The rise of bitcoin
The rise of bitcoin
Homemade Money Pseudo-currency Bitcoin has been all over the news for months. But what is it? Who uses it? And will your corner shop be taking it any time soon? Dan Griliopoulos investigates
Y
ou’ve probably heard of Bitcoin, yet you probably have only a vague idea what it is. You’ve no doubt seen a lot of news stories about it; after all, second only to the boom in Bitcoin prices has been the boom in news stories about the Bitcoin. Yet very few of them explained much about the technology. So what is Bitcoin, and why does it matter? The history of the currency is straight out of cyberpunk fiction, and could easily have sprung from the pages of William Gibson’s Neuromancer or Neal Stephenson’s Cryptonomicon. A 37-year old Japanese cryptology specialist, Satoshi Nakamoto, came up with an idea for a new currency. It would be based not on a tangible standard, like gold, or a standard driven by economic power, like the dollar, but on something far more 21st century: pure computational power. The complete transaction history of Bitcoin is protected by the constant solving of complex mathematical problems. These intensive computing tasks are undertaken by a distributed network of thousands of computers around the globe, a peer-to-peer system much like the one that distributes BitTorrent files. What that means in practice is that all the computers around the world running Bitcoin software each contain ‘the blockchain’, a copy of the history of all Bitcoin transactions and of the life of each of the possible 21 million Bitcoins. Each computer running the Bitcoin software – called a ‘Bitcoin miner’ – keeps the transaction list up to date by encoding it using complex cryptography. ASIC miners, the most up-to-date custom hardware, can crunch through Bitcoin’s programming problems more cheaply than anything else
140
october 2013
| COMPUTER SHOPPER | Issue 308
Issue 308 | COMPUTER SHOPPER
| october 2013
Occasionally, as a by-product of this cryptography, these computers are given new Bitcoins, which rewards them for doing this work. This ensures that enough computational power is aimed at the continuation of the blockchain that it would be nearly impossible for anyone to hijack the currency using superior computing power. Even if they did, they would own so many Bitcoins themselves that it wouldn’t be in their interest to do so. Once you’ve mined Bitcoins, or bought some online from someone who has – which is as easy as buying foreign currency or using PayPal – then you can spend them on all sorts of things, buy a pint of beer in some pubs via an app, or order illegal drugs to be delivered to your door using just a web browser.
Old money
Like any good Cyberpunk novel hero, Satoshi Nakamoto seems to have never existed. There is no-one of that name and age in Japan. Investigations by the New Yorker and Fast
Company found possible suspects for him, but their evidence is circumstantial. Nakamoto, to all intents and purposes, made the currency and vanished. He handed his project over to a few fellow cryptography fiends, including current Bitcoin head Gavin Andresen, and evaporated like morning dew. It’s notable that neither the cryptography nor the concept of a virtual currency were original. Cryptography pioneer David Chaum described the first anonymous cryptographic cash system in 1982, later creating ecash in 1990. Other currencies such as Bit gold and Reusable Proofs of Work even followed the ‘proof of work’ system that Bitcoin would later use. So the idea didn’t spring from nowhere into the fantastical Nakamoto’s head; it was something that had been discussed, on and off, for nearly 20 years. But Bitcoin is not an easy technology to understand. Is it a real currency at all? Dr Eyjolfur Gudmundsson is lead economist for Eve Online (www.eveonline.com), an online game that uses its own internal currency, ISK. He thinks the question is nonsensical. “Virtual currency is already a real currency, and all real currency is really just virtual since the value of a currency is in the minds of those that use that currency. “So let’s rather talk about electronic currency versus hard cash,” he continued. “Already more trade is done electronically than in real-life cash, so even real-life cash has become an electronic currency as well. In fact, there is no difference between virtual and real-life currency. So the question should rather be: when will a virtual currency become just as important and valuable as real-life currency in the mind of the consumer? This trend is happening right now and will only continue to grow in the next five years.”
