Bitcoin: A 21st Century Currency Explained By a Wall Street Veteran

| Published on February 7, 2016 at 19:30 GMT
Feature

Jason Leibowitz is a former Wall Street professional who pivoted careers in 2014 to focus full-time on digital currency.

In this paper, Leibowitz answers questions about how bitcoin was created, how it works and why it matters.

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It has been described as a "techno tour de force" by Microsoft founder Bill Gates, and as a "remarkable cryptographic achievement…that has enormous value" by Google CEO, Eric Schmidt. It was even predicted by Nobel Prize-winning economist Milton Friedman in 1999 when he said, "The one thing that’s missing, but will soon be developed, is a reliable e-cash."

Friedman was a visionary, and in this instance he was a decade ahead of the rest, foreseeing the advent of digital currency, and more specifically, bitcoin.

Bitcoin’s rise to prominence is causing a global rethink of the concept of money. For thousands of years, gold was the currency of the land, and many of gold's qualities have allowed it to stand the test of time. As civilization developed and industrialized, ruling bodies learned that printing a government’s own currency, called fiat, was a more convenient and easier method of distributing wealth in society.

However, government-backed money has not stood the test of time; the average life of fiat currency is only 27 years. History is littered with examples of the failure of money, such as the Mark in post-WWI Weimar Germany and the Greek drachma in 1944.

Fast forward to the 21st century, where there are more mobile phones than there are people on earth, and perhaps it makes sense for a more global form of money to exist. Bitcoin is exactly that: a universal, internet currency that can work on any computer or mobile phone.

It is the result of decades of work in computer technology by nearly anonymous researchers, as it elegantly solves a longstanding problem in computer science. Bitcoin allows for trust between two unrelated parties over an untrustworthy network like the Internet.

With just a mobile phone any two parties can now transact without a central authority, company or bank mediating the transaction and in such a way that is safe and secure, publicly known, and uncontestable.

The origin of bitcoin

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Similar to the way e-mail is a messaging rail that exists freely on the Internet for anyone to use globally 24x7, bitcoin is a payments rail that also exists freely on the Internet for anyone to use globally 24x7. Bitcoin (a crypto-currency, abbreviated BTC) was released in January of 2009 as a first-of-its-kind free payments system.

It does not require a credit card, bank account or the divulging of any personal identification to use or acquire. The catch is that you’re not using any government-backed fiat currency in this system. It uses a new currency altogether: bitcoin.

Before bitcoin was released there was a white paper entitled “Bitcoin, a Peer-to-Peer Electronic Cash System”, that was published in November 2008 by Satoshi Nakamoto.

Satoshi is an alias, and this creator of bitcoin has chosen to remain anonymous even to this day. Thinking about the global economic environment in November of 2008 when the white paper was published, it was the early stages of what is now known as the Great Recession.

Banks that were  deemed "too big to fail" were on the verge of collapse, global stock markets were crashing, and wealth was being lost at a rapid pace.

Bitcoin dealt with the combination of distrust and uncertainty in the financial landscape of the time, offering a solution to the question, "Where can someone store value if the financial system fails?" The answer: the Internet.

The ubiquity of the internet in the 21st century is critical to the rise of Bitcoin. Of the approximately 5 billion adults in the world, over 85% have mobile phones. Even the most basic of mobile phones gives you access to a global network of communication, and bitcoin is transmittable on any network via multiple channels, including SMS text.

Mobile phones are becoming an increasingly important aspect of the global economy, and one interesting and relevant use case pertains to a program known as M-Pesa in Africa.

M-Pesa is a mobile-based virtual currency created by Safaricom, the largest mobile network operator in Kenya. It allows users to deposit, withdraw, transfer money and pay for goods and services easily with any mobile device.

M-Pesa stands for “mobile-money”, and was first launched approximately two years prior to bitcoin, in 2007.

Anyone with a mobile phone on this network can financially transact without the use of cash, credit cards or a bank account by simply using the SMS feature to securely send and receive monetary balances. M-Pesa is setup as a branchless banking service.

