They’re everywhere from glossy magazines to scuzzy emails, and are accepted by multinationals and assassins. To some, they are the future of money; to others, they are a disaster waiting to happen. Either way, there’s no denying the current buzz over cryptocurrencies. From Bitcoin, Litecoin and Ethereum to newcomers like Zcash and Ubiq, there are over 1,000 different varieties to choose from. But should you plunge in or stay well clear? It’s a question that’s been asked ever since January 2009, when the grandaddy of them emerged from literally nowhere: Bitcoin.
A few months earlier, a message had popped up on a technical mailing list describing a new form of electronic payment. That in itself wasn’t particularly exciting: over the years there have been many ideas for new forms of digital cash which for one reason or another have never caught on. But according to its inventor, the elusive Satoshi Nakamoto, Bitcoin was different. It was, he claimed, able to operate completely independently of governments, regulators or banks, yet still be totally trustworthy.
The sheer magnitude of this claim becomes clear as soon as you think how conventional money works. Hard cash – in the form of coins and notes – is physically produced by national mints, and crammed with anti-counterfeiting features to stop people simply making their own whenever they need more. But electronic money, like stocks, shares and any online transactions, isn’t real: it’s just digital signals, which can just be copied and pasted. To combat this, the global financial system relies on electronic clearing houses that keep tabs on every transaction in an attempt to stop fraud. Or at least, that’s what they are supposed to do. In reality, fraudsters and insiders can – and have – found ways to cheat the system. But Nakamoto claimed to have found a way to prevent this. Put simply, Bitcoin works by converting the information about each new transaction into a form that’s mathematically almost impossible to read or change, and then entered into a permanent electronic ledger, known as a blockchain.
As well as being secure, the blockchain doesn’t exist in a single place. Instead, it’s spread across a virtual network, producing a global system of electronic currency that is fast, efficient and trustworthy – and out of the hands of governments or banks. Cutting out the financial establishment seems to have been a big motivator for Nakamoto. When Bitcoin was launched, the world was in the grip of the worst financial crisis since the 1930s. Banks were widely seen as the culprits, yet governments were racing to bail them out. This infuriated many, who believed the banks should suffer the consequences.
“One reason Bitcoin has captured the imagination of so many people is that it holds the promise of democratising finance,” says David Orrell, co-author of the The Evolution Of Money.
One key appeal of cryptocurrencies is the ability to perform transactions completely outside the standard banking system. Two ‘mainstream’ benefits of this are an ability to carry out…
Illustration: Cathal Duane