141
The rise of bitcoin
Dr Stuart Jeanne Bramhall, who operates a global virtual barter-currency (https://www. community-exchange.org), agrees: “97 per cent of the US dollars that circulate are virtual; only about three per cent exist in the form of paper currency and coins. When you deposit $100 in a bank, the bank doesn’t lock your $100 in the vault. They just record in their computer system that they owe you $100.”
New money
Vitalik Buterin writes for Bitcoin Magazine. “Bitcoin was not the first form of digital payment, but it was the first decentralised digital currency that exists only on the internet,” he says. “Those extra attributes are important: the fact that Bitcoin is independent of the legacy banking system or any physical material (such as gold) means the barriers to entry and the costs for dealing with it are much lower, allowing for near-zero transaction fees and letting startups design innovative technologies around it that would not be possible elsewhere. “The decentralisation aspect helps particularly on the regulatory side. Sergey Brin once said they had been talking about introducing a digital currency at Google, ‘Google Bucks’, but decided against it exactly because it would be too difficult from a legal standpoint.” With Bitcoin, control and ownership is distributed across the net, so just like BitTorrent it would be very hard, if
The rise of bitcoin
Most of the US dollars that circulate are virtual; only about three per cent exist in the form of notes and coins not impossible, for nation states to legislate against it with any success. Transactions are extremely safe. “The Bitcoin system is very secure,” Buterin says. “The closest the network got to being hacked was an incident in 2010 where an attacker was able to create 183 billion Bitcoins due to an integer overflow exploit, but the transaction was quickly reversed and the bug fixed.” The cryptography elements of Bitcoin are going to hurt your head (they certainly hurt ours). The system works by generating a tough computing problem, which it estimates will be solved by the entire Bitcoin computing network in a given period (this is usually
around 10 minutes). As the computing power aimed at Bitcoin mining increases, so the problem’s complexity is automatically increased. The computer that solves the problem is rewarded with a number of Bitcoins (25 at the moment, though it halves every four years) and the cycle begins again. This process is called mining because, like mining in the days before effective geological surveys, it’s a matter of brute force; you dig as much as you can to make sure you get something out. The problem being solved also generates ‘the blockchain’. As we mentioned earlier, this is a history of all the transactions of Bitcoins since the last update, which all mining computers have a copy of. For a standard PC running the Bitcoin client, your chances of solving the problem in time are tiny; we estimate the average time for an average PC to mine its first Bitcoin is about 13 years. Expensive and power-hungry parallel hardware does the job better – especially GPU hardware – and the first entirely Bitcoin mining-specific hardware has just appeared, which is far more efficient. Most individual users join pools, where their mining time brings smaller, but more regular rewards, or create their own Bitcoin farms, where they have many bespoke computers running the client at once. If you’re not using the bespoke hardware, though, it’s unlikely that you’ll be covering the cost of the electricity you’re using to run all that kit.
Walking the Silk Road
Meyer – not his real name – is a longtime Silk Road user. We talked to him about how it allows anonymous illegal purchases
142
How did you find out about Silk Road? Read about it on Wired, maybe. You have to use the TOR browser to use it, which has lots of built-in anonymising features. It masks IPs and stuff like that. I’m not too hot on all the technical stuff, but I understood it when I was learning to do it. The address changes every now and then.
Was it hard to set up? Bitcoin took ages to set up, downloading the full blockchain took four to five days, and my computer occasionally stuttered while it was doing it as it was using loads of system resources. It’s going to get harder as the years go by, as the blockchain is only going to get bigger and bigger. I try not to think about it too much, because I sort of understand it, but the more I think about it, the less I understand. It’s a bit too complicated.
What’s it like to use? It’s the best way to buy drugs. I’ve had good dealers and bad dealers, but I’ve never had this level of service. You use a fake name for everything, PGP encryption for sending messages, so only the intended recipient can read the message if they were to get intercepted somehow. It looks pretty basic, like a lot of e-commerce sites from the late 1990s. The search engine’s really basic and the range of categories of all the stuff you can buy is down the side.
