The end of cash: It’s a Bit harder to trace online currency, but not impossible
They were so cheap as to be almost worthless at the time, but by November 2013, their value had risen to more than $1,200 each.
By then however, Howells had done some spring cleaning and had inadvertently dumped the hard drive on which all that value had been stored.
When he discovered his mistake, he embarked on a frantic search through his computer files for a backup, and when that proved fruitless, he dashed down to his local landfill only to be confronted by acres of mountainous waste.
This missing hard drive with its $9m was gone forever.
Bitcoin is what’s called a cryptocurrency, and is only the most successful of a number of these that have appeared in the past eight years.
It is a digital asset, designed to operate like a conventional currency as a store of wealth and a medium of exchange.
The prefix ‘crypto’ signifies that cryptography is used both to create new units of Bitcoin and to secure transactions in the currency.
That’s the theory. Beyond that, it gets complicated.
Conventional currencies are created by a national or supranational monetary authority. The big differentiator with Bitcoin is that there is no equivalent centralised system of creation or control.
Bitcoins are ‘mined’ by individuals like the unfortunate Mr Howells by solving mathematical problems using special software.
Effectively, these individuals or pools of individuals offer their computing power to record Bitcoin transactions and are rewarded with transaction fees and newly minted Bitcoins.
These are then stored digitally and can be used to buy and sell goods and services, or they can be converted into conventional currencies.
While Bitcoin is accepted in an increasing number of online markets, you don’t find too many retailers in Ireland that are happy to take them.
Marvin.ie however is one notable exception. This is an online takeaway business which allows customers to order from one of hundreds of takeaways around the country.
In addition to accepting all the usual methods of payment, you can also pay for your curry or your pizza or your chips using Bitcoin.
Co-founder and MD James Galvin says that the company decided to accept Bitcoin in order to offer customers as many payment options as possible, and to give the business a competitive edge.
“We knew Bitcoin was growing hugely in popularity and we felt as it wasn’t too hard to integrate, and the fraud risks were minimal, unlike credit card systems. It was an easy decision to make.”
The company works with a payment merchant called Coinify which handles the bitcoin payments side of the business.
“It acts for all intents and purposes like any other online payment system, not dissimilar to Paypal. Bitcoin is still only around 5% of our total orders. It’s slowly growing, but what I find interesting is that we’ve never had one recorded issue of fraud.”
One of the key advantages of Bitcoin, its proponents argue, is the fact that transaction fees are really low.
It’s possible to move large sums of money internationally by paying only a fraction of the fee you would pay for transferring an equivalent sum denominated in a conventional currency.
As a store of value, the currency is subject to the vagaries of any asset.
Recent times have seen huge swings in its fortunes. Over 2016, the price of Bitcoin rose from $400 to $1,000.
By January of this year, it was trading near all-time highs at around $1,150. Then it lost 20% of its value overnight following developments in the Chinese economy (around 95% of Bitcoin transactions happen in China, which makes developments there hugely influential).
Then there’s the whole anonymity thing. While all Bitcoin transactions are stored publically and permanently, the identity of the user behind an address remains unknown.
Privacy advocates naturally love this, but the secrecy element is causing headaches elsewhere.
Law enforcement agencies have expressed concern over Bitcoin’s use in criminal activity.
In fact, more than one commentator has asserted that if it wasn’t for its use in the trade of illegal goods and services, Bitcoin would never have taken off. Finding definitive evidence of this however not easy.
The now defunct Silk Road — which specialised in the online trade of a wide variety of illicit goods and services — dealt in Bitcoin, while there are any number of reports of the use of Bitcoin in the trade of everything from child pornography to arms.
That doesn’t necessarily make the medium of exchange inherently wrong of course.
It’s also worth pointing out that while the cryptography and peer-to-peer architecture on which Bitcoin is based make it more difficult to identify who sold what to whom, these are electronic transactions.
By their nature they leave a trail.
Ross Ulbricht, who ran Silk Road, is currently serving a life sentence for facilitating the sale of drugs.
There have been several successful convictions of individuals who used the currency for illegal activity, proving that while it may be difficult to trace transactions, it can be done.