To obtain the currency one simply visits any distributor and physically exchanges cash for a text message containing a converted M-Pesa balance. Businesses of all types double as M-Pesa agents, in a similar way to corner stores with ATMs, and there are approximately 40,000 agents in Kenya.

M-Pesa has been praised for granting millions of people access to the formal financial system and for reducing crime in an otherwise largely cash-based society.

As of May 2015, over 40% of Kenya’s annual GDP was transacted through M-Pesa, and the success of the service has caused it to spread across three continents. However, the catch with M-Pesa is that you can only transact with someone on the same or a partnering cellular network. Bitcoin is similar in many ways to M-Pesa, only it is distributed globally for anyone to use on any network.

Bitcoin’s global accessibility is one of its most important features.

Each year, more than $500bn is sent across international borders in the form of remittances. This is the result of millions of immigrants across the world finding work in foreign countries in order to send money back home to their families and friends. Many of them are unbanked, making the process of remitting money across borders costly and inefficient.

However, digital currency technologies like bitcoin are disrupting traditional remittances businesses.

The most well-known money transfer companies are Western Union (WU) founded in 1851, and MoneyGram International (MGI) founded in 1940.

According to the World Bank, the average cost per user for sending remittances from G8 countries is around 10%. The high cost of remittances is due in part to the fact that there are over 10,000 employees working for traditional money-transfer corporations, with thousands of brick-and-mortar locations.

The high cost of operating these businesses is passed on to the customer through steep fees.

But in the 21st century, when transferring money is really just the instant click of a button and the update of a computerized ledger, it begs the question of whether such old-fashioned infrastructure is really necessary. Bitcoin enables users to remit money in minutes, for a fraction of the cost, using only a cell phone. Further, Bitcoin provides the rails to go from one currency to another using the Internet as a middleman (which is free) instead of companies like Western Union (not free).

For the banked population, sending money has become a relatively simple task with the advent of companies and programs such as PayPal, Venmo and Chase QuickPay.

They are easy to use and can be done from any smartphone. That said, they all require that the user has either a bank account or a credit card. The major limitation preventing these services from being a digital solution to the remittance problem is that approximately half of the adult world today is unbanked; this amounts to 2–3 billion people.

Given the high cell phone penetration discussed earlier, these numbers describe a population of at least 2 billion adults with cell phones who do not have access to credit or banking services. Bitcoin will be a bridge for this large chunk of the population to join the global financial system.

While it’s beneficial to be banked for many reasons, it comes with its own risks. Digital crime in the form of hacking, identity theft and stolen credit and bank card information has become commonplace over the past decade. Not only have large international corporations compromised their customers’ personal identities through getting hacked (ie Sony, Target, Home Depot), but even the largest banks have fallen short of keeping their customers’ identities safe.

In 2014, JP Morgan had 83 million accounts penetrated by hackers in one of the biggest data breaches in history.

One of the thematic problems and areas of exploitation for hackers is the level of information required when using bank or credit cards. Not only does each customer need to disclose his or her card number for each transaction, but often one must disclose their billing address, phone number, e-mail address and even government identity information.

Credit cards were invented in the 1950s. The technology of the magnetic strip no longer provides the security it once did; today copying a card number and relevant information is as easy as buying a card scanner for $20 on eBay.

Card companies have attempted to become more secure with the advent of chip-based cards. However, criminals can still break the system, it just costs more to hack.

Over 100,000 companies worldwide now accept bitcoin for payment, and to use bitcoin does not require divulging any personal identification information to the merchant. For this reason, no criminal can get into your bitcoin account and spend your money by simply hacking the servers of a company that you performed a transaction with.

While there are benefits for individuals using bitcoin, there are also benefits for business owners in accepting bitcoin.

Bitcoin is similar to a cash transaction for a company, which has two main advantages. First, the merchant does not have to pay a credit card company a 2–3% fee each time they swipe a card. Instead the cost for each merchant to accept bitcoin and convert it to fiat is on average less than 1%, a service provided by payment processors.

