The end of fiat currency, or just another nerd fad, ask Rafi Alam and Mason McCann.

First hailed as the crystallisation of free market ideals and the death knell for the central bank, Bitcoins have since survived repeated robberies, wild fluctuations in value, being used to buy drugs and weaponry online, and a series of very awkward podcasts, but Bitcoins are still around, so let’s take a look at why. The question asked most often is, “what the hell are Bitcoins?” For those people who’ve never thought of using hashtags as money, Bitcoins are a virtual currency where value is based not on government fiat, but on a community of individuals deciding that the currency has value by agreeing to accept it in exchange for goods and services. Bitcoins are “mined” out of a “cloud” algorithm and then stored in “wallets” for later use (it takes a lot of quotation marks to explain Bitcoins).

Developed by Satoshi Nakamoto (thought to be a pseudonym), Bitcoins are a relatively new online technology that expands upon the potential of peer-to-peer file sharing to bypass the legal limitations of credit cards and bank transfers.
Many music and film aficionados would be familiar with ‘torrenting’, a method of sharing content without hosting it on a web server. Instead content is hosted on individual uploader’s computers, and shared to downloaders, in a system known as peer-to-peer file sharing. Using this method torrent websites ar­­e able to – in theory – avoid litigation. Sites like The Pirate Bay are public websites, accessible to everyone, freely distributing copyrighted material.

More successful torrent sites are hosted in the ‘Deep Web’. In this complex online web, there exist exclusive, invite-only communities where users must maintain a share ratio which meets the standards of the site in order to stay involved in its activities. On these websites you can find hundreds of thousands of torrents, in different file qualities, different releases, from different countries. But the web goes deeper still: for example, ‘topsites’ are highly secretive websites that host illegal content, uploaded by online groups and couriers who vie to be the first to release new films, games, and music. From here, content trickles down to private and public torrent sites, and eventually into the hands of the average internet user.

But while corporations are concerned with the expanding illegal trade of music and film on the internet, police and governments are more preoccupied with the darker side of the Deep Web: drugs, hacker groups, child pornography distribution rings, and domestic terrorism. While selling drugs on the internet arguably provides more security than selling them on a street corner, high profile crackdowns on groups hosting illegal websites have forced agents in the online black market to find more innovative ways to distribute products and transfer currency. Paper trails don’t disappear on the internet, and there are many ways for the legal system to keep track of an individual’s financial and usage records.

Mining Bitcoins uses more RAM than your Macbook can handle.

This is where Bitcoins come in. The Bitcoins system caps the total number of potential Bitcoins at 21 million, to guard against inflation and ensure a rising currency value. New Bitcoins are constantly entering circulation at an exponentially decreasing pace in order to keep supply in a rough equilibrium with demand. It becomes harder to produce bitcoins as time goes on, to ensure their stability.

Currency is transferred in the same way as an electronic bank transfer – numbers change, and suddenly there is less or more value in your account. Each transaction is encrypted so users remain completely anonymous except to one another. This anonymity is what makes Bitcoins so appealing to owners of websites dedicated to illegal trade.

But this system isn’t devoid of fault. Online currencies like Bitcoins have always had to contest with a major issue: ‘double spending’. As online currency units are just pieces of data stored with users and/or on the net, they’re susceptible to cloning, an act whereby users spend the same currency units multiple times. A central institution to ensure the validity of transactions would remedy the problem of ‘double spending’, but would also allow the institution to keep track of transaction records and store the identity of users, which would compromise the anonymity of users and defeat the entire purpose of the project.

Bitcoins are unique in that they overcome this obstacle by using peer-to-peer technology to apply a kind of ‘peer-review’ process for ensuring the currency’s integrity. A network of computers runs a program that can recognise whether previous Bitcoins- tagged with a specific code – have already been spent. This network can block a transaction if the specific code has already been used. This way, Bitcoins do away with the necessity of a central bank to regulate the integrity of the currency while maintaining transactional security and anonymity.

The initial popularity of Bitcoins can be largely traced to the context in which they were first created. In 2008, Nakamoto and many of his peers were dissatisfied with the banks. Global financial crises, super-profits, and corporate power had created an atmosphere of distrust of the financial sector and its unprecedented power over individuals through the corporatisation of everyday life. Many saw the dominance of banks as a major global issue, with their independent power to regulate the value of money behind closed doors, as a threat to democratic principles.

In response, the anarchic side of the internet formed a narrative of participatory counterculture that drove individuals, like Nakamoto, to pursue a system that would bypass the corruption they saw in society. In Nakomoto’s own words: “The central bank must be trusted not to debase the currency, but the history of fiat currencies is full of breaches of that trust. Banks must be trusted to hold our money and transfer it electronically, but they lend it out in waves of credit bubbles with barely a fraction in reserve. We have to trust them with our privacy, trust them not to let identity thieves drain our accounts.”

Bitcoins rode the wave of countercultural movements like Occupy Wall Street and Anonymous, which were all either formed or popularised by the prevailing opinion that global finance was a rigged game. Bitcoins became a countercultural motif as organisations like LulzSec, a group of hackers who use their skills to shut down the websites of groups they consider authoritarian or immoral, began using Bitcoins both to avoid having their activities traced as well as to show their disapproval for fiat currencies.

