In 2008, the world-renowned computer security specialist, Dan Kaminsky, identified a critical flaw in the Internet’s Domain Name System that would have potentially allowed any highly skilled coder to hack and bring down the World Wide Web. Fortunately, Mr Kaminsky worked alongside governments and major technology companies to patch this weakness. Several years later, Kaminsky tried cracking Bitcoin, a cryptocurrency existing purely in the virtual world, a feat presumed much simpler than his discovery years before. The task proved impossible, the code was impregnable, even for the man capable of hacking the world’s information source – thereby solidifying Bitcoin and its still-unknown creator as a force in the world of cryptocurrencies.
Since Bitcoin’s inception after the global financial crisis, scores of cryptocurrencies have been derived from its open source code. Despite its growing popularity and intrigue, the actual meaning of “cryptocurrency” is a source of confusion and is often mistaken for other non-controversial online currency and payment systems (for example PayPal).
Cryptocurrencies are often incorrectly compared to virtual currencies, which are commonly used in venues, for example video games, to purchase items for sale in the game’s fantasy marketplace. These virtual currencies are centrally controlled by the games’ developers and do not have any value outside of their respective gaming world.
Digital currency, on the other hand, is currency that lacks a physical existence and instead only appears in the virtual world, but can be used to purchase goods and services in the “real” world. Much of our money supply is now digital and is recorded in highly-secure bank computers. Some sources claim that less than 1/10th of the world’s money supply is actually physical paper or coin money.
Bitcoin and similar currencies, Quark and Dogecoin for example, take digital currencies one step further. Although they are digital in nature, they are not considered legal tender and exist as an unofficial, and widely illegal, alternative to hard currencies like the dollar and the euro. They also have the unique feature of encryption to ensure that every transaction is entirely untraceable, often facilitating illicit use such as narcotics trafficking and money laundering. It also ensures that each Bitcoin can only be used at one time as each coin has its own unique code, eliminating the possibility of fraud.
To obtain these cryptocurrencies, computers “mine” for coins by connecting to peer-to-peer networks similar to those used for sharing pirated movies and music. Coins are awarded to the most powerful computers, and become increasingly more difficult to mine as the number of available units diminishes. The currency’s encryption limits the number of possible units, so once all coins are mined more cannot be created.
It is this demand for limited currency units that sparked Bitcoin’s creation, the world’s first cryptocurrency. It’s creator, though anonymous, has stated his or her intention to create a currency insulated from government interference in its value. Unlike currencies controlled by international institutions, it’s impossible to simply “print” additional Bitcoins, as many countries do to increase their money supply, often leading to inflation. For example, Zimbabwe printed so much money that it experienced hyperinflation, leading to a nearly 80 billion per cent inflation rate in 2008.
The idea of cryptocurrency remains a relatively new concept, one with unpredictable implications that many of us are still struggling to understand. As it is something we have never faced before, there are many uncertainties that lie ahead, namely establishing a regulatory framework.
For currencies to be “common currency” they need to have liquidity (ie there is sufficient flowing to support transactions) and ubiquitous (ie accessible to all). It’s difficult to say when or if consumers and merchants will widely accept cryptocurrencies, but we are witnessing the very beginning of this unfolding as ShapeShift, the first cryptocurrency trading app, launches in the Apple store this week, whilst in parallel an increasing number of retailers are beginning to accept Bitcoins. Bitcoin ATMs are even being experimentally introduced in select areas.
As the market continues to develop, the future of cryptocurrencies will become clearer, but for now their future remains as mysterious as their creator. However, as we continue to embrace the digital era, what is certain is how we create, store, manage and distribute data will be of critical importance. Are institutions prepared to support today’s data points let alone new cryptocurrency data points? Not all are and so investment in data architecture, data infrastructure and data management will continue to be a priority.