If the merchant wants to hold bitcoin then it’s a free transaction like accepting cash. Second, there are no chargebacks when accepting bitcoin. A chargeback is when a customer using a credit card makes a purchase and then decides to reverse the purchase, asking their credit card company for their money back.

The merchant takes the loss for chargebacks, which makes accepting credit cards a liability for business owners. From a merchant’s perspective, cash is always preferable because there is no fee and no risk of chargebacks.

Bitcoin is quite literally virtual cash. The instant convertibility into fiat currency gives merchants the same benefits as accepting greenbacks.

How bitcoin works

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To better illustrate the properties of bitcoin and how it works, it is important to look under the hood. Bitcoin is a digital currency that uniquely allows users to transact without the need for a middleman or central authority.

At the user interface level it’s similar to how Venmo or PayPal works. If, for example, Bob wants to send Alice money, he will log into his account on either his phone or computer and initiate a transaction. He will need to choose how much to send (let’s say 1 BTC), and who to send it to (Alice). Bob also has the option to attach a message to the transaction. It’s behind the scenes that bitcoin differs from every other payment mechanism.

Bitcoin is part of what is known as the "sharing economy", the peer-to-peer sharing of goods and services. The most well-known examples in the sharing economy are AirBnB and Uber.

With AirBnB individuals can monetize their houses or apartments by renting them for a fee, and with Uber individuals can monetize their cars by giving passengers rides for a fee. With bitcoin, individuals can monetize their laptops and computers by sharing their processing power over the Internet in order to verify transactions on the bitcoin network.

These individuals are referred to as "miners", and their goal is to quickly and efficiently verify blocks of transactions in return for a reward paid out in bitcoin. Anyone with a computer who wants to earn extra money can decide to download the bitcoin software for free and become a miner, easily done by letting the program run automatically in the background of your computer.

Back to the example of Bob sending Alice 1 BTC, once Bob hits the "send" button to initiate the transaction, it is broadcasted over the Internet to the entire network of mining computers distributed globally, all of whom are simultaneously verifying and adding approved transactions to bitcoin’s proprietary accounting ledger, known formally as the "blockchain".

Miners are a necessity for bitcoin to work because they ensure the integrity of transactions.

In our example, miners would make sure Bob is in possession of 1 bitcoin to send, and if so, they update the Blockchain in real time so as to decrease 1 BTC from Bob’s balance and add 1 BTC to Alice’s.

The blockchain and mining

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The blockchain is the key innovation that makes Bitcoin both unique and groundbreaking. It is a decentralized public ledger that tracks every transaction in bitcoin’s history.

The word "decentralized" is critical to understand bitcoin and the blockchain, because this is what makes it virtually impossible to hack. Companies like JP Morgan are vulnerable to cyber-attacks because the geographical locations of their computer servers can be discovered and targeted by criminals.

With bitcoin, there is no centrally owned computer or set of computers to target. Bitcoin is unique because the computers running the network are spread out globally with no entity or monetary authority in control. Unlike AirBnB and Uber, bitcoin is neither a company nor an entity.

Think of bitcoin the way you think of e-mail, a peer-to-peer technology that exists freely on the Internet to make the transmitting of information more efficient.

Satoshi Nakamoto programmed the algorithm powering bitcoin to work in such a way that transactions would be grouped into "blocks" every 10 minutes. He also devised a clever reward-based incentive mechanism to maintain the validity and timeliness of the blockchain.

Once each block of transactions over a 10 minute period is solved for – meaning that a miner has verified that all transactions in the block are valid and the miner has proved to more than 50% of the rest of miners that his work was accurate — then that mined-block is added to the existing chain of previous transactions (hence "block-chain").

Miners’ ledgers are automatically updated to reflect the latest addition to the chain, and the single miner who added the block receives a bitcoin reward. The process of verifying transactions is essentially a computer race among miners where the winner receives bitcoin.

The bitcoin code is programmed to automatically release a set amount of bitcoin to the quickest miner for every 10 minute period. This is how bitcoin are released into circulation without the need for a monetary authority.

