Bitcoin

by Mehrdad Falsafioun and Greta Laage,
PhD candidates at Polytechnique School of Montreal

2008. While the most financial crisis since the Great Depression is having a direct impact on most of the developed countries, the mysterious developer Satoshi Nakamoto whom real identity has not yet been discovered introduces Bitcoin, the first digital currency to the world. Besides Nakamoto’s identity, what is hidden behind what has been called the digital gold?

When it appeared, Bitcoin was a new ultra-secure online payment method, anonymous and on the fringes of standard banking systems. Within 3 years dozens of millions of people were using it for their daily transactions. The main innovation of the Bitcoin network is a decentralized electronic money system whose bitcoin, the unit of account, does not exist physically. There is no central authority and no one can control it, neither governments nor private organizations. The proper functioning of the exchanges is guaranteed by a general organization that everyone can examine because everything is public: the basic protocols, the cryptographic algorithms used, the programs making them operational, the account data and the debates of the developers.

The Bitcoin network can be drawn as a gigantic accounts book shared to everyone that contains all accounts and their balance. It has been designed to self-regulate and in a limited quantity: no more than 21 millions of bitcoin units can be created thus preventing from money supply increase. Some estimations showed that all bitcoin units will be created before 2140. Consequently, its price depends only on offer and demand.

The real history behind

In the 1990s, the first concepts of virtual currencies (Ecash, digicash, bitgold) were born, based on cryptographic protocols. These experiments failed one after the other, due to their lack of reliability in terms of transaction control and protection against fraud.

In 2008, a mysterious developer, only known by his pseudonym, Satoshi Nakamoto, posed the concept of the bitcoin. It's great innovation, which will make the difference, is to operate through a cryptographic chain of evidence system, which makes the currency unalterable and not dependent on third parties.

The following year, in January, the first 50 bitcoins were created and the open-source software for their creation was gotten available. First confined to a small group of users, virtual currency develops beyond the small world of crypto-geeks.

A mystery always hangs over this creator, who in 2010 disappeared from the canvas as he appeared there. No one knows his true identity, and many disciples make assumptions about his existence. Is it really possible that a single man created such a complex program? Perhaps it is a group of developers or a government agency type NSA? Google? Last year, Newsweek evoked a certain Dorian Satoshi Nakamoto, a 65-year-old American engineer. But this one denies any participation, and the mystery remains whole, taking part in the legend bitcoin ...

The explosion of the Bitcoin phenomenon

In 2011, the bitcoin gradually came out of anonymity following the increase in its price. While a Bitcoin was worth only a few cents in 2010, in June 2011, its exchange rate exceeded 31 dollars, before falling back sharply. On November 27, 2013, thunder on the financial markets: it exceeded 1000 dollars!

Even if this remained marginal, more and more websites and even worldwide companies were beginning to accept payments in bitcoin: from the US website Expedia to the Japanese Rakuten.  Ebay announced in 2014 that it will accept them in 2015, a university in Cyprus now allows the payment of registration fees in bitcoin, and a Norwegian student bought an apartment with his precious pieces.

 From a monetary ideal to a speculative bubble?

For some, the bitcoin represents the pinnacle of the liberal ideal: a decentralized currency, independent of any state or institution. For others, it's a fantastic digital experiment. However, for some sceptical economists, Bitcoin cannot be a stable solution due to its high volatility. Yet, it has also become a new Digital Eldorado, a new kind of investment vehicle. What is certain is that its applications are still far from having been all found.

Thanks to this success, several other crypto-currencies have since emerged, such as Litecoin, Peercoin, Dogecoin, Darkcoin or Namecoin. The 10 main currencies in circulation represent 10 billion euros.


References

1- Nakamoto, Satoshi (October 2008). "Bitcoin: A Peer-to-Peer Electronic Cash System" (PDF). bitcoin.org. Retrieved 28 April 2014.

2- Nermin Hajdarbegovic (7 October 2014). "Bitcoin Foundation to Standardise Bitcoin Symbol and Code Next Year". CoinDesk. Retrieved 28 January 2015.

3- Davis, Joshua (10 October 2011). "The Crypto-Currency: Bitcoin and its mysterious inventor". The New Yorker. Retrieved 31 October 2014.

4- Cuthbertson, Anthony (4 February 2015). "Bitcoin now accepted by 100,000 merchants worldwide". International Business Times. IBTimes Co., Ltd. Retrieved 20 November 2015.