Nobody knows, but it's expensive
Material posted: Publication date: 04-04-2013

One of the best ways to make money in the last couple of weeks was investing money in "bitcoins" — a virtual currency that since mid-March has risen from 47 to 150 dollars. The rapid growth rate in the same volume of calculations testifies to inflate the next bubble, but the flow of wanting to buy "bitcoins" does not dry out. Supporters of the virtual currency refute the accusation of creating another financial pyramid, but someone will lose their money when the bubble bursts.

The current world monetary system was formed by the results of three key events of the twentieth century: the gold standard in the United States (1933), the conclusion of the Bretton woods agreement, which gave the dollar the status of a world reserve currency (1944), and then the US refused to exchange dollars for gold (1971), marked the end of the Bretton woods system.

Now the value of a currency is determined on the free market. This has several disadvantages. For example, States may understate the rate of the national currency, and the exporting countries gain a competitive advantage in the translation of foreign revenues into the national currency at a higher rate get more money. Artificial control of the exchange rate does not suit other States that are trying to support exporters and triggers a currency war. In addition, the current monetary system is blamed for the unchecked ability to print money.

Enthusiasts around the world are scratching their heads over how you can change the existing monetary system. Many are encouraged to return to the gold standard — he allegedly would be able to give paper money value is valid. Another suggestion (closest to the gold standard) — the introduction of virtual currency.

The idea of creating electronic coins, the so — called "bitcoins", which was positioned as sort of the gold standard, is as economically questionable how beautiful from the point of view of programming. Development of a system for Bitcoins started in 2007 and launched it in 2009. the Author of virtual currency is a Satoshi Nakamoto (Satoshi Nakamoto). Live it no one has ever seen — apparently it's a pseudonym, behind which may be hiding as one person or a group. Journalists tried to find out who actually is the developer of the system, but this has failed.

In search of the Creator of "bitcoin" was used a lot of specialists. The researchers came to the conclusion that the author of the system programmer with excellent knowledge of English. There are several versions as to his identity. Now the most probable is the hypothesis, put forward by journalist and linguist Adam Penenberg. The Professor had deduced from the texts of Satoshi Nakamoto a specific phrase (computationally impractical to reverse) and found that on the Internet it occurs only 26 times. Most of them are copies of the source code. Exactly the same phrase, Penenberg met in the application for patent Updating And Distributing Encryption Keys, which describes the kind of cryptographic system operating on the principles close to the functioning of the system "bitcoin". The application was filed on 15 August 2008, and three days later was a registered domain The authors of the application are Neal king, Charles Bry and Vladimir oksman, his involvement in the creation of "bitcoin" deny.

The basic principle of Bitcoins is constant the calculation of the encrypting function. A user wishing to create new "bitcoins", you need to install on your computer a special software. Initially, the program even had a button "generate new bitcoins", but then it was removed, since the power of a conventional computer ceased to satisfy the requirements of the system. Now to generate new coins Internet users in groups.

The process of creating a new "bitcoin" is called "mining" (from the English. mining — mine development, mineral extraction). The basis of mining based on cryptographic algorithm SHA-256, representing a hash function (turns data into a bit string).

The producer of "bitcoin" or "miner", substitutes the values of variables and loops through the results of a hash function c frequency a million times per second in hopes of getting a result, less of a particular algorithm threshold. When the desired result is found, creates a new numeric code (example block). It checks all the nodes in the network, and if the solution is indeed correct, the miner is awarded 25 of "bitcoin" (first it was 50). Thus are issued the new e-coins (the technical side of mining are described, for example, here).

No practical benefit from "mining" Bitcoins outside no, its only purpose is to ensure that the system and its security. The network is open to all comers. When a new user connects, he gets the load in several gigabytes of information, checking of previous transactions that are also stored as blocks of digital code. Subsequently, the blocks are arranged in a chain (sort of the history of the "life" of each bitcoin), and for proper operation of the system it is necessary to determine the validity of a chain.

Assume that the addresses A, b and C that belong to the user-swindler. The attacker decided to use their "bitcoins" twice and created two chains of transactions D and E. It transfers money from address A to address B, receiving the chain D, and then puts the same tools from A to C, receiving the chain E. Then for the same two chains, the money is transferred unsuspecting F and G. If the victim of the fraud will decide to get rid of "bitcoin" on the exchange (Mt.Gox), selling them beyond the usual dollars, euros or another currency, then one dismayed to learn that his fake virtual coins since block chain is invalid.