The amount of the reward is set to halve every 210,000 blocks mined, a mechanism put in place by Satoshi in order to cap supply and limit inflation. When bitcoin was first released in 2009, the miner reward was 50 BTC for each block. In 2012, block number 210,000 was mined and so the reward was halved to 25 BTC where it remains today, meaning right now 25 bitcoins are released into circulation every 10 minutes.

It is projected that on July 23, 2016 block number 420,000 will be mined, and so the reward will halve on that date to 12.5 BTC.

The year will be 2140 by the time the halving of the bitcoin reward goes down to 0 (or parabolically close to 0 if you do the math); the amount of BTC in circulation will total 21 million, and by code no more will ever be released.

That means there will be no more Bitcoin reward for miners, but in order to maintain an incentivization scheme in the Bitcoin sharing economy the system is expected to shift from reward-based to fee-based on a per transaction basis.

At the moment this paper is being written there are 15.1m BTC in circulation.

Hashing to be hack-proof

In thinking about a global payments platform on the Internet, transactions are constantly taking place. Bitcoin was designed with that in mind, and a set of rules were pre-programmed so as to handle the load and make the blockchain tamper-proof.

After a block of transactions is verified, in order to add it to the blockchain miners put it through a cryptographic process, essentially taking the details of all transactions in the block and applying a mathematical formula to the data to turn it into what is known as a hash.

A hash is a seemingly random sequence of letters and numbers, and what makes it useful is it is easy to turn any amount of data (eg words, numbers, equations, details of financial transactions, etc) into a hash, but practically impossible to go backwards and turn a hash into the original data.

Another critical property of hashes is that if you change just one character in the data you are hashing, the resulting hash will be completely different. The way the blockchain is created is each block is hashed, and then the next block in the chain is hashed along with the hash from the previous block.

To demonstrate through example, it helps to analyze the first block in the entire blockchain, also known as the "genesis block."

After the first block was created, miners hashed all transaction details in that block and stored the resulting string of letters and numbers (the hash) on the blockchain alongside the mined genesis block.

Then the next block of transactions was verified by miners and attached chronologically after the genesis block, only this time the hash from the genesis block would also be hashed along with all the transaction details from the second block. This resulting hash would be stored alongside the second block.

Once the third block was ready to be added to the chain, miners would hash its transaction details along with the hash result from the second block, and this process would continue.

In other words, the second block contains the hash from the genesis block, the third block contains a hash from the second block which also contains the hash from the genesis block, etc. Because each block’s hash is created using the hash of the block before it, it becomes a digital version of a wax seal.

If previous blocks are changed in any way, the resulting hashes would be incorrect, and altered blocks could instantly be spotted as fakes and disregarded.

Part of the mining process requires running the hashing function through the entire blockchain and proving to more than 50% of all miners that previous blocks have not been altered. This makes the blockchain tamper-proof, or in other words, hack-proof.

This cryptography running behind the scenes of Bitcoin is what gives it the classification of a cryptocurrency. It is also what prevents double spending, or the spending of the same money twice.

Once Bob sends Alice his bitcoin, miners put it through the hashing algorithm when adding the transaction to the blockchain, and ownership of that Bitcoin is transferred from Bob to Alice. Therefore, Bob cannot spend the same bitcoin again, because even if he tried miners would not approve the transaction.

As such, Bitcoin is a digitally scarce asset.

The philosophy of money

Skeptics of bitcoin often point to the fact that it is not backed by anything and there is no intrinsic value. They prefer to label both fiat currencies and gold as real "money" because their value is backed by either a government or a rare precious metal.

The value of fiat currency is not determined by the material it is made of, rather it is the economic laws of supply and demand that dictate its value.

With regards to bitcoin not being backed by governments or gold, skeptics often overlook that a large majority of the world does not have a reliable, stable currency.

Only in the developed world do fiat currencies truly work as money, meaning they are stores of value, units of account, and mediums of exchange. More specifically, for something to be defined as money it must be able to retain its value over time, be a standard for measuring the relative worth of economic items, and be used for the buying and selling of goods and services.

