The Bitcoin symbol
On May 4, the No. 98 car took to the track at Talladega for the Aaron’s 499 NASCAR race covered in pictures of — a dog?
Close, but the Shiba Inu in this particular picture is from a meme officially referred to as “Doge,” and the car was wrapped in livery featuring Dogecoin, the Internet’s newest cryptocurrency, a form of digital currency that relies on advanced cryptography for security.
On the recently canceled Fox show Almost Human, today’s most successful cryptocurrency, Bitcoin, got a nod every few episodes as pop culture’s pick for the future of money. While these recent introductions into the zeitgeist are an indicator that cryptocurrency is gaining a foothold in the public consciousness, the decision by the Federal Election Commission on May 8 to allow Bitcoin for campaign contributions is an indicator that cryptocurrency is gaining true legitimacy.
With the rise of the Internet and the ability to conduct global transactions in fractions of a second, it seems inevitable that a worldwide, all-digital currency would emerge. The idea of a “new form of money that uses cryptography to control its creation and transactions, rather than a central authority,” was floated as far back as 1998, but it gained steam with a proof-of-concept publication in 2009, according to the Bitcoin.org website. Today, the equivalent value of the total Bitcoins in circulation is nearly $6 billion U.S. dollars. That’s no small change.
“Bitcoin is a peer-to-peer digital currency that uses a distributed public ledger and cryptography to allow for verifiable proof of ownership across multiple intermediaries,” said Lexington’s Lamar Wilson, co-owner of 212ths.com and Love Will, Inc., and one of the designers behind Pheeva, a multiplatform Bitcoin wallet. “In a nutshell, Bitcoin is the Internet of money.”
Unlike with government-backed fiat money, Bitcoins aren’t poured or printed in a mint. They aren’t created entirely out of thin air, either, and the technical aspects of their creation and circulation can be somewhat staggering to consider.
“Bitcoins are created through a process called mining,” said Wilson. “Mining uses the computational power of many distributed computers … to find consensus for the confirmation of transactions waiting to be verified. Once the miner verifies the transaction block, it is rewarded with Bitcoins.”
After Bitcoins are in circulation, parties use special wallets with a private key to transact with others, and all transactions are cleared on a public ledger called a block chain, the integrity and order of which is enforced with cryptography.
According to Wilson, there are many advantages to this form of currency, some because of the way Bitcoin is decentralized and the assets can only be controlled by the holder of the private key. Much of the benefit, however, has to do with the security of the currency itself.
“A lot of the cost associated with [traditional] payment gateways goes toward pprotecting against fraud, and these fees are getting so high that many small businesses are being squeezed out. In a small grocery store, for instance, the profit margins can be about 1 to 3 percent a year,” Wilson said. “Imagine getting rid of most, or all, of the 2.5 to 3 percent fees from credit cards. All of a sudden, the store owner has more than doubled their profit for the year.”
The same is true for credit cards, said Wilson, because there’s a tremendous amount of work that goes into protecting transactions and preventing theft. That effort is reflected in the fees.
The rising ubiquity of Bitcoin is not without its share of both pitfalls and detractors, however.
In a study presented at the 17th International Financial Cryptography and Data Security Conference last year, researchers found that 45 percent of Bitcoin exchanges fail, taking the Bitcoins of the users of those exchanges with them. This statistic was further complicated by the collapse of Mt. Gox (short for “Magic the Gathering Online Exchange”), the largest Bitcoin exchange, in February, taking some $480 million in Bitcoins with it.
On May 7, the Securities and Exchange Commission issued a warning to investors about investing in Bitcoin ventures, citing factors such as the relative youth and volatility of the currency.
Wilson believes those setbacks are growing pains and all part of the process.
“In every industry, there are bad apples. For every Bernie Madoff, there is a Warren Buffet. For every Enron, a GE. There isn’t any difference in Bitcoin,” said Wilson. “Nevertheless, just as with many failures and trials in life, Bitcoin is becoming stronger as a result of these setbacks. … Bitcoin will get better over time. I envision a future where you won’t know that you are using Bitcoin, in that same way today many people don’t know they are using TCP/IP or SMTP [web portals and email systems that make up the backbone of the modern user experience on the Web].”