The value of one bitcoin, the world’s most popular cryptocurrency, recently surpassed six thousand US dollars, a new high, raising the question as to why, considering that bitcoin are not backed by any country, are legal tender nowhere, and are generally poorly understood.
While the term cryptocurrency implies that the eventual goal of the technology is to create a currency backed by cryptography, the hideously complicated mathematics that describe codes and encryption, rather than government fiat, the real value of cryptocurrency is as a payment network, an alternative to credit cards and PayPal rather than to dollars and pounds.
Bitcoins found their first use among computer programmers, the libertarian, and the privacy-obsessed, but quickly found an eager user base among criminals, particularly those operating darknet marketplaces like the Silk Road. The Silk Road, which went live in 2011, roughly two years after the development of bitcoin, was a marketplace, much like eBay, where people could buy everything that cannot be sold on eBay: drugs, stolen data, hacking tools, and weapons. The site could only be accessed through the Tor network, a system for anonymous web browsing developed by the US Navy and released to the wider world in 2003, and processed payments using bitcoin, also anonymously. Predecessors to the Silk Road, like the Farmers Market, had failed at similar aims because they lacked a way to anonymously process payments. The technology underpinning bitcoin, the blockchain, was first described in a paper by Satoshi Nakamoto published in 2009. Nakamoto’s identity remains a secret, adding to the technology’s mystique and association with crime. The paper described how a decentralized and anonymous payment network could be established by maintaining a public ledger of all transactions, where each entry in the ledger is encrypted by both parties to the transaction, ensuring that each entry to the ledger is permanent, eliminating the possibility of fraud. In this way it would be possible to conduct financial transactions without a need for a central authority, like a government or a bank, to verify transactions. While the Silk Road was shut down in 2013, bitcoin remains strongly associated with crime, an association for which it is much maligned.
However, it is worth mentioning that arguments against bitcoin as an enabler of cybercriminals are also arguments against cash as an enabler of real-world criminals. Cash is also an anonymous, decentralized network of payments, and while not as sexy as bitcoin, it has faced the same tradeoffs as bitcoin for centuries. Anonymity protects the privacy of buyers and sellers, but also makes it much more difficult for law enforcement to track down those who take advantage of this fact to evade the law, be they mobsters, tax cheats, or corrupt politicians. Decentralization keeps operating costs low (effectively zero for cash, as all costs of producing and maintaining its supply are borne by the government) for participants in the network, but again makes individual transactions much harder to trace, giving succour to money launderers and other criminals. High-denomination bills are especially prone to these issues, as they are too valuable to be of much use to everyday users (many businesses in the United States refuse to accept $100 bills, for example), but by virtue of their compact size and weight are incredibly useful for organized criminals who often need to discreetly move large sums of money, so much so that the European Central Bank has discontinued the 500 euro note.
The cash analogy is perhaps the most useful way to think of bitcoin as an improved payment network. Cash, while much maligned, is a very good payment network, despite its flaws. It is a reliable and cheap way to transfer value from one person to another, be it in exchange for a good or service or just because, perhaps as a gift. It is the public option for payments. However, cash is firmly rooted in the terrestrial world. It cannot, and does not, function in online spaces, and despite the explosive growth in e-commerce over the past 25 years, there has not been significant effort towards solving this issue. Instead, online payments have flowed through the private payment system, set up by banks and credit card companies in the 1950s. It is a deeply flawed and greedy system, prone to fraud and rife with fees, as unlike cash, it is a centralized system maintained by banks and other private corporations, each of whom take a cut of the payments that flow through them in exchange for doing essentially nothing besides verifying that a transaction is legitimate, a task at which they often fail, as numerous massive data breaches over the years have shown, and which can be handled better by clever computer science and cryptography, as the rise of bitcoin has demonstrated.
Simply put, bitcoin has the potential to be the digital version of cash, a viable alternative to the antiquated private payment processing system we currently have, which is why its value has steadily, albeit fitfully, risen, as awareness of its potential has spread beyond computer nerds, privacy freaks, and criminals, and towards those who have real money to throw behind the technology. All this at the same time that ‘cashless’ proposals gain steam in the US and Western Europe, proposals backed by banks and private processors, corporations not content with dominating the online payments space who wish to dominate terrestrial payments as well, thereby subsuming the entire payments space under their control, effectively replacing the public option of cash with their own antiquated, faulty, and expensive private system.