Fiat currencies in the developed world, such as the US Dollar and the Euro, exhibit these three properties of money. That said, countries with stable fiat currencies only account for approximately 15% of the world’s population.

"There are more people in the world who need a currency they can trust than there are people in the world who can trust their currency," says Wences Cesares, an Argentinian technology entrepreneur and CEO of Bitcoin wallet provider, Xapo.

Cesares knows first-hand how unreliable fiat currencies can become having lived through multiple depressions in Argentina.

Bitcoin, inflation and deflation

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As a barometer of healthy money, the world’s best economies have average annual inflation rates below 1.5%.

In economic terms, low to zero inflation is a sign of healthy money because the value of the currency does not fluctuate significantly and is therefore reliable. However, in a country like Argentina, the annual inflation rate is estimated to be close to 40% today.

That means if you’re an Argentinian citizen and you save 100 Argentine Pesos, one year from now the value of those 100 pesos will be worth only 60 pesos relative to the world’s stable currencies. In Argentina, holding money means losing money, and so its citizens are actively looking for alternative stores of value to simply preserve the money they have earned and worked for.

Other examples of problematic economies with high inflation rates are Venezuela, which is expected to have annual inflation of 180% in 2015, and Zimbabwe, where the rate of inflation for the Zimbabwean Dollar was so high that this year they decided to stop printing it and the government is abandoning their currency altogether.

Zimbabwe went through a period of what is known as hyperinflation; their annual inflation rate in 2008 was recorded as high as 11,000,000%. What currencies could citizens from these countries use if not their own? The US dollar? Gold? M-Pesa? Bitcoin?

The reasons for such high inflation rates are complicated and they vary from country to country, but a common theme is that these rates are only found in government-backed fiat currencies.

Governments can lose control of their money in various ways because as with all fiat currencies, their values are tied to the laws of supply and demand. If a government prints too much money then the value of its currency can deteriorate, as seen recently in Zimbabwe, and after WWI in Weimar Germany.

History is full of stories underscored by the failures of money, and if history repeats itself, the future will be no different.

Given bouts of high volatility in bitcoin, it may be difficult to understand how this new Internet currency can act as a store of value. However, comparing the rate of fluctuation of the price of bitcoin to some of the fiat currency examples above, bitcoin contends as a candidate for an alternative currency.

Part of its appeal in countries with strict currency controls is the relative ease in which it can be acquired and used, especially considering all one needs is an Internet connection. Once money is converted into bitcoin, the inflation rates of local fiat currencies do not affect bitcoin holdings and it can be sent anywhere through the Internet for free.

Additionally, no one but the account owner has access to their bitcoin. This is especially important in light of the financial crisis.

In 2013, banks in Cyprus became insolvent but were bailed out by European and international monetary authorities. However, one of the conditions for Cyprus to receive the emergency funding was that bank depositors had to pay part of the tab.

That meant depositors, those who had their money in the banks for safe-keeping, found their individual accounts drained 6–10% by the government, overnight. That would be impossible with digital currency like bitcoin, which makes it valuable for many who reside in parts of the world with deteriorating economies and/or currencies.

Bitcoin also provides an option for those living in countries whose currencies are restricted or not free floating (eg China, Russia), looking to get money out of the country.

Even in the strongest economies the question of how stable certain fiat currencies really are is being tested. In a post-Great Recession world, governments of some of the leading economies decided to essentially print their way back to prosperity in one of the most massive economic experiments ever conducted: Quantitative Easing (QE).

The US led the way with QE in November 2008 with Ben Bernanke, then the head of the Federal Reserve, spearheading the experiment.

After Lehman Brothers collapsed, as the economic debacle unfolded, developed-market central banks became fearful of deflation as opposed to inflation, an experience Japan had been dealing with since the early 1990s.

Deflation is an insidious economic plague where citizens choose to hoard rather than to spend money, expecting lower prices for goods and services tomorrow relative to today.