How do you get your Bitcoins? I used to buy from Blockchain, but the banks stopped letting us use UK bank transfers. I wonder whether that’s because they thought, ‘this is dodgy illegal stuff we shouldn’t do’, as that doesn’t normally stop bankers, or was it more: ‘this is direct competition with our entire financial system; do we want Bitcoins to be a system that we’re supporting?’ I use Local Bitcoins now. You can use it to find someone in your area to buy and sell in person, but you can also do it online. I always
do it online. I just have the client running on my PC, the standard Bitcoin one. How reliable is the system? It definitely seems to work. I thought it was too good to be true when I first heard about it. It tells you how many transactions people have completed, what percentage have been fine and if they’ve had good feedback. Everyone can leave comments, how discreet the package was, whether it matched the weights, was it exactly what you were expecting. The sellers are motivated to give the best description of what they’re selling and give decent quality product because it’s going to affect their ability to make money down the line. Often the weight is slightly more than they’ve said it’s going to be, to make sure there’s no-one complaining. I’ve bought cheap stuff, but they make it clear. It’s definitely made me take things that I wouldn’t have otherwise have taken because I wouldn’t be sure of getting a clean supply, or at least going into it feeling better.
october 2013
| COMPUTER SHOPPER | Issue 308
Field Programme Gate Arrays can be programmed for specific tasks and networked via USB in huge numbers, ideal for Bitcoin mining
Show me the money
But why mine them at all? Well, assuming popularity is a form of success, Bitcoin has succeeded where other such new currencies have failed because it’s been supported. The key institutions are libertarian organisations such as Wikileaks and anarchist ones such as the now defunct super-hackers LulzSec. With the prospects of donations to organisations such as these fading as national banks around the world closed their accounts because of their quasi-legal nature, these organisations looked around for other donation methods. One of those they settled on was Bitcoin. These institutions didn’t popularise Bitcoin
Any bad experiences? The cheapest one I did was when I tried to buy an ounce of weed from a guy in Mexico. It cost £25, compared to seven or eight times that much in the UK. I bought it, and he said it was going to take a month to arrive. He had about 80 per cent feedback, with the rest of the people saying it didn’t turn up. I waited two months and no package arrived, and I got a friendly letter from the border force saying, ‘we’ve intercepted a package of yours because it contained drugs. If you would like to appeal this, here’s how you can get in contact with us’. The implication was that they weren’t going to do anything else. It wasn’t even my name, it was just my address. So I won’t be ordering from them again. But that’s the only package that’s not turned up, out of 15 or 20 orders. I rate that better than street dealers. And I knew what the risk was anyway, because of the 80 per cent. I assume he’s just throwing them in a bag. He’s not going to be running a really tight operation if his selling point is a really big bag of weed really cheap. I’d pay double if it was vacuum-sealed. So you don’t buy internationally much? It lists where it’s coming from on the site. I’ve felt more comfortable with UK ones, just in terms of the package turning up, because it doesn’t have to go through borders. In my head, that seems more secure. That would be
Issue 308 | COMPUTER SHOPPER
| october 2013
something a bit stronger than a pint. The most infamous of these is Silk Road, a marketplace that would not be possible without Bitcoin. Silk Road is an online marketplace where users can buy all sorts of illegal goods – banned books, prescription-only drugs, illegal drugs and, once upon a time, serious firearms, though those have now been removed. You won’t find Silk Road by Googling it. It’s somewhere between the Deep Web – areas of the internet not touched by search engines – and the darknet – the areas of the – that was down to Silk web that consist only of Road, more on which in a anonymised peer-to-peer moment – but they did connections, where those Bitcoins can be transferred by bring it to public attention, who want to hide from phone, but remember it’s best to so much so that bleedingsociety’s rules go, whether store the majority of your coins in edge companies such as political or criminal (and if separate wallets WordPress, OK Cupid and you have to hide your Reddit now accept it as a payment method. political views here, these days they’re likely Even a few coffee shops in the more to be criminal views, too). You have to use the techno-savvy parts of the world have started TOR anonymising browser and know the accepting it, and you can now buy a pint with address to even find it. Bitcoins in the east end of London: at the Silk Road users (such as Meyer; see Pembury Arms in, unsurprisingly, Hackney. the box below) use Bitcoin as a way of The darker side of Bitcoin is its use in anonymising their online purchases. The online marketplaces, where you can get technology supplies them with a way of
