Dubai. Greece. Spain. Portugal. Italy. Cyprus. Ireland. The list of countries needing financial bailouts seems to go on and on. And that’s before you include those banks in the US, the UK and beyond that were “too big to fail”.
As well as revealing the fragility of the global economy, the current crisis has also raised some existential questions about the nature of money.
Can any government really promise to protect the value of its currency and be taken at its word? And how – other than by hiding gold bars under their mattresses – can the residents of a country in crisis hope to safeguard their wealth? As a controversial economist once noted, there are times when all that seemed solid can melt into air.
One recent and much-publicised answer to this last question is a form of money that comes pre-dissolved into the ether: Bitcoins. The world’s “first decentralised digital currency” hit the headlines this week, but has been lurking at the edges of global attention for considerably longer.
Trust in maths
Born at the start of 2009 in the aftermath of the global financial crisis – courtesy of a mysterious and possibly non-existent Japanese programmer calling himself Satoshi Nakamoto – Bitcoins are a mathematical concoction, combining the attributes of a scarce commodity, like gold, with the frictionless trading of an electronic currency. They achieve this through the ingenious combination of three factors: “mining”, peer-to-peer networking and cryptography.
The first of these is one of the central reasons for their appeal. Despite being wholly electronic, every Bitcoin in existence has been “mined” by someone running Nakamoto’s software, which regulates the global supply of Bitcoins by forcing computers to crunch increasingly difficult equations in order to generate each coin. Coins emerge at a pre-determined rate: as more people use the software, it gets harder and harder to create them, with the global supply decelerating geometrically towards a predetermined limit. At the time of writing, there were a total of 11,023,350 Bitcoins in the world (one of the joys of an open digital currency is the ease of accessing statistics), and there will never be more than 21 million.
Like everything else about Bitcoins, these factors are hard-coded into its software – and it’s the peer-to-peer element of this software that makes the system so compelling. Almost every modern currency is guaranteed by the “fiat” of government regulation or laws. That is, their worth is based on faith in a central authority – and is undermined when faith declines in that authority.
Bitcoins have no central authority and no such promise, and rely on no intermediaries or banks to hold or to transfer money. Instead, each user operates an “electronic wallet” that embodies their money in a highly secure electronic form, and allows them to exchange Bitcoins directly with any other user on the network. Every transaction is automatically confirmed by the software of every other user, and cannot take place if it fails to match the network’s standards: each transaction is “stamped” with the unique time of its occurrence to prevent double spending, while the cryptographic standards in place ensure the network confirms the validity of every action taking place.
There is, in other words, no need ever to trust any central database or authority. It’s a narrative perfectly matched to troubled economic times, and one reason for the staggering increase in the recent value of Bitcoins. Buying a single Bitcon on 9 April 2013 – through any one of the growing number of online exchanges – would have cost you almost $200, more than fifteen times its $9 value in January. As author Paul Ford wrote in Businessweek: “There’s nothing to trust but math... [and] that’s where Bitcoin thrives: where people would prefer to throw in their lot with anonymous strangers instead of the world economy.”