However, an economy can only improve when its citizens spend money. When companies have too few customers because the masses are scared to spend, employees are laid off in order to cut costs, and unemployment rises, reducing income streams and thus spending power.

It’s a vicious downward spiral, and Mr. Bernanke decided that the best way to stimulate the economy would be to increase inflation and lower unemployment, and he aimed to achieve this through massively increasing the money supply of the US dollar.

The US printed trillions of newly minted dollars over the six year period from 2008 to 2014 in an effort to stimulate the economy. The program worked to a degree, inflating asset prices per design due in part to the US dollar representing the world’s strongest economy as the global reserve currency.

The European Union (EU) has seen the success of QE in the US and has launched its own program to try to aid their unstable economy. The EU will print over 1 trillion new Euros by the time their version of QE is over.

Whether QE works in the long run remains to be seen, but the fact is governments have the power to print as much of their own money as they want. If QE does not work and inflation becomes rampant, there are severe economic consequences as history has shown us.

Digital gold

Gold bars

Like gold, there is a finite supply of bitcoin.

No one can produce more gold than there is in the world, and similarly, no one can create more bitcoin. Bitcoin was modeled in several ways after gold: they are both scarce, they are both "mined" in order to add more into circulation, and it is impossible to artificially inflate supply.

In order to determine what gives bitcoin value, it first makes sense to analyze what gives gold value.

Gold has been in demand for thousands of years. It is rare, but not too rare so that it is impossible to obtain, and it is malleable so that it can be stamped for the purposes of coins. Its durability makes it reliable over time, as gold does not corrode, and its shiny and lustrous properties make it ideal for jewelry, its primary use.

For today’s purposes, gold is an efficient conductor of electricity, making it useful for electronics, though only in tiny amounts.

Gold, like anything else, has value primarily because humans have attached value to it over time. Any economic item is only worth what someone is willing to pay for it. Society, and now economies have placed value on the shiny metal, thus perpetuating its worth.

It does not provide food, shelter or clothing, but with enough gold one can purchase those items. When other currencies falter and stop working, societies have historically fallen back to a gold standard, which means gold also has some value as insurance against difficult times.

Bitcoin is a more transportable version of gold.

Satoshi essentially took the properties of gold that make it valuable and programmed them into bitcoin, making bitcoin a more efficient and easier-to-use form of gold. Gold is heavy and non-divisible, meaning it is difficult to carry and impossible to spend in small amounts.

You can’t spend a piece of a gold coin in your possession.

As bitcoin is digital, it has no physical presence, only existing on the Internet, and it has the power of infinite divisibility. Bitcoin takes up no room in your wallet, safe, or vault, and currently it can be spent in any amount out to eight decimal points.

That means regardless of the price of 1 BTC, it can still be spent in whatever small amounts the user wants. This enables the ability to use bitcoin for tiny online transactions that have never before been feasible despite years of attempts.

Using bitcoin

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This new use case deals with what are known as micropayments.

Micropayments are financial transactions that involve very small sums of money (think pennies or fractions of pennies).

Before bitcoin, the smallest sized Internet transactions were not less than a few dollars, because it is not cost effective to run small payments through the existing credit/debit and banking systems. The fee structures of those systems makes them nonviable.

However, with bitcoin, suddenly this becomes trivially easy.

Micropayments can optimize content monetization, eliminating the need for banner ads and pop-ups, because Internet users can opt to pay as they go using arbitrarily small amounts of money to forgo ads when reading news articles or watching videos.

Micropayments can also be used to fight spam. Future e-mail systems can refuse incoming messages unless they are accompanied by tiny amounts of bitcoin, tiny enough not to matter to the sender but large enough to prevent spammers, who these days can send billions of messages without limitation.

By attaching even a minor cost to spamming, that path of free advertising disappears. Public payments are another possibility that bitcoin makes possible.

There are examples of individuals holding up signs saying "send me bitcoin!" next to a QR code (a type of barcode). These codes can be seen in person, on TV, or in a photo, and sending Bitcoin is as easy as scanning a QR code using the camera feature of a phone.