my line if I ever got caught: ‘I never bought it, it just turned up at my house’. Am I breaking the law by opening a package with someone else’s name on it? It’s not a major crime. And you’ve only bought drugs? Yes, I’ve not tried to buy anything else. You can get ingredients for making drugs, and equipment, fake IDs, forgeries… I’ve used prescription drugs I’ve got from there. When I signed up, the most recent blog post on there was why they’d decided to take the firearms section out. That was reassuring, I guess; I’d prefer there not to be automatic weapons. How many users are there? It’s hard to track how popular it is. A lot of the big sellers have got several hundred transactions under their belts. There’s a few that have a thousand or two. But there aren’t like hundreds of thousand of transactions. Some people will ask you to finalise early, so they get their feedback rating and money early. Some say ‘I require this for customers from other countries’. Some say ‘if you do this, I’ll give you slightly more’. It’s up to you, though. It’s not a good idea generally. Are there any difficulties? Well, it’s common sense to use a fake name. But that means if the postman comes with a package and you’re not there to sign for it, it
gets sent to the post office and you need ID to pick it up. So I always have to make sure I’m around to answer the door when I need a package. Because I wouldn’t just go and try to convince them, because [with] some of these packages, even when they’re vacuum-sealed, I’ve been able to smell the drugs on them. Are you scared of getting caught? The only way I can think of getting caught is if the Bitcoin security gets undermined. If that happens, they’re going to have hundreds and thousands of people who’ve been doing this. They’ll be some kind of amnesty or something. They can’t just arrest everyone. There’s talk of a US ban of Bitcoins. They can try and ban it all they like. How are they, in practice, going to do that? They could make its use illegal, but I don’t know how they could stop people using it. You can’t stop people sending emails. They’d have to ban anonymisers, which is a huge step towards an anti-libertarian state, where having anything you want to hide is illegal. I don’t connect with the political side of it; I wouldn’t call myself a libertarian. But I can understand the argument for economic systems being improved by having a currency within them that doesn’t have a government controlling it. That seems rational. But I don’t think it’s going to replace pounds sterling.
143
The rise of bitcoin
Bit-bot-net
Spending your Bitcoins may not be a security problem, but new crimes are popping up around the currency. If you’re an evil hacker with thousands of virus-infected computers at your disposal, you can just use your botnet to mine for you. Or you can do the same as an unscrupulous programmer at the ESEA eSports network did, and hide it in a piece of pro-gaming software, causing gamers’ computers around the world to operate at maximum capacity and sometimes burn out – all to mine Bitcoins for him. Richard Henderson is security strategist for the network security specialist Fortinet. “The hiding of the Bitcoin client inside the ESEA anti-cheating software is maybe the first time we’ve seen Bitcoin-based ‘malware’ inside gaming software,” he says. “What’s interesting about this specific incident is that gamers installed this client and allowed it to update itself automatically, which meant they had no way of preventing the [later] installation of the Bitcoin mining client.” Dmitry Bestuzhev, an expert who works for the major anti-virus firm Kaspersky Lab, is seeing a rapid growth in this monetisation of computer takeovers. “More and more cybercriminals try to build malware capable of mining Bitcoins, or stealing them from wallets or redirecting the victim to a fake website under a special technique called
A step-by-step guide to getting Bitcoins
Bitcoin production rate 160,000
600k
80,000
300K
140
2
Now you have to wait for the blockchain to download. This can take an awful long time; as much as a week at its current size. You can order the blockchain on DVD if you really want, but we’d recommend just waiting.
3
Once you’ve downloaded the blockchain, your computer is now mining Bitcoins. Now you need to create a ‘wallet’ (a folder in which the client stores your Bitcoins). Make a copy of the Wallet.dat file and store it on a thumb drive. If you lose the file, you lose all your Bitcoins.
4
If you’re interested in mining Bitcoins (something of a fool’s errand, given that it will cost you more in power to generate them than they’re worth) you can join a ‘pool’. These share computational power and share rewards. We’ll assume, however, that you just want money. Click ‘receive money’ and you’ll get the code for that wallet.
