Is This Why Bitcoin Is Surging?
The original design for bitcoin comes from a 2008 paper published by a person named Satoshi Nakamoto. Who, by the by, doesn’t actually exist.
Bitcoin’s basic architecture is decentralized – no one is “In control.” People with fast computers and some coding skills compete to solve a puzzle created by the algorithm described in Satoshi’s paper. Simultaneously, they track all the transactions in the bitcoin universe – people and businesses exchanging value for goods and services. Every ten minutes, on average, some lucky coder – or group of coders – solves the puzzle, gets a few new bitcoins, and validates the transaction list. Then the whole thing resets and everyone gets to work on the next puzzle.
In principle, this process leaves everyone exchanging or “mining” (cracking the code gets you 25 bitcoins currently) anonymously in the system. Everything in bitcoin is identified with a nearly-impossible-to-crack coding of letters and numbers. No names, phone numbers, or addresses needed.
Tech savvy people, who by their nature and high-functioning professional skills tend to have a few shekels lying around? Yep – classic early adopters.
Then there might be independence-minded older white males in the U.S., ticked off by the Federal Reserve and government in general. Yes, they like the story as well.
And then there are the criminals – drug dealers and so forth – who might not know a creation myth from crystal meth, but appreciate the potential for secrecy.
Offshore millionaires from essentially anywhere in the world, looking for classic diversification and a liquid investment. All you need to access your bitcoins is that long alphanumeric key and a local bank account which links to a ‘Wallet’ – an online repository to hold the currency. Deposit money in China, write down the key, fly to Monaco and go into an Internet café. Easy-peasy.
The U.S. government made it clear that they expect all currencies and their users to adhere to anti-money-laundering laws, including know-your-customer statutes which eliminate the notional secrecy of bitcoin.
The Feds also went after the druggies, shutting down Silk Road – a widely known website for the purchase of illicit substances.
In an odd twist of fate, the U.S. government now owns about 174,000 bitcoins, with a current value of $42 million thanks to the Silk Road bust and other actions.
The biggest bitcoin exchange is now in China, displacing Japanese, American and European sources of demand. That enterprise is called BTC China, and its CEO Bobby Lee hails from Yahoo! and Walmart China. Oh, and he graduated from Stanford with a degree in Computer Science. In short, an apparently pretty clever fellow.
Our sources in the bitcoin community also agree that Second Market, the New York based business best known for trading pre-IPO company stock, has become a major player in demand for bitcoin. Earlier this year they started the Bitcoin Investment Trust, an open ended product to buy and hold bitcoins. There’s no way to know how much Second Market has purchased on behalf of its clients, but it must be a popular offering – the banner ad on their site for the trust occupied the top third of their front page.
It’s not all been roses for bitcoin, even in this recent run-up. Back in September computer science researchers from UC – San Diego showed that it was actually fairly easy to track individual transactions in the bitcoin transaction ledger. Just this week, academics at Cornell proposed that bitcoin could eventually be coopted by a handful of “Miners” who could hijack the system.
Bitcoin could become a country’s ‘Second currency’. One of the more interesting conversations with one of our industry sources is the thought that one or more sovereign nations would entertain making bitcoin a parallel currency to their existing monetary system. Keep in mind that our source owns a lot of bitcoin personally…. But it is an intriguing thought nonetheless.