for
criticism, however, as even Europe has
its own issues. The LIBOR (London
Interbank Offered Rate) scandal has
proved that major financial institutions
in the United Kingdom were not
above manipulating the interest rates
worldwide for their own profit. The
scandal revealed that traders would
routinely manipulate the LIBOR
upwards or downwards depending on
their trades for the day.
An adjustment downwards
would increase their credit score
and promote a perception of better
financial health, while an adjustment
upwards would result in higher loan
rates for customers. Since LIBOR is
the most widely used interest rate in
the world, its value also sets the rates
of US derivatives and loans. Thus the
ripple effects of the LIBOR scam were
felt throughout the global financial
marketplace.
Many view the banking institutions
and governments that control, issue
and manipulate currency as the
proverbial fox guarding the henhouse.
The machinations are too complex
and opaque for the average person to
understand and abuse is rife. Bitcoins
offer a solution because they are
capped at finite amounts and their
functioning is completely transparent.
The code also happens to be open
source and can be freely examined by
anybody so inclined. Bitcoin can never
be manipulated by a sudden increase in
supply and, instead, its supply increases
in a measured, predictable manner.
Bitcoin does have drawbacks
Some of the biggest advantages of
Bitcoin could also prove the biggest
barrier to its mass adoption. Bitcoin
is unregulated and completely
anonymous. While many herald this as
a major benefit, it puts Bitcoin squarely
in the sights of regulatory authorities
of various governments in whose
jurisdiction these transactions occur.
US prosecutors recently shut down
Liberty Reserve, the second largest
Bitcoin exchange, for alleged criminal
links and money laundering. This is the
sort of risk that’s part and parcel of the
anonymous currency concept.
People have used Bitcoin to
purchase everything from guns to
drugs, all anonymously via a website
known as the Silk Road that accepts
payment solely in untraceable Bitcoins.
It’s unlikely that the currency will
be allowed to survive in its present
form without heavy attempts by
governments to regulate it.
The other problem with untraceable
Bitcoins is that one’s entire Bitcoin
portfolio is stored on one file in one’s PC
(known as a Bitcoin Wallet) and is thus
susceptible to theft. While some have
chosen to store their Bitcoins in services
that provide essentially the equivalent
of an online vault, these too have been
targeted by hackers in the past.
Many view the banking institutions and governments
that control, issue and manipulate currency as the
proverbial fox guarding the henhouse. Bitcoins offer a
solution because they are capped at finite amounts and
their functioning is completely transparent.
3. 88 GlobeAsia July 2013
Technology
The problem is that there is no
remedy for theft because even the
Bitcoins obtained through theft are as
valid and untraceable as those obtained
through other means. If a credit card was
lost, one could just call and cancel it – but
there is no way to do that with Bitcoin.
On the other hand, one could say
the same is true for actual currency.
If you lose your wallet, you have little
means at your disposal to track that
money down and reclaim it. That
said, at least Bitcoiners do not have to
be concerned with the government
deciding it can reach into your digital
wallet and help itself to some of your
money, as was the case in Cyprus.
Another concern is the volatility
of the currency. Over the course of
their existence Bitcoins have cost
anything from $5 to a high of $266 and
everything in between. This makes it
difficult for businesses to feel stable in
accepting it in lieu of payment.
Since there is no central regulatory
authority, the buffer role that central
banks play in stabilizing currency
fluctuations just does not exist in this
case. On the other hand, services have
slowly been emerging that would ease
this sort of volatility.
Websites like Bitpay, for example,
allow merchants including those on
Amazon to accept Bitcoins and have
the funds transferred to their bank
accounts in real currency at the close
of the business day. This eases risks
somewhat for business owners, because
the currency is unlikely to have a
massive negative fluctuation simply
over the course of the business day.