5
As discussed in the article, Mt.Gox is under threat from the US government, but it’s still the best exchange for swapping real money for Bitcoins.
‘Proxy auto configuration’, installed in the browser of the infected machine,” he says. Of course, botnets don’t cost the hacker anything compared to the bespoke hardware, as Henderson explains. “The issue with customised hardware built specifically for mining Bitcoin is two-fold: there’s the initial cost of the hardware, and then the ongoing cost of running the hardware. Botnets used to mine Bitcoin don’t have to take those factors into consideration: everything is paid for by the victim. On top of that, when we’re talking about botnets with tens of thousands of victims or more, it’s strictly a numbers game; solving problems to mine new
coins is effectively just throwing random solutions to a problem looking for a correct answer. [Having] more systems… ‘guessing’ means you’re just as likely to stumble upon a correct solution as someone with tailormade hardware.” Thankfully, it’s quite easy to spot when your computer has been ‘bitbotted’. “The CPU of such machines works hard,” says Bestuzhev. “The biggest risk is for users who just leave their machines on all day and go out of the house or go to sleep. Such unattended machines can then easily mine money for cybercriminals.” As Bestuzhev mentioned, ownership of a Bitcoin itself is potentially extremely vulnerable – after all, it’s simply a string of code on a computer’s hard disk. “When we manage an online banking account, the account itself and the database with the numbers are on the server side, the bank side. With the Bitcoins the situation is different. The wallet itself is stored on the hard disk, and this is a big risk.” Many users store their Bitcoins in USB drives, rather than on the computer itself – and standardised secure USB wallets are in development right now.
Dr Eyjolfur Gudmundsson is the lead economist in the popular game Eve Online. It’s his job to make sure the game’s virtual economy works to further the enjoyment of the players
But the largest burst of usage we’ve seen recently hasn’t been from those sorts of financial criminals, but the previously more respectable banks and private investors. Some of these may have been traditional panicked investors fleeing the stock market and
october 2013
| COMPUTER SHOPPER | Issue 308
Hash rate
280
1
The first thing you need to do is download a Bitcoin client. If you visit www.bitcoin.org, you’ll see the recommended clients. We’re going to assume you’re using the main Bitcoin client. Make sure you have at least 10GB free on your main hard disk, as that’s where Bitcoin will store the blockchain.
Bit bubbles
144
US dollars v Bitcoin exchange rate
Hash rate (GHz)
securely transferring money to reliable sellers without the state intervening, something that we imagine traditional retailers such as Amazon would dearly like to emulate. It’s easy to forget now how suspiciously Amazon was regarded when it launched, with many consumers worrying about their money disappearing or their bank account being emptied. Bitcoin transactions on Silk Road remove that uncertainty completely – in many senses, it’s more secure than the traditional banking model – and undoubtedly more secure than using a credit card.
