Digital Media Concepts/Bitcoin

Bitcoin Logo

Bitcoin

Bitcoin is currently the most popular digital currency, also known as a cryptocurrency. Unlike most currencies that are created, distributed, and monitored by governments, Bitcoin (and many other cryptocurrencies) are entirely decentralized.

Creation

The first known appearance of the word Bitcoin came on 18 August 2008, when the domain bitcoin.org was registered. A few months later, on 31 October, a paper written by Satoshi Nakamoto called Bitcoin: A Peer-to-Peer Electronic Cash System was posted online. This would be the foundation for the Bitcoin network, which was created on 3 January 2009 when Satoshi Nakamoto mined the first block of bitcoin. The first known real-world transaction of Bitcoin was made by Laszlo Hanyecz on 22 May 2010, where he purchased two pizzas in Jacksonville, Florida for 10,000 BTC. This amount would be worth over $500 million if held until October 2021.

Satoshi Nakamoto

As no one knows the real identity of Satoshi Nakamoto, it is widely considered that the name is a pseudonym for the person or people that were involved in the creation of Bitcoin. Throughout the years, there has been large amounts of speculation of the identity of Satoshi Nakamoto. Investigations were launched by both The New Yorker and Fast Company in the search to discover the real creator of Bitcoin. While multiple candidates were found in each investigation, all of them later denied being affiliated with Bitcoin. As the months went on, more and more speculations emerged but none ever were confirmed. Satoshi’s connection with Bitcoin ended sometime in mid-2010, and the real identity of Satoshi Nakamoto still remains a matter of dispute.

How Bitcoin Works

Digital Signatures

Every time a transaction occurs, both the sender and receiver use what is called a digital signature. This involves using a public key and a private key, both of which are a string of bits (1’s and 0’s). In each transaction, a new public and private key is generated for that specific transaction, making it impossible for people to copy either just the transaction or key by itself. Another function is used using the public key that will verify if the transaction was signed by a valid private key. Overall, the idea is that with these public and private keys, there is no feasible way of faking transactions. To go deeper into the process on how these digital signatures work, look into 256 bit encryption. Each transaction is also given a unique ID, so even if both the private key and transaction are copied and used again, the new transaction would not be valid.

Blockchain

All Bitcoin transactions that have ever occurred are stored on what is called a blockchain. Bitcoins blockchain is stored on every person’s computer that has been used to send or receive Bitcoin. After every single transaction occurs, a proof of work is needed to verify. The proof of work is created by having a certain input (the transaction) match a desired output.

So far, the only way of finding this desired output is by guessing and checking, meaning there is no way to “cheat” the system and easily create proofs of work. Once the correct proof of work is created, it is easily verifiable by all other members in the blockchain. When someone finds the correct proof of work for a block (a random number that gets harder and harder to find, for example a number that starts with 100 zeros) they are given a reward, a small amount of Bitcoin. This leads to people “mining” for Bitcoin or using computing power to guess trillions and trillions of numbers until the correct proof of work is found. To ensure that one person doesn’t find the correct proof and decide to make fraudulent transactions with it, a minimum of 50% of the Bitcoin network must agree with the transaction. This means that one person must control over 50% of the computing power in the Bitcoin network to be able to make counterfeit transactions. Because of this minimum, Bitcoin is able to be a relatively safe currency without having any one central authority governing it.

Criticisms

Energy Consumption

Because of the mathematical intensity used to create new blocks (read above under proof of work), a lot of power is used to mine Bitcoin. In 2015, the estimated combined electricity consumption was about 166.7 megawatts. By 2018, that number had risen to nearly 4 gigawatts, or 1/20th of the total power used by the global banking sector. In 2021 that number had risen to an astronomical 178 terawatts, or as much as the entire country as Sweden. While a large chunk of Bitcoin is mined in northern countries like Iceland where geothermal energy is used, much of it is also mined in China where electricity is subsidized by the government. Most of this energy is produced by coal, which raises concerns about Bitcoin’s environmental impact.

Use on the Dark Web

Bitcoin Price Chart

Much of Bitcoin’s fame (or infamy) comes from the fact the use of bitcoin can easily be used for illegal purposes. One of the original illegal marketplaces on the internet, the Silk Road, used bitcoins to enable vendors to be able to sell drugs, weapons, and other unscrupulous things online. Many people say that the only reason Bitcoin is so popular is because it can be used in an untraceable (at least harder to trace) way. In 2017, Australian researchers estimated that a quarter of all bitcoin users and nearly half of all Bitcoin transactions were used for illegal activity.

Lack of stability

While Bitcoin may be used for illegal activities, Bitcoin’s price and volatility is the main cause of the cryptocurrency’s popularity. In 2011, Bitcoin rose from about $0.30 to nearly 100x times that, before crashing back down to $2. Then again in 2012/13 Bitcoin skyrocketed to over $250 before falling down to $50. One of the largest price bubbles occurred in late 2017, where Bitcoin was hovering around $1,000. By the middle of December, Bitcoin had roared past $20,000. This hot streak helped place Bitcoin in the mainstream spotlight. Continuing into 2021, Bitcoin prices have reached new all-time highs of over $60,000, leaving many hoping that it will continue this trend.

Regulatory Issues

One of the main selling points to Bitcoin is the lack of a central distributor (like a government or company). This is also a huge drawback to many possible users - if no one is regulating Bitcoin then who will stop scammers and hackers from running rampant with no repercussions? With only one country in the world (El Salvador) even considering Bitcoin a legal currency, this question is far from answered. The U.S. Securities Exchange Commission (SEC) and the Commodity Futures Trading Commission (CFTC) both regulate traders under anti-fraud rules, but because cryptocurrencies are not governed by these regulators, these rules do not apply. An example would be from June 2021 when Elon Musk (Tesla CEO) tweeted first that he would no longer be accepting Bitcoin to purchase cars, and quickly followed by saying he would accept them (Bitcoin) once about 50% of mining was done by clean energy. These two tweets first dropped Bitcoin down to under $31,100 and then rocketed it up to over $40,000 in the span of a few days.

Another occurence that exemplifies the lack of regulation in the cryptocurrency world was the Mt. Gox exchange "hack". Mt. Gox, short for "Magic: The Gathering Online eXchange" was one of the first public online Bitcoin trading sites. In 2013 and 2014, nearly 70% of all Bitcoin transactions worldwide were handled by this one website. In February 2014, Mt. Gox suspended trading and shut down the website, and filed for bankruptcy. The reasoning behind this bankruptcy is still unclear, but the official announcement from Mt. Gox was that 850,000 Bitcoins (valued at over $42 billion dollars in October 2021) were stolen. Over a quarter of those Bitcoin were later found, possibly pointing towards the fact that none of the Bitcoin had ever been stolen in the first place.