Also, as more people begin
to use Bitcoins, the currency will
automatically stabilize as, with
increased usage, the market will figure
out how to price them reliably. There
are currently a little over 11 million
Bitcoins in circulation and there
is quite a bit of mining left before
Bitcoin hits the hard limit of 21 billion
Bitcoins. That means of course, that
many more Bitcoins will be introduced
into the system. More Bitcoins in
circulation will mean more people
with a vested interest in maintaining
its value.
Many have suggested that since
the system is designed to become
progressively harder after every Bitcoin
is released that miners will lose interest
in the currency once it is no longer
economical to mine. They predict
that deflation is a real possibility with
Bitcoins because increased scarcity
would change the economics of the
system.
These naysayers fail to consider
Moore’s law which, if applied to
Bitcoin, suggests that the computing
power will likely increase at such a rate
so as to offset the increasing complexity
needed to make more Bitcoins.
How will this all play out?
Bitcoin will likely face extreme
resistance from both the financial
services industry and government
regulatory agencies. Bitcoin represents
disruptive change in the way these two
groups do business and they are not
likely to take it lying down.
The financial services industry,
for example, will have to completely
revamp its business strategies. Credit
card and money transfer companies
will have to drastically drop their rates
to compete with the much lower rates
that govern Bitcoin transactions.
Governments, too, will push back
and lobby for increased regulation to
prevent things like money laundering,
but will likely be more concerned at
losing their monopoly on determining
what constitutes money.
The future for Bitcoin is wide open.
The genie has been released from the
bottle, never to return. While Bitcoin
itself may not survive long-term, the
concept itself is here to stay: record
companies were able to shut down
Napster, but file sharing lives on in the
dark corners of the internet.
Ultimately, the government cannot
prevent an otherwise legal transaction
between two parties from happening,
simply because it doesn’t like what
is being bartered. Bitcoin has value
because several people the world over
mutually agree that it does. The most
recent exchange rate has one Bitcoin
hovering at $109 and, while it has
come down off its high from several
weeks ago, it still retains quite a bit of
its value.
As the world financial markets
remain in flux, Bitcoin will continue
to be an attractive option for many
looking to diversify their cash holdings
to guard against sudden fluctuations.
Bitcoin represents a change in the way
we earn, spend and think about money.
Bitcoin is Money 2.0.
Jason Fernandes is a tech commentator
and the founder of SmartKlock.
Ultimately, the government cannot prevent an
otherwise legal transaction between two parties
from happening, simply because it doesn’t like what
is being bartered.
4. Technology
74 | GlobeAsia April 2014
B
itcoin has seen some interesting twists and
turns of late, some almost worthy of a spy
novel. On February 10 Mt. Gox, the world’s
largest Bitcoin exchange, suspended trading,
citing a possible hacking incident. Later we would
learn that in the weeks leading up to its collapse,
Mt. Gox was experiencing as many as 150,000
DDoS (denial of service) attacks per second. These
were followed closely by hacking of the notorious
Silk Road 2 illegal marketplace on February 14
and the collapse of Mt. Gox competitor Flexcoin
shortly thereafter.
While not quite the St. Valentine’s Day
massacre, the Silk Road 2 hack resulted in a loss
of over $2.4 million while Flexcoin, too, reported
a loss of over half a million dollars, which it
attributed to hacker activity. Another victim of
the hacking epidemic, Slovenia’s Bitstamp, was
also forced to temporarily halt trading after a
DDoS attack on its servers.
The fallout from these disasters unfortunately
did not limit itself to the virtual world, as
evidenced by the untimely death of Singapore-
based Bitcoin exchange First Meta’s chief
executive officer Autumn Radtke. A victim of
what’s beginning to look like the Bitcoin curse,
Radtke was found dead on February 26 in an
apparent suicide. Radke had shared a news story
on depression among entrepreneurs via a social
media site shortly before her death.
If Bitcoin enthusiasts were hoping for a quiet
and uneventful March, fate did not oblige. By
The Bitcoin curse:
Can the crypto currency weather the storm?
IllustrationNelarealino
5. April 2014 GlobeAsia | 75
far the strangest week yet in the saga
of Bitcoin began with the release of
Newsweek’s print issue relaunch on
March 7. The article centered around
the supposed unmasking of the
mysterious Satoshi Nakamoto.
