If you’ve never heard of Bitcoin, then you must have been living under a rock for the last six months. It’s the first and most well-known cryptocurrency in the world. I have to admit, I’m a little bit of a freak when it comes to this subject, so my opinion on this subject might be a little biased.
For those of you who have homes under rocks, a cryptocurrency is an open source digital currency. What makes it valuable is it’s peer-to-peer infrastructure which insures there is no central point of failure (ie. a central bank siphoning billions of dollars from a government bailout) and it’s method of encryption (which ensures that even though you can publicize you wallet’s public address, only you hold the keys to unlock its contents). There are many other incredible applications for the Bitcoin infrastructure, from recording proof of intellectual property to ensuring legal contracts are upheld prior to payment, but that is outside the scope of this article. In fact, you could literally spend days diving into the world of cryptocurrencies, as I seem to have done lately.
What you need to know for now is that…
- Bitcoin was invented by a mysterious individual named Satoshi Nakamoto, who no one has ever met in person.
- Bitcoin is essentially a digital ledger of transactions that exist on a peer to peer network. Every transaction is permanently recorded and distributed to every Bitcoin client applitcation.
- The price of a Bitcoin has gone from zero to a high of $1200 USD in less than 5 years.
- Bitcoins are transferred instantly and anonymously to anyone in the world. Unless you know who owns an address you can’t really track them down. Also, once your money is sent, it’s gone. There’s no way to retreive it. It’s like sending cash digitally
- Bitcoins are mined using computing power. There are massive mining houses in mostly Asia churning teraflops of hashing power 24-hours a day.
- There are a finite number of bitcoins that can be mined ($21 Mil). We’re predicted to get to that number by 2140.
- The Bitcoin network has sprouted an entire industry of currency exchanges, goods & services, and is quickly gaining mainstream status.
- Experts have said that Bitcoin could eventually take over 1 to 10% of the Forex market, which would put its value somewhere between $40,000 to $1 Mil per Bitcoin.
- Recently, Overstock.com announced they would begin accepting Bitcoin as a method of payment in the second half of 2014.
I first heard about Bitcoin in 2009 when a group email circulated around the office from a fellow coworker. I worked at an internet services company at the time with an office full of professional nerds. These guys were hardcore hackers, experienced in just about every programming language you can think of. I read the email and checked out the Bitcoin project which was just getting off the ground then. I think I replied something like, “mind blown”, but I didn’t look into it any further than that and it got filed away as an interesting but inconsequential curiosity. Had I actually paid attention, mining 100 Bitcoin would have taken a couple of days with a standard PC. Today, those 100 Bitcoin would be worth $71,790.
So you can imagine that with that much potential value, in such a new frontier, that I’m not the first person on Earth to think that maybe there’s some potential for some serious criminal activity. It appears as though governments around the world are worried about exactly the same thing. In November, the Senate Committee on Homeland Security and Governmental Affairs held a hearing on the future of Bitcoin. In that hearing Mythili Raman of the Justice Department said the following:
We are attuned to the criminal use. These virtual currencies are not in and of themselves illegal. There is good reason for us to remain watchful, but we also intend to balance that against the need for legitimate users.
The Justice Department isn’t the only US Government entity to get interested in digital currencies. FINCEN, the Financial Crimes Enforcement Network that is an arm of the Treasury Department and dictates how the nation’s anti-money-laundering and financial crime regulations are interpreted, has already started exerting its influence. Last month they sent a threatening letter to Mike Caldwell, the maker of physical Bitcoins known as Casascius Coins which caused Caldwell to shut down his operation indefinitely. Surely the IRS is also looking at cryptos very carefully as they can be a remarkably easy way to hide assets and generate tax-free capital gains.
The thing that makes cryptocurrencies so appealing is also what makes them somewhat scary. If you get access to someone’s private key, you have access to their wallet and all of its contents. This private key is an alphanumeric string that can be interpreted by a QR code which can be read by any mobile device. This was recently demonstrated during a television broadcast. Bloomberg anchor Matt Miller was doing a series on Bitcoin and gifted co-anchors Trish Regan and Adam Johnson live on air. The private key was exposed to the camera for just a second, but that’s how quickly the Bitcoin contained in the wallets was stolen. A reddit user by the name of “milkywaymasta” an idea. He claims to have taken the certificates (only worth $20) and suggested Bloomberg run a segment on the importance of not showing the private keys on the air.
This demonstration served as more of a lesson to newcomers than anything truly malicious. However, the technology’s relative youth has provided several opportunities for major heists, some of which rival the largest bank robberies of all time. In fact one of the largest Bitcoin heists ever is happening right now.
Sheep is a digital marketplace on the Tor network which sprouted up to replace the infamous Silk Road after its closure in October. A vulnerability on the site was recently exposed, and the hacker was able to pull off an elaborate heist totaling $100 million dollars in Bitcoin. The currencies’ current valuation of close to $800 US, makes this one of the largest robberies of all time, only rivaled by the $108m diamond theft at the Harry Winston store in Paris in 2008.
Due to the nature of Bitcoin and its transactions being permanently recorded on the Blockchain, you can track the thief in real time as he attempts to launder his coins through a process called “tumbling” where Bitcoins are moved from wallet to wallet, merging with other bitcoins, splitting up, and coming out the other side so that tainted coins can’t be differentiated from legitimate coins. Truly, this is a brave new world.