Last week Monday, I was in awe of the price of bitcoin. I hesitate to use the word “bubble” – but now people I know own bitcoins. And they bought them this weekend, when the price was above $800.

To be clear, last Monday it was floating around the $500 mark.

It’s astounding. I’m astounded. And running out of vocabulary, apparently.

Back in March (when a bitcoin would have set you back $34.55), I wrote this post:

“Bitcoin: The Art of Free Market Currency“

I’m just not sure that the world at large is fully appreciative of the impact this rise could have. Only this weekend, the University of Nicosia in Cyprus announced that it would start accepting Bitcoin as payment for tuition fees. It also announced a Master’s degree in digital currency – although that does seem a bit premature (what would they teach exactly?). But it seems that Cyprus, in the aftermath of its EU-targetted annihilation of its banking sector, is attempting to position itself as the digital currency haven.

And of course, the bitcoin story is just rife with Star Wars-style drama: a mysterious founder, accusations of anarchy, a guest slot on the Good Wife, emergence from “the deep web”, active proponents in the form of aggrieved twins, a meteoric rise to power…

It’s science fiction as fact.

Who In The World Is Satoshi Nakamoto?

In November 2008, an academic paper called “Bitcoin: A Peer-to-Peer Electronic Cash System” was published. The author was listed as Satoshi Nakamoto. Shortly after this paper came about, bitcoin was launched. And Satoshi continued to write about bitcoin until 2010, when, according to bitcoin.org, “Satoshi left the project…without revealing much about himself”.

Interestingly, Satoshi is a real live Japanese person who apparently can’t speak much English – so he’s generally dismissed as being the real Satoshi Nakamoto. The bitcoin “real” one, that is.

So that’s the mysterious founder.

What is bitcoin?

To quote the abstract of Nakamoto’s paper:

“A purely peer-to-peer version of electronic cash would allow online payments to be sent directly from one party to another without going through a financial institution.”

Just think about what that means:

• You might think that in terms of secrecy and money laundering, the biggest problem an undercover criminal would face is the need to keep money somewhere other than a mattress. Particularly if you’re a successful one.
• And banks are such a pain with their regulation.
• But what would happen if you could do these transfers without being bothered with all the red-tape rigmarole of exchange controls and FICA/RICA/whatever-CA requirements and all the proof-of-addressing?
• That would be excellent.

Unfortunately, you run into snags almost immediately, because we currently sit with our money in bank accounts. In order for a peer-to-peer electronic cash settlement to work, you need to have people holding some form of electronic cash.

And that would only happen if this electronic cash were both trustworthy and limited. So the solution is the development of (what-we-all-think-of-as) bitcoin: the alternative digital financially-encryted currency.

Triple-Entry Accounting?

We’ve all heard of double-entry accounting (I hope). It’s the language of finance, the debit and credit, fathered by Luca Pacioli, and so on. But here’s the thing: debits and credits tell you what is happening at a point in time – if you wanted to see what preceded a transaction (ie. where did this money come from?!), then you’d have to engage in a little auditing…

But what if the money itself came encoded with all of its transactions since the date of its mined inception (including timestamps, payers and recipients)?

That’s what bitcoin encryption contains: it is the insurance that your bitcoin is the real deal. So when you buy and sell a bitcoin, you have indelibly marked yourself on its code from now until forever.

Question though…

Surely that’s a bad idea for money launderers?

More on how bitcoin actually works tomorrow…