The name Satoshi Nakamoto was
the (presumed) pseudonym used by
the creator of Bitcoin who had gone
to great lengths to keep his identity
secret, and had not been heard from
in a long while. Newsweek claims to
have discovered that the true identity
of Satoshi Nakamoto is none other
than 64-year-old bespectacled Dorian
Nakamoto.
Nakamoto has since vigorously
denied having any connection with
Bitcoin and other news organizations,
too, have expressed heavy skepticism
toward Newsweek’s reporting. Indeed,
an expert hired by Forbes magazine
is convinced that Nakamoto is not the
same Satoshi Nakamoto presumably
connected with Bitcoin. Newsweek,
for its part, has not only stood by its
story, but deepened the mystery by
indicating it has secret evidence – that
it will not reveal – which definitively
convinced it of Nakamoto’s identity.
Interestingly, Nakamoto has
previously worked on classified projects
for the United States government and
there are huge swathes of his life that
are largely unaccounted for. Nakamoto
also seems to be an otherwise good
candidate, given his engineering and
mathematics background. In an even
weirder (according to Nakamoto)
coincidence, he was also once known as
Satoshi Nakamoto, but westernized his
name in a bid, he says, to simplify it.
As the story played out over the
next few hours and days, it took on a
bizarre life of its own complete with
a car chase through downtown Los
Angeles, as reporters jostled to get a
word in with the presumed, elusive
creator of Bitcoin.
If things were not strange enough,
on exactly the same day the Newsweek
While Bitcoin reached a high of
approximately $1,000 recently, the
Mt Gox fiasco caused it to drop to
about $500. Bitcoin now trades in the
neighborhood of $750. While this is
certainly more volatile than we would
like to see, it is a good deal less volatile
than it could have been, given that this
is such a new concept.
Among the torrent of news relating
to Bitcoin this month, reports say that
a group of individuals has proposed
a service they call Goxcoin. As the
mutant cousin of Bitcoin, Goxcoin
would allow individuals who lost
money in Mt. Gox to sell their right
to the recovery of said monies in
exchange for immediate liquidity at a
heavily discounted rate. The existence
of Goxcoin (even as a theory, if not yet
in practice) speaks volumes about how
confident these individuals are that
the stolen Bitcoin will eventually be
recovered.
Fortunately for those who have
lost Bitcoins in the whole Mt. Gox
fiasco, a volunteer army continues
to crowdsource their search efforts.
This sort of altruism is built into the
concept of Bitcoin itself, since because
of its revolutionary structure, every
Bitcoiner has an interest in locating
the stolen coins. Because an increased
supply could impact the value of their
own holdings, there are quite a few
armchair detectives hot on the case.
A good thing in the long run?
Recently Benjamin Lawsky,
superintendent of New York’s
Department of Financial Services, told
Reuters that the collapse of Mt. Gox
article went to print, there appears
to have been a historic transaction
involving 180,000 Bitcoins, worth an
estimated $115 million. Nobody has
yet been able to ascertain the source
or destination of those funds but
many theories revolve around the
mysterious Satoshi Nakamoto and his
rumored stash of over $400 million in
Bitcoin.
The drama didn’t end there.
Just when everybody thought they
had heard the last of Mt. Gox and
its founder Mark Karpeles, the saga
again took a turn for the absurd. Soon
after Mt. Gox filed for bankruptcy
protection, a group of hackers released
a collection of documents purportedly
from Karpeles’s hard drive that they
say indicates Karpeles may have
spirited away the money himself!
While it is too soon to definitively
prove just who could have made off
with millions in Bitcoins, an ad-hoc
group of cyber sleuths is hot on the
trail. Experts say that by examining
the Bitcoin Chain, the public registry
of all Bitcoin transactions, it should be
possible to trace the stolen Bitcoins,
although this is a lengthy process.
