For the last month, I have been conducting a small portion of my business in a different currency – Bitcoin. I do the same work as I do for British pounds, but instead of cash or a bank transfer, I’m paid with a few clicks of a mouse in a currency that is backed by no state, or by gold or silver, but by the consent of its users. I have had a fascinating and frustrating time so far working with this “open-source currency.”
Bitcoins were designed by an anonymous cryptographer as a stateless, digital currency, continuously authenticated by its users. This is called a cryptocurrency. Like other very useful things, such as the contact list on my phone and this article as I write it, a a cryptocurrency exists purely as information. Of course, so does most of our money – it exists as numbers in the computers of banks. The difference with a cryptocurrency like Bitcoin is that it is not backed by, ultimately, the guns and bombs of the state. It is verified, instead, by cryptography.
A single Bitcoin is the answer to a complex mathematics problem. There are millions of solutions to this problem – but there are a finite number of them – around 21 million; and as one attempts to compute these solutions, the numbers involved get larger, and so they get harder and harder to compute. In this way, a unit of a cryptocurrency is like precious metal – there is scarcity, and labour required to extract it.
In order to create the supply of Bitcoins, they must be mined. Prospectors must find the solutions to the maths problem by running a computer program which solves the problem serially, from the first to the last solution. In 2009, when Bitcoin was launched, anyone could run this program on ordinary consumer computers, and many thousands of Bitcoins were mined (and promptly forgotten, to be found – or discarded – according to chance). At present, 12 million of the coins have been mined, the computers needed to efficiently mine Bitcoin cost the equivalent of thousands of pounds, and people form mining pools to reap shared rewards. Now, as then, when a new solution is found, a new “block” of Bitcoins is mined, and the solution’s finders reap their reward, 25 Bitcoins. As part of the design of the system, the reward halves every four years.
Each solution – each Bitcoin – is unique and identifiable, and computer programs can trace a specific Bitcoin, or fragment of it, just as surely as if it was an object inscribed with a serial number. It cannot be counterfeited, because each Bitcoin – whether it is the first, the fourth, or the millionth, or any fragment thereof – can be put into a computer program and connected with a vast, open-book ledger of all of the Bitcoin transactions in the history of the earth, each assigned to its anonymous numbered account, redundantly backed up on thousands of computers of ordinary Bitcoin users worldwide. This system is called the blockchain.
Sadly, most of the popular awareness about Bitcoin is about its recent skyrocketing value and its volatility. This makes people hoard their Bitcoin, or day-trade it like a penny stock, and slows its adoption as a means of exchange. The point of Bitcoin is not to hoard it and get a bunch of dollars or pounds out – instead, it’s important to buy goods and services with it, and encourage others to do so. The real power of Bitcoin will be when it is accepted for everything from milk to babysitting to life insurance, and is no longer associated with the underbelly of the economy.
I heard about Bitcoin years ago but I never actually got around to getting any until I read the aforementioned article. Like so many others I cursed my luck at having missed the boat. Bitcoins had always been, in my mind, a currency used by people buying weed over the Internet – or, selling explosives or illegal pornography. Then I thought how useful Bitcoin could be for sex workers. We and our clients use cash because of its anonymity, but carrying cash poses its own risks. Robbery and confidence games are a real threat, and counterfeit cash is always a risk. Credit cards, PayPal, and other systems are able to be reversed, so Bitcoin could present an opportunity for sex workers to gain an added layer of safety, protecting their income from thieves and predators. For clients, Bitcoin offers a chance to pay securely and anonymously, making hiring the services of sex workers safer.
Anonymity helps people who are victimised by power, not just sex workers and clients. Any political resistance against an unjust government requires use of money and the economy, and as more and more of the world’s economic transactions are conducted online, that government can track that resistance as easily as if it had planted a bug on the resistance’s treasurer. That might be a good reason why China decided to prevent its banks from dealing in Bitcoin.
The Bitcoin system was designed to have extremely low transaction fees – .01% or less of most transactions; this, its self-certifying nature, and its usability over networks as modest as a handful of cell-phones make it an ideal way for the people of the global South to trade remotely. Bitcoin could take over much of the remittance trade, and could even make a modest inroad into the supremacy of the dollar there, with many good political effects.
Properly deployed, Bitcoin’s convenience makes it attractive. As a currency, Bitcoin has the potential to be transformative. In itself, though, Bitcoin cannot cause revolutionary social change, as its most vocal supporters suggest. For critics of capitalism, Bitcoin can be a useful tool to protect the identities of activists, but it is also an interesting item of study in itself. For all of our critiques of the existing system, we socialists propose our own states, complete with currencies. Would a decentralised currency like Bitcoin pose as much of a threat to socialist economies as it could to today’s central-bank-mediated capitalism?
In order to answer these questions fully, Bitcoin and other cryptocurrencies need to eliminate a few bugs from their systems. Although it is quite easy to have a secure, offline Bitcoin ‘wallet,’ many users don’t know this and protect their Bitcoins with flimsy passwords, so they’re stolen. Some Bitcoin exchanges and businesses have succumbed to hackers or the greed of their owners, and thousands of Bitcoins have been stolen in this way. This ‘wild west’ situation has made it easy for governments, banks and big retailers to eschew Bitcoin as an unsafe bet; for the deeper arguments about power and the meaning of currency to be raised, Bitcoin’s community first needs to resolve these concerns.
Of course, socialist political parties and movement organisations should accept Bitcoin, and get the support of those who would prefer to give anonymously. But socialists should also study Bitcoin, and the concept of cryptocurrency as a whole, as part of the new heterodoxy of ideas on the left. Marx, Lenin or Trotsky could not have conceived of a decentralised currency mediated via the Internet, or of the Internet itself; but like many other things that have arisen out of the world’s increased connectedness, Bitcoin could be a powerful tool towards realising their ideas.