The infamous Silk Road, an online drug bazaar, also uses Bitcoins to keep their users – and the sites managers – safe from international drug enforcement agencies. Silk Road, too, carries with it a moral agenda; when asked about possible deaths resulting from the use of drugs bought on Silk Road, the site’s administrator responded by saying, “it is [our] sincere hope that by making drugs available in a safe, secure, and predictable way, that we will eliminate the violence and danger of obtaining and using drugs through traditional methods.” They cited their refusal to allow the listing of child pornography, hitman services, counterfeit documents, and credit card fraud as an example of their moral agenda.

Online communities tend to form around private and secure illegal trade websites and the countercultural narratives that support them. Music file sharing communities often discuss the unfairness of major record labels keeping the majority of profits for themselves, while many of their users still refuse to download music by artists on independent labels. Similarly, Silk Road users often see their transactions as a political message against drug criminalisation and the war on drugs.

Bitcoins’ potential can be highlighted by the animosity from governmental agencies: the FBI penned a document called “Bitcoin Virtual Currency: Unique Features Present Distinct Challenges for Deterring Illicit Activity” that outlined how Bitcoins can be used for money laundering and illicit trade, admitting: “Despite the virtual nature of Bitcoin, users value the currency for many of the same reasons people trust Federal Reserve notes: they believe they can exchange the currency for goods, services, or a national currency at a later date.”

The FBI document, unclassified but leaked through news sites like Wired, also notes that the dangers of Bitcoins extend to users themselves. Much like any other currency, Bitcoins are susceptible to theft – however, unlike fiat currencies, there exist no central institutions to provide currency insurance to their users. There is also a threat of compromised anonymity for semi-illicit activities, or an increase in security for users, to the point of seriously inhibiting law enforcement’s ability to police incidents where Bitcoins are used for hitmen and child pornography. While Bitcoins can be used to drive an agenda of resistance, those with more unethical aims can also exploit them.

The economic theory behind Bitcoins is relatively sound, albeit unique in that it artificially attempts to limit inflation by making it exponentially more difficult to ‘mine’ each successive coin. One might ask: “What if we all agreed that rocks were a currency, wouldn’t that make rocks valuable?” But Bitcoins are able to overcome the obvious flaw in such a proposal (too many rocks) by making it progressively harder for the people who ‘mine’ Bitcoins to find the next ‘valid’ coin. Thereby they artificially strangle supply and maintain a stable currency value – provided, of course, that demand either increases or remains static.

Don’t get the wrong impression from the term ‘mine’: there is no physical labour involved in the acquisition of Bitcoins. Instead, enormous, exorbitantly expensive, and ludicrously powerful processing computers are bought by the kinds of people who want to use Bitcoins and set to the task of finding usable coins. The cost in electricity and computational resources, as well as the massive amount of heat generated by mining setups makes them utterly economically unfeasible for anyone who isn’t receiving free electricity in a secure environment. Further, the increased demand for power and incredible heat in the server rooms are the same signs that law enforcement agencies look for in identifying and raiding marijuana grow-operations. If you want a picture of the reality of Bitcoins, picture a network of hyper-nerds, holed up in IT company boiler rooms and Russian bunkers, expending thousands of dollars worth of electricity in a fevered and desperate effort to get to at that one, last coin.

For those who still want to use Bitcoins without going to the effort of mining them, there is another, seemingly easier way to acquire the currency: theft. In March this year, hackers broke into the servers of the site Bitcoinica, an online Bitcoin broker and made off with $87,000 worth of the currency, prompting site operators to shut down trading in an attempt to lock the gate after virtual thieves had already made off with the horse. This came in the wake of an earlier theft, at the beginning of 2012 when thieves made off with over $210,000 dollars worth of BTC (as the currency is called). Over a quarter of a million dollars in online currency has been stolen from this one website alone and there is no avenue for recourse by users because of the decentralised, non-fiat nature of Bitcoin. In fact, some internet users have pointed out that technically, under the law, stealing Bitcoins does not even qualify as larceny, it’s closer to intellectual property theft.

If an individual navigates the pitfalls of theft, prohibitive costs and police intervention into their Bitcoin “grow-operation”, they then have access to a colourful and varied online marketplace of vendors who accept the coins as currency.

Unfortunately, many of the vendors’ descriptions read like this:

Education of the Noobz: Lossless downloads of lo-tech Homecomputer music and mixed live recordings from Dragan Espenschied, member of Bodenständig 2000. ASCII shopping cart interface. Martial arts clothing, weapons and equipment from Free worldwide shipping, specializing in clothing, books, DVDs, gifts and weapons for Karate, Bujinkan Taijutsu, Judo, Aikido, Masaki Ryu, Shurikenjutsu, Kenjutsu, and general Budo.

Fortunately, the only people who will know what any of those words mean are the same people who will spend thousands of dollars on computers to make online currency. Therein lies the central problem with Bitcoins: after Occupy Wall Street faded into the countercultural limbo and the central banks were no longer the enemy, the majority of the Bitcoin community faded away as well. This left behind only the most hardened adherents to internet culture, and only their particular interests. Bitcoins are progressively becoming a more and more specialised service for buying more and more specialised products. This is also due in part to the fact that very, very few reputable goods and services vendors will accept payment in Bitcoins.

And so we come to the central irony of Bitcoins: while their adherents call them the perfect free-market solution to a corrupt and bloated system of fiat currencies, the free market itself roundly rejects them based on their comic instability and inherent inability to be backed by any sort of sociopolitical clout. Unfortunately for the serious users of Bitcoins, you can’t build a new financial empire on social awkwardness and libertarian pipe dreams alone.