What is really interesting,
however, is how resilient the
currency has proved. Bitcoin has
emerged largely unfazed by the entire
hullabaloo, all things considered.
Certainly the thieves who have been
stealing these massive troves of
Bitcoin were not afraid of the potential
reduction in value that a Bitcoin crash
triggered by their actions could bring.
Indeed the numbers appear to support
such a view.
Bitcoin is not the only girl at the dance, only the
prettiest. Crypto currencies are all the rage these days
and there are plenty of alternatives waiting in the
wings to take Bitcoin’s place.
April 2014 GlobeAsia | 75
Jason Fernandes
Tech commentator and the founder of SmartKlock.
6. Technology
76 | GlobeAsia April 2014
weed out the smaller players, there is clearly
a growing enthusiasm for these currencies.
While part of this is speculation, a great deal
of the interest comes from people who are
increasingly distrustful of financial institutions
and government regulation.
What next?
One can’t help but wonder if perhaps Dorian
Nakamoto’s choice for a new first name was not
influenced by the classic Oscar Wilde novel A
Picture of Dorian Gray. The tormented portrait
of Gray is a perfect metaphor for the original
Satoshi Nakamoto (whoever he is) and his Dr.
Frankenstein-like relationship with his creation.
The future of Bitcoin, of course, depends on
what’s next for the fledgling cyber currency. Will
it ever grow out of its fascination with its creator
and actually become a viable transactional
currency? Many (myself included) once believed
Bitcoin had the potential to change everything
but now that view appears to be faltering.
The good news is that Bitcoin is not
inherently insecure. While Bitcoin is distributed
and untraceable by design, that does not mean
Bitcoins are unsecurable or that Mt. Gox took
every available precaution but was simply
overrun by a fundamental flaw in Bitcoin.
Indeed, the transactions that are at the center
of the Mt. Gox collapse could have been easily
avoided or quickly discovered, had Mt. Gox used
industry-accepted accounting practices.
The fact is that there is a way to do this
legitimately and still profit because there is such
a huge opportunity for exchanges. Perhaps a
bigger player will see the value of Bitcoin and
jump in with a fully-secure system that insures all
deposits the way the Federal Deposit Insurance
Corporation (FDIC) does for banks. While nobody
wants increased regulation, some regulation
might be welcome and indeed necessary, if that’s
what it takes to keep the idea alive.
Peer-to-peer finance is the next area of
great innovation and Bitcoin is at the forefront
of this democratization of finance. One must
learn to expect a few ruffled feathers when a
fledgling currency like Bitcoin begins to play in
the big leagues, but once these early troubles are
overcome, the possibilities are too great to be
ignored.
could actually strengthen Bitcoin in the long run.
He described the collapse as a “shaking out” of
the market. I disagree with this characterization
because Mt. Gox was the world’s largest Bitcoin
trading exchange and “shaking out” usually
refers to the culling of the smaller players in the
market.
On the positive side, the collapse will
likely lead to increased safeguards and better
accounting practices across the industry. The
most controversial possibility is the ever-looming
specter of government regulation, something
Lawsky appears to favor. Part of Bitcoin’s whole
appeal is its Wild West-style fierce independence.
Most Bitcoiners would likely look at any
regulation warily and with great suspicion,
prodding it only from time to time with a long
stick to ensure that it was truly not a threat.
I’d be a fool to say that Bitcoin will survive in
its current form for much longer. Just a few short
months ago in these very pages I heralded Bitcoin
as the future of money. Today the future seems
uncertain. India has strongly cautioned Bitcoin
users and both Japan and the United Kingdom
have flirted with regulating it, only to shy away at
the last moment.
Bitcoin is not the only girl at the dance
though, only the prettiest. Crypto currencies are
all the rage these days and there are plenty of
alternatives waiting in the wings to take its place.
Ripple, Litecoin and Dogecoin are all growing
quite fast and while market forces will eventually
Many (myself included) once believed Bitcoin
had the potential to change everything but now
that view appears to be faltering.