New "miners" load chain verification just in order to prevent similar incidents. Simply put, miners get a reward in the form of new "bitcoins" that serve the system. Thus the developers have killed two birds with one stone: find a constant source of computing resources to process transactions and created a programmed algorithm to generate "bitcoins". Although the mechanism of emission, it was possible to come up with another.

График создания новых «биткоинов»
Schedule the creation of new "bitcoins"
Image: Wikimedia

The release of new virtual coins is limited. Now in circulation is nearly 11 million "bitcoins", will be released no more than 21 million. With the growth of the emissions, the complexity of solving the above mentioned task increases and the reward decreases. The generation of new bitcoins will be exponentially (see graph).

The algorithm is constructed so that a new block is created in the system on average every ten minutes, and the reward is halved after every creation of 210 thousand units. Thus, the emission will be reduced by half approximately every four years, and the process of generating new coins will be completed by about the year 2140.

The ultimate goal of numerous calculations and spending effort is the establishment of a free and decentralized monetary system. Bitcoins adherents believe that "bitcoins" are a free currency with no governing center — no one has a right to print money or to limit their offer. Economists also refer to the new system with skepticism.


The bubble, the pyramid or the currency of the future

The main claims that economists put forward to the "bitcoins" generally boil down to the fact that this currency is, in their opinion, is nothing like a soap bubble. Just look at the dynamics of the course the virtual coins — and statements about the illegal revaluation of "bitcoin" will seem quite reasonable. The value of the virtual currency increases due to speculation, while the volumes of its actual use for the trading remain the same.

График стоимости «биткоинов»
 Graph the value of "bitcoin"

During the first six months of trading (the stock exchange opened in July 2010) in one "bitcoin" gave less than a dollar. In early 2011 the value of virtual coins began to grow and by June reached a peak of 35 dollars. By the end of that year there was a collapse — the bubble burst, the rate falls to 2.5 per dollar. By the beginning of 2013 the currency has increased to $ 15. Then there was an unprecedented leap — electronic coin has risen by almost ten times. As of April 3, one "bitcoin" gave more than 140 dollars. Growth strongly accelerated in the second half of March amid the Cyprus crisis.

There are no objective reasons for a rise in price of "bitcoin", except the growth of speculative demand. You can talk about similar characteristics of gold — rare, limited inventory, safety, but the precious metal is at least one significant difference — the value of jewelry. New virtual currency accused of lack of collateral. "Gold also does not assured, but appreciated all over the world," the answer is the supporters of "bitcoin". In their view, dollar and Euro are the same bubbles as "bitcoins" (this argument, however, is untenable: the dollar and the Euro are mnogomillionniy economy, and for "bitcoins" — while some only ambition).

The second major argument against the use of "bitcoins" — the similarity of the system with a pyramid scheme. Supporters of the new currency reject these accusations, explaining that "the miners" and users virtual coins no promises of profit, as in the pyramids. However, "bitcoins" give someone money. For example, the holder 100 coins could get for them more than 12 thousand dollars (average exchange rate on 3 April at 20:00 Moscow time is 125 dollars for one "bitcoin").

Head Gavin Andresen

Another drawback of "bitcoin", like any other asset with a limited supply, deflation. The currency grows in value, so its holders have no incentive to spend. Let us illustrate it on example phone. Suppose that in the spring of 2011 he was worth a thousand dollars, a course "bitcoin" was then two dollars — which was worth 500 "bitcoins". By the beginning of 2013 there was little inflation, the price increased to $ 1050. By this time the course "bitcoins" jumped to $ 15. So the price is denominated in a virtual currency amounted to 70 "bitcoins".

In the result, we get deflation, which is disastrous for the economy: consumers do not spend money, demand for goods falls, prices decline, businesses suffer losses and are forced to cut production, lay off employees and reduce their salaries. However, supporters of "bitcoin" believethat the untwisting of a deflationary spiral will be avoided, because one unit of the new currency can be divided into 100 million parts — that is, if desired, in the end, you will receive 21 million, and about two quadrillion "bitcoin".

In the heat of a dispute about e-currency journalists and economists often switch to other more global issues. Harmful actually deflation for the economy? Do I need to return the gold standard? Can function normally the currency without the control center?

On the one hand, that "bitcoin" can become the digital equivalent of gold, really hard to believe. On the other hand, we know already enough examples of how the second plan depart of technology, once considered revolutionary: a fixed (and now even mobile) telephony, rail, CDs. It is not excluded that the future of "bitcoin" now it is doubtful just because of the potential threat that they pose to the financial world. In the current monetary system is intertwined with too many interests, and a virtual currency looks like a toy that bankers and government regulators allowed at the time — until then, until you deem it too dangerous for themselves.


Tags: financial center , crisis , finances