The rise of bitcoin
0K Sep 10
Jan 11
Jan 12
terrified by the high price of gold. But some of the reason for the move is that electronic currencies do have some advantages over paper currencies, such as privacy, zero transaction charges and security. Bitcoin’s success seems to have terrified the US government. It has started threatening Bitcoin suppliers and is making extremely negative noises towards the new exchanges that support Bitcoin. Mt.Gox, for example, an exchange that started out as a forum for trading Magic: The Gathering cards but now handles 80 per cent of all Bitcoin trades, has found itself under threat, with its assets being seized by the US authorities. However, Vitalik Buterin isn’t concerned about this. “The days of Bitcoin exchanges disappearing with hundreds of thousands of dollars in customer funds are long over. All the exchanges that are still left standing have proven themselves to be reliable over the past two years, and have policies in place (such as storing over 90 per cent of funds in offline ‘cold storage’) to help ensure security. “As for legality, the US government’s FINCEN guidance in March 2013 clarified a lot of issues around the legality of Bitcoin services; if you’re not an exchange, you have nothing to worry about, and the exchanges are rapidly working on compliance.” Most of the exchanges are signing up to the ‘money transmitter’ licences that will enable them to become recognised banking institutions. That’s not the only problem for the market, though. Mt.Gox has come under repeated distributed denial of service (DDoS) attacks in recent months. Then, on 10th April this year, the price for a Bitcoin fell from US$266 to $76 before bouncing back to $160. Fortinet’s Henderson says, “These were most likely used by someone or multiple persons to profit from market instability. “Other methods of market manipulation mirror those used in the real world of stocks and bonds, although at a much smaller scale. It’s likely there are cabals of investors who are engaging in unethical practices. I’ve seen speculation that the massive run-up of Bitcoin value recently may have been a ‘perfect storm’ of media attention, pumping and dumping and churning in order to attract a lot of new attention to Bitcoin and, with it, new
Issue 308 | COMPUTER SHOPPER
| october 2013
Jan 13
May
0
investors… which inevitably caused the price of a Bitcoin to shoot through the roof.” Eve’s Dr Gudmundsson agrees. “For the short-term trader, higher volatility means higher probability to make a short-term gain, so if city investors believe that one currency is undervalued then they would quickly move their funds towards that currency and move out again before it collapses again. So I would actually be more interested in knowing when they start to sell again.”
Majority report
A potential problem for Bitcoin, but one’s that becoming less prevalent as the currency grows, is known as the ‘51 per cent problem’. We talked earlier about the blockchain – the transaction history that’s shared between all Bitcoin users and how this takes the form of a kind of consensual agreement between all the miners; if there are two competing histories in the system, then the one with the larger number of users is true. So for someone to change the history, and effectively destroy the ownership of all Bitcoins, they’d need to have 51 per cent of the computing power. Richard Henderson thinks it’s unlikely. “Who would want to control 51 per cent of the miners with the intention of shutting
Dmitry Bestuzhev, from anti-virus firm Kaspersky Lab, has seen cybercriminals flock to exploit Bitcoin’s success
0 Jan 09
Jan 11
Jan 13
As the price boomed, so did the number of people grinding out Bitcoins – that is, the hash rate The price of Bitcoins has boomed recently. A pizza that three years ago cost 10,000 Bitcoins would now be worth around $3 million
down the whole system? The owners of botnets that are mining coin wouldn’t want to shut it down: they’re in the business of making money. Tinfoil hat aside, the only possibility is a nation state or a financial organisation interested in seeing the Bitcoin experiment fail and people who have bought into it lose a lot of money. My guess is that a lot of smart people on both sides of the fence are watching very carefully.” The US government looks to be Bitcoin’s only real threat. Other secondary currencies, including the short-lived Liberty Dollar, have already been banned in the USA – despite the fact that these currencies are, as Dr Eyjolfur Gudmundsson points out, indistinguishable from the coupon and points schemes that companies such as Tesco or British Airways run. A bigger problem is the unknown. As we said, Bitcoins top out at 21 million. At that point no-one, not even the people who created it, know how the market will react. Dr Gudmundsson thinks it’s a bad idea. “Strictly limiting the money supply is not a good thing for any currency. It means more deflation, less economic activity and therefore lower economic value in the long run.” It’s where pure science meets groundbreaking social experiment – the ‘let’s make this thing and see what it does’ approach that so traumatised A-bomb researcher Carl Sagan and other naïve pure science researchers. That said, many of our experts trust the currency. Vitalik Buterin is a case in point. “I keep a substantial portion of my funds in cryptocurrencies; some Bitcoin, about a third as much in Ripples (another new virtual cryptocurrency],” he says. “It’s a volatile, but good investment; even if there’s a 95 per cent chance it will go to zero, if there’s a five per cent chance it will grow by another factor of 100 that’s a 5x average return. I don’t mind; I don’t have time for it, and I move around too much these days to keep Singles or Avalons (specialised Bitcoin mining devices) with me.” Of course, as a current investor in Bitcoin you would expect him to talk up the currency. We’re not going to – but if you’re a gambling man, you might want to bet a small amount on a Bitcoin or two. After all, even the strangest science-fiction stories can have a tendency to come true.
145