QR codes can contain the information of a public bitcoin wallet address, in which case all you then need to do is send your Bitcoin to the specified destination. In two clicks you can send a complete stranger money. This has implications for crowd-funding, protests and social movements, to name a few.

Anyone can acquire and use bitcoin, and there are several ways to obtain it. The original method is through mining and winning the bitcoin reward; anyone with a computer can participate.

For everyone else, bitcoin exchanges offer users the ability to transfer fiat money from a credit card or bank account in exchange for bitcoin.

For the unbanked, bitcoin ATMs are also becoming more widespread, allowing users to exchange cash for bitcoin or bitcoin for cash, using the local fiat currency of whatever city the bitcoin ATM is located in. Bartering and exchanging bitcoin in peer-to-peer transactions is another easy way to obtain bitcoin.

Lastly, but more uncommon given the early stages of the bitcoin economy, you can find work where employees are paid in bitcoin.

From a purely numbers perspective bitcoin has monetary value.

Given all the current use cases for the currency, the ubiquity of mobile phones, and the billions of people who are not yet part of the global financial system, bitcoin is an important asset class because it serves a purpose and provides solutions to existing problems.

Gold has value because it is scarce and there is demand for it.

Contrarily, the Zimbabwean Dollar does not have value because it is not scarce, despite domestic demand for it. Bitcoin is scarce, and because there is demand for it in many forms, it has value. There are currently 14.9, BTC in circulation and the price per Bitcoin is $455 at the time of writing. That yields a market capitalization of $6.8bn, in line with a mid-cap stock.

Unfortunately but not surprisingly, some of the demand for Bitcoin comes from those operating outside of legal boundaries.

Milton Friedman also predicted that the advent of digital currency "has its negative side. It means that the gangsters, the people who are engaged in illegal transactions, will also have an easier way to carry on their business."

The most well-documented example was the US government shut-down of Silk Road, an online drug bazaar that used Bitcoin to conduct transactions. However, one important and useful fact about how bitcoin works is that, much like e-mail which is traceable, bitcoin is pseudonymous, not anonymous.

Every transaction in the bitcoin network is logged forever, permanently and immutably on the blockchain.

As this can and has helped law enforcement officials track down criminals, many governments around the world are not outlawing bitcoin, but instead are starting to enforce that bitcoin-related businesses have compliant Know-Your-Customer (KYC) and Anti-Money Laundering (AML) policies in place.

On that note, the singularly most used payment for illicit transactions are US $20, $50 and $100 bills.

Conclusion

Bitcoin is beginning to be seen by the masses as a revolutionary technology. It rethinks the concept of money and eliminates the need for fee-taking middlemen when conducting transactions.

The current use case is broad, affecting the unbanked, the remittances market, online security, micropayments and public payments.

Thinking forward, the implications of this technology are vast and extend well beyond the use of Bitcoin as a currency.

For example, "proof of existence" is a concept that the immutability of the blockchain makes digitally possible. In the future people may not need to physically carry around wallets if government ID’s and passports are on the blockchain.

In November 2015, a couple notarized the birth of their daughter on the blockchain, attaching a hashed hospital birth certificate and video attestation from the parents and grandparents to a tiny bitcoin transaction. The result is a timestamped proof of the existence of their newborn on the blockchain, which can never be altered or disputed.

The ability to digitize notarizations is yet another possibility that the blockchain makes more efficient. There are thousands of bitcoin and blockchain-related startups around the world, with over $1bn of venture capital money invested in the space to date.

It is impossible to know what life-changing developments may result from this technology, similar to the way it wasn’t possible to predict the invention and impact of Twitter and Facebook when the internet was being developed in the early 1990s.

Bitcoin has only been around since 2009, and most people had not heard of it until it started to make front-page news in 2013.

As it develops into a more familiar technology, it is on track to become the first universal, Internet currency for the global citizen.

This piece originally appeared on Medium and has been republished here with the author's permission.

Follow Jason on Twitter here.

Global currency image via Shutterstock

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