Bitcoin: a hopeful start, a stunning spurt, and what the Romans did

Welcome to the CoinDesk Weekly Review 30th August 2013 – a regular look at the hottest, most controversial and thought-provoking events in the world of digital currency through the eyes of skepticism and wonder. Your host … John Law.

As regulators, law-makers and other agencies met the Bitcoin Foundation in Washington earlier this week, one important fact became clear. If you want to get government to listen to you – no, not like the NSA – do something interesting with money that’s difficult to understand.

For, while there’s been no shortage of blowhard politicians ready to proclaim bitcoin as terrorism, tax evasion and massive drug fun all rolled into one, it turns out that Washington is well stocked with smart people who aren’t afraid to ask questions and listen to the answers.

Only one person was mentioned, sadly not by name, as being in the ‘all progress is bad’ camp (“When it is not necessary to change ...” said the Duke of Wellington, “... it is necessary not to change.” Well, this was before Darwin). For the rest, the meetings seemed to be not of the “How can we regulate the hell out of this thing?” but “What on earth is it?”.

This is a very hopeful sign. The difference between bitcoin and other potentially scandalous online happenings – privacy, naughty pictures, file sharing – which have been heavily impacted is that it is pure money.

There’s no lobbying to be done trying to say that X is so valuable and generally beneficial to the government it must be left alone, or Y is so dangerous and without redeeming features it has to be stamped out. That bitcoin is a way of moving money over the Internet as easily as a Youtube link: yes, thanks, got that. But what does it mean? How does it work?

There’s an interesting comparison to be made with illegal drugs. By and large, before the 20th century, drugs such as cocaine, cannabis and opium were unrestricted in Western societies.

Then a series of moral panics, usually connected with drug use by racial minorities, the poor or in ways threatening to children, created an ever-increasing set of laws that were intended to prevent drug use.

Few of these laws were based on evidence, even by the standards of the day, and none on the health problems drugs can cause – in other words, the reverse of the “regulate, tax and allow” approach towards alcohol and cigarettes.

The long-term results of the war on drugs are some 25% of the US prison population, huge amounts of potential tax revenue not collected but instead supporting criminal networks, and no particular diminution of the quantity of drugs imbibed – or mitigation of the health problems caused.

Given that bitcoin can’t be stopped from working any more than any other sort of computation, that people want to use it because it’s useful, and that the rest of the world is mostly open to the idea (at least until it really does cause problems), the US is faced with a fairly simple choice: decide from the outset to raise a moral panic and try yet more prohibition, or to actually take a step back, see what’s going on and not assume the worst from the word go.

Perhaps, just perhaps, a hundred-year experiment in repression through ignorance has persuaded those who run the place to think a little more freely.

As Churchill never said: we can always rely on the Americans to do the right thing. After they have exhausted all other possibilities.

This is one scary graph.

In fact, it’s many things. On the surface, it’s just a record of the global bitcoin hash rate – the speed at which people are searching for bitcoin in cryptospace. This is a proxy for a couple of other things – how hard it is to find one bitcoin, and how much energy is being expended in that search. Finally, it is exponential: doubling roughly every month.

Exponential curves are big news. They’re the signature of something turning on, of running out of control, of rules changing. The Internet went exponential in the mid-90s. The human population’s been doing it since the invention of science. And it characterises almost every aspect of the last few moments of a supernova’s life as it collapses into a black hole: exponential is strong ju-ju.

The hash rate curve seems to have kicked off around March, when the rate was around 30 terahashes a second. Coindesk first noted the trend in June, and now, at the end of August, it’s 650 Th/s – twenty times as much as March in just five months.

Assuming this carries on, then by this time next month it’ll have crossed the petahash per second marker. One petahash is one billion billion hashes. In fact, the number should be around 1.3 petahashes per second, which is one of those numbers that exceeds the capability of the sober mind to apprehend.

While it’s monumentally hard to get all the figures right, the total global energy used in doing so will be roughly the same as consumed by the sleepy South Devon town of Newton Abbot. Don’t panic about that.

Likewise, if the entire bitcoin mining system was taken over and devoted to cracking passwords protected by the SHA256 system – which is the one bitcoin itself uses – it could only manage around six eight-character passwords a second. In other words, outside the world of bitcoin, these figures aren’t that significant.

What’s driving this huge increase in mining activity? Given the relative economics of the options, anyone paying their own power bills can only be using ASIC miners – so on this evidence alone, someone’s shipping in numbers.

And with the twice-monthly adjustment in mining difficulty to rein in the increase in mining power, there’ll be no shortage of people wanting to buy new, more efficient and faster mining rigs, if the sudden upsurge in hash rate is because people are actually making money now. That market at least looks like a good bet.

What we should expect, though, is more in-depth digging out of facts, supposition and guesswork.

Who’s doing this? Where are they? How are they doing it? Is it some well-funded bunch with a warehouse of chips, or twenty million Chinese having a go? What will happen when the power consumption really does outpace the expansion of the Universe? Coming soon, to a screen near you.

Bitcoin, now: that’s a different matter. For while nobody knows where twerk comes from and selfies is, one learns, a shortened version of self-portrait photograph popularised by mobile phones and the need for social media avatars, the word ‘bitcoin’ has much more interesting provenance.

Let’s start at the end. What have the Romans ever done for us? They invented the word cuneus, which means corner or wedge, which turned into the Old French for the thing you stamped coins out with, which turned into coin. (Except in France, where coin still means corner, but what can you do, eh?) That’s mildly interesting for the technophiles, who always like words that derive from pre-modern technology.

Which leaves us with bit. You may know that this is short for Binary Digit, aka the one or zero that is all a binary number can have in it. It’s also, therefore, the smallest amount of information you can have. (Apart from in wireless networks, where you can break bits into sub-bits, but let’s ignore that.)

Bit is a new coining. The name was invented by Claude Shannon, an American mathematician who slept late, rode a unicycle, drove a camper van he called his Touring Machine (see here for why geeks find this funny), and married a computer. No, really: back in the pre-digital 40s when he was a-wooing, most scientific and industrial computation was carried out by ranks of young women called computers.

Shannon also invented information theory, which is one of the big reasons you’re reading these words at all. Information theory describes how data moves, how fast it can go and how it can be saved from corruption: it’s the bedrock of modern communications.

It’s also built on mind-bendingly hard mathematics, which is why you’ve never heard of Shannon – despite him being one of the chief architects of modern life and one of the most important mathematicians of the last hundred years.

But he did invent the modern usage of bit, as well as the idea of the bit itself, and thus deserves our thanks – it’s a bit – yes, sorry – like having his head on one side of the coin. That one of the most modern words is coupled to one of the more ancient seems apt for an idea that takes one of the ancient, abiding inventions of civilisation – money – and couples it to the Internet.

Now, try pulling something profound out of twerk.

John Law

is an 18th century Scottish entrepreneur, financial engineer and gambler. Having reformed the French economy, invented paper currency, state banks, the Mississippi Bubble and other ideas essential to modern economics, he took three hundred years off in a small cottage outside Bude. He has returned to write for CoinDesk on the foibles of digital currency.