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Bitcoin Is Dead — Long Live Bitcoin

Bitcoin's turbulent year has put the cryptocurrency's future in doubt, but its potentially revolutionary tech underpinning is here to stay.
Photo by Steve Garfield

The Japanese Bitcoin exchange MtGox, which shut down after losing $350 million in Bitcoins to hackers last month, just revealed that it found some of them — 200,000 Bitcoins worth $116 million were discovered in an old-format digital wallet that the firm thought was empty. It happens.

As Bill Maher recently joked, when you invest your money in virtual currency, don’t be surprised when it virtually disappears. Or reappears, for that matter.


It's been quite a year for the nascent cryptocurrency. Newsweek's supposed outing of Bitcoin founder Satoshi Nakamoto earlier this month led to a surreal media frenzy in LA during which journalists and paparazzi chased the 64-year-old model train enthusiast through the city. He denies he's the Bitcoin creator, and has hired a lawyer in his quest for a retraction.

Last October, the Bitcoin-powered black-market site Silk Road was shut down by the FBI, who also arrested the site's alleged owner, Ross William Ulbricht, a.k.a. Dread Pirate Roberts. The site had reportedly been making tens of millions of dollars in commissions and was attracting almost 2 million visits a month.

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At the same time, high-profile Silicon Valley venture capitalists have been buying up Bitcoin startups. The firm Andreesen Horowitz invested $30 million in a Bitcoin wallet company called Coinbase, and — not coincidentally — Marc Andreesen emerged as one of the biggest proponents for the mainstream promise of Bitcoin.

Governments around the world are taking notice. In the United States, Canada, Norway, and Japan, regulatory committees are attempting to categorize Bitcoin and figure out how to fit it into existing financial systems. Is it a currency or a form of barter? Should it be treated like Linden dollars in Second Life, or as an illegal currency? Should transactions be taxed and regulated? So far, few regulatory bodies have come up with any answers. New York Senator Chuck Schumer labeled Bitcoin a form of money laundering, and called on the Fed to shut it down.


The fact that online drug dealers, Silicon Valley VCs, the FBI, and financial oversight committees in countries all over the world are equally interested in Bitcoin is fascinating. But their interests are at odds with one another — which will quite possibly spell the end of Bitcoin.

For investors, the closing of the Silk Road was great news. It was a step toward what they saw as legitimacy.

For starters, there's the growing divide between those who want to use the currency as a libertarian weapon against governments and established financial institutions, and Silicon Valley VCs who want to make Bitcoin a legal means of exchange by normalizing it within State control. Governments find themselves somewhere in the middle.

Bitcoin was imagined and conceived in radical and deeply ideological opposition to State power. Early advocates of Bitcoin considered themselves crypto-anarchists, a term first coined by engineer-turned-author Tim May in his 1988 "The Crypto Anarchist Manifesto." It refers to the state of lawlessness that could arise from the widespread adoption of encryption technologies. May saw the potential for increased privacy and individual freedom in the use of encryption, and believed it could be used as a means of liberation against government control.

Bitcoin was born out of this distrust of institutions. Instead of allowing governments, central bankers, and financial institutions to control currency, Satoshi Nakamoto — there is still no consensus on who he actually is, or if he's even a single person — built a system that allowed financial transactions to be guaranteed and tracked by a distributed network of computers solving complex math problems.


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To Ulbricht, Silk Road and the Bitcoins that fuel it are about citizens taking power — over currency and the free market — back from the State. The goal, he wrote in 2012, is to “challenge the powers that be and at last give people the options to choose freedom over tyranny…. The people now can control the flow and distribution of information and the flow of money…. Sector by sector the state is being cut out of the equation and power is being returned to the individual."

That's a slightly different take than Silicon Valley has. Investors like Andreesen see Bitcoin as the future currency of the internet, one that allows the simple exchange of value across boarders, undercuts the costly hold the banking sector has on online payments and transfers, and provides a native currency for the internet of things — imagine your washing machine paying its own electricity bill. In very simplified terms, they want Bitcoin to be the next Paypal, only better. And they want an IPO.

The good news for crypto-anarchists, and the bad news for governments and investors, is that the fate of Bitcoin is largely irrelevant.

To accomplish this, however, Bitcoin must be brought within the regulatory control of the State. Governments must sanction its use, tax it, control its international flow, and crack down on illegal markets. So for investors like Andreesen — who recently pledged to invest hundreds of millions more in Bitcoin — the closing of the Silk Road was great news. It was a step toward what they saw as legitimacy.


Thing is, the characteristics that make Bitcoin so powerful, such as its anonymity and decentralized network, mean that it is also very difficult to control. The same technology that facilitates illicit transactions will also underlie legal ones. And so if governments can only enable the "legitimate" use of Bitcoin by also effectively enabling its illicit uses, they're extremely unlikely to support Bitcoin's normalization. And without this support, Bitcoin as a mainstream currency is doomed.

The good news for crypto-anarchists, and the bad news for governments and investors, is that the fate of Bitcoin is largely irrelevant. If it were to disappear tomorrow, then any number of new cryptocurrencies using similar technologies could and would emerge in its place. What's important about Bitcoin isn’t the start-up ecosystem that is being built around it, or the debates in governments and law-enforcement agencies about its use. It's the technology.

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Bitcoin is based on two interrelated innovations. First, the idea of "currency mining," whereby participants in the network provide computational power required to solve the complex math problems that allow transactions to be guaranteed. Second, a decentralized and anonymous means of transaction verification. And so, when a user's computer solves the math problem, the user is at once verifying a transaction and being rewarded for the use of his computing power with Bitcoins, ensuring a slow growth of the total coins available.

This combination of encryption, mining, and decentralized verification makes Bitcoin potentially powerful and difficult to control, but governments do have tools at their disposal that could make it all but impossible for Bitcoin to become widely adopted. (Congress could enact laws, for example, that would all but remove Bitcoin from US online commerce.) And so Bitcoin may very well die. But the widespread proliferation of cryptocurrencies almost certainly won't — and that no doubt makes governments very nervous.

Follow Taylor Owen on Twitter: @taylor_owen

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