Bitcoin - A Brief Introduction
It is not ironic that Milton Friedman, author of a leading treatise on the interaction of currency, macroeconomics and governmental action prophesized of a time when the internet would help evolve a new currency.
Most of the currencies in the world at present, including the reserve currencies, are fiat currencies. The term ‘fiat currencies’ refers to currencies that are issued by a government, and the government promises to pay the holder of such currencies an equivalent amount in gold, if needed. Thus, these currencies usually have a central regulatory body which issues them, and are consequently called ‘centralized’. In fact, at the end of the day, they have the value they have, because somebody said so. The modern state can make anything it chooses as acceptable currency, without any further backing of any kind, even without a connection with gold.
A cryptocurrency is a medium of exchange that uses cryptography to manage the creation of new units as well as secure the transactions.These are a subset of digital currencies.One of the most striking features of cryptocurrency is that it weeds out the need for a trusted third party such as a governmental agency, bank etc. The cryptocurrency system collectively creates the units. The rate at which such units are created is defined beforehand and is publicly known unlike the traditional currencies where the government or the authorized banks control the supply.
The fundamental system on which most cryptocurrencies are based today was created by Satoshi Nakamoto. The production of most cryptocurrencies is deigned to gradually decrease, eventually placing a cap on the number of units that will ever be in circulation. This can lead the currency to mimic the scarcity that is usually seen in the supply of precious metal, thus avoiding hyperinflation. The cryptocurrencies today, are pseudo-anonymous, though newer currencies like Zerocoin have been suggested to allow for complete anonymity.
In 2008, in the aftermath of the subprime mortgage crisis, the confidence in the government issued currency and governments’ and bank’s ability to manage the economy, the supply of money had almost hit rock bottom. Millions of dollars were used to bail out banks and insurance companies after the “quantitative easing” measures adopted by the Federal Reserve. This essentially meant that money was being printed in order to stimulate the economy. The glut of currency backed with little or no economic productivity led to a global recession ultimately precipitating a sovereign debt crisis in several countries. The price of gold was constantly rising.
At this point, the paper by Satoshi Nakamoto was published online describing the Bitcoin for the first time. In the opinion of Nakamoto, the major problem with conventional currency today was that trust was required to make the system work. He makes it clear in in his paper, that while looking at the history of fiat currencies, one can see that it is full of breaches of such trust. He further goes on to state that banks use the currency entrusted to them to lend it out in ‘waves of credit bubbles’, with hardly anything left in reserve.
Thus, Nakamoto’s ideologies in creating Bitcoin would seem to be entirely political. Supporting this argument is the fact that he introduced the currency just a few months after the collapse of the global banking sector. His Bitcoin software would allow its users to send money over the internet directly to each other without an intermediary, and no outside
party could create Bitcoin, entirely cutting out the role of central banks and governments in online transactions. As Nakamoto said, ‘everything is based on crypto proof instead of trust’. Furthermore, unlike banks and governments which can print more money whenever they deem fit, the bots that are currently creating Bitcoin are supposed to stop
doing so in or around the year 2140 according to their programming itself. And unlike fiat currencies, whose value is derived through regulation or law and underwritten by the state, Bitcoin derive their value through the simple principles of supply and demand – they have no intrinsic value and no backing, and their value depends entirely on what people are willing to trade for them.
Hence, no faith or trust towards the financers or politicians was required in case of Bitcoin, but only in Nakamoto’s well-designed algorithms. Not only the public ledger of Bitcoin, i.e. the ‘block chain’ seemed to fend off fraud, but also kept the money supply of Bitcoin growing at a predictable rate due to the prearranged release of the virtual currency. The
Bitcoin network came into existence with the release of open source Bitcoin client and with the issuance of the first Bitcoin. Satoshi mined18 the first 50 Bitcoin which are famously known as the “Genesis Block”. In the same year the exchange rate of Bitcoin was first published by liberty standard at $1 for 1,309.03 BTC. Within a couple of years, around February 2011, Bitcoin achieved dollar parity and was now being accepted all over the world as a mode of payment for a plethora of products. Even Wikileaks and other organizations started accepting Bitcoin as donations. Although, during the same year, Bitcoin suffered a security breach in one of the largest Bitcoin exchanges, Mt. Gox and crashed. But, it also bounced back being stronger than before. Since then, Bitcoin have been extremely volatile but have not seen any major security breaches.
Nakamoto had created the first working cryptocurrency, making it as different from the existing fiat currencies as possible. It was meant to be an alternative to them, a new method of transaction, entirely free of government control, and, perhaps a challenge to it. It was to challenge the governments, to make people rethink the existing economic systems, to question their faith in it.