News Column

How Bitcoin and Other Cryptocurrencies Work

December 11, 2013

Chris Brauer, City A.M. (UK)

bitcoin
Bitcoin and other cryptocurrencies are the new money (file photo)

For all the talk of a Bitcoin bubble, it's easy to miss the real significance of what is currently happening. The rise of Bitcoin is just the beginning. Cryptocurrencies are no longer the domain of activists and grassroots movements, they are nothing less than "new money".

Many are waiting for the moment when a central banker or government drives a stake once and for all through the logic of this digital upstart. But the arrival of cryptocurrencies on the lips of US Senate committees and regulators in China marks a dramatic ascent to another level of credibility.

Six months ago, my appearances as a cryptocurrency analyst on financial news networks helped clear the fog around what they were and how they worked. Now hosts admit to cheeky crypto investments off-camera. Oncamera the questions are all about daily price changes and opportunities to spend this new money on anything from college courses to space travel.

There is, however, a bigger picture.

Cryptocurrencies are part of a broader wave of crypto innovations tearing up established economic models and challenging politics and public attitudes.

These include Wikileaks's disruption of knowledge power, BitTorrent's disruption of intellectual property, and the Tor browser shield against crypto-cracking surveillance.

The financial crisis exploded dynamite in cryptocurrency mineshafts. Currencies, after all, are powerful tools of social control and the cracks in prevailing economic models are opening innovation opportunities for a global generation armed with picks and shovels.

It's no coincidence that the four biggest Bitcoin exchanges are in China, Slovenia, Russia, and Japan, none traditional global financial centres.

Of course, dissent is still widespread. Some, like Alan Greenspan, represent confusion over how cryptocurrencies are backed and what gives them intrinsic value. Yet the Winklevoss twins, big investors in Bitcoin, just shrug and say we "trust in cryptography". A generation of digital natives nods in agreement.

There is a chasm in the literacy of disruption that inevitably pits the old against the new. Bill Gates didn't see the internet coming.

In their essence, cryptocurrencies like Bitcoin and Litecoin are a new form of trust. The credibility of this new money starts with a handful of practical applications. Trust in sustainable urban regeneration, like efforts in Berlin to use Bitcoin to reduce transaction costs from debit and credit facilities and create efficiencies for small retailers. Trust in the reinvention of money transfer globally, lowering costs and speed to zero, and enhancing reliability.

Trust in finance as a service to business and innovation, not the other way around. In Dante's Inferno, those who betray trust, particularly those that bind humanity (like our systems of trade and interpretations of value) reside in the ninth circle of Hell next to Lucifer. Reinvention was long overdue.

There is, of course, a risk that a perceived cryptocurrency bubble will burst, tarnishing its future possibilities. But it's not the bubble that matters.

Dr Chris Brauer is a senior lecturer in the Institute of Management Studies at Goldsmiths, University of London. To find out more about technology's impact on our future, visit the RE.WORK Cities Summit this Friday in London. www.re-work.co/cities

(c) 2013 City A.M.


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Source: (c) 2013 City A.M.