Tuesday, March 18, 2014

The Real Problem Behind Bitcoins

The news is aflame with stories of hacks, stolen bitcoin, exchanges defaulting, and shamed Bitcoin leadership, but it hasn’t touched on the major impact of bitcoin investments beyond the liquidity of the digital currency itself. The true problem of the currency resides with its legitimate purposes and who it’s making rich.

To understand this, context is needed behind the origins and the purpose behind bitcoin. The cryptographic currency, developed in 2009, was designed to be stored and used anonymously. This currency was originally “mined” using shared processing power and could be stored offline or on virtual exchanges. This meant that, early on, those with the greatest amount of processing power, or the tech savvy, could “mine” for the currency with their unused processing power.


A bitcoins mining rig
(via Gizmodo)

The currency mined or “earned” could then be traded for goods or services just as any other currency is used. In 2013, a smattering of small businesses and vendors began to accept bitcoin; Virgin Galactic even took them as payment for a commercial spaceflight into space. However, prior to 2013 (which was when we saw this surge of interest in bitcoin), what were the legitimate purposes for this currency? The most well-known of markets for the use of bitcoin has been the Silk Road, an online market that is the Amazon of the “hidden” internet.

Where does that leave us today? Bitcoin, once valued around US$30 in 2011 (or pennies in 2009) has jumped to US$630. Investors will leap at an investment like that, and many have. Considering the limited legitimate purposes for the currency, investors should question who are the major holders of bitcoin. That’s an answer no one knows since the currency is anonymous. Yet, looking at bitcoin’s largest known market (the Silk Road) and the processing power needed to “mine” the currency, it stands to reason the ones who hold the most currency are the ones who got in early and who trade services and goods for bitcoin (as true with any currency).

The problem is that the largest marketplace for bitcoin is also a marketplace for drugs, guns, child pornography, and other dubious activities. Another problem is that those who could’ve mined the currency earliest (beyond individuals) were spammers and hackers who developed botnets to mine copious amounts.

So what has the greed of our market done? The unknowing public’s speculation into bitcoin has increased the holdings of these drug runners, gun smugglers, pornographers, human traffickers, and potential criminals by 20-fold, if not more.

Op-Ed Disclaimer: The opinions in this article do not necessarily reflect the views and positions of The Wang Post.

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