Why has studying Bitcoin become a popular subject?

What is Bitcoin?

Asked which event in recent years reshaped the financial industry, bankers will point to the collapse of Lehman Brothers on September 15, 2008, the worst moment of the financial crisis. Fintech workers are more likely to point to something that happened six weeks later.

On October 31, 2008, a crypto enthusiast who calls himself "Satoshi Nakamoto" but whose true identity remains a mystery created a project he called Bitcoin: "a new electronic cash system that is completely P2P and does not involve a trusted third party." It describes a seemingly robust monetary framework that does not require any government support to operate. Its supporters claim that finance is about to enter the era of cryptocurrency. To a large extent, the need for a trusted third party has always been the essential reason for the existence of banks, so this may mean that people will no longer need banks in the future.

Interest in the inner workings of Bitcoin continues to grow. The technological breakthrough that made Bitcoin possible, using encryption to organize a complex network, has fascinated Silicon Valley leaders, many of whom believe that parts of Nakamoto's idea can be copied for other uses.

What is blockchain?

The "blockchain" technology that Bitcoin is based on is a P2P currency operating system. Essentially, it is a giant ledger that keeps track of who owns how many Bitcoins. The coins themselves are not physical objects, or even digital documents, but entries on the blockchain ledger. Therefore, owning a Bitcoin is just owning a piece of information on the blockchain.

You could say that this is how banks track how much money is in each bank account. But that’s where the similarities end. Unlike a bank’s centralized and private ledger, a blockchain is public and widely distributed. Anyone can download a copy. Aside from user identities protected by clever encryption, the system is completely transparent.

In addition to tracking who currently owns Bitcoin, the blockchain also records who has owned each Bitcoin since its creation. As a new transaction "block" is added to the existing chain of currency units, a certain unit of currency is transferred from one party to another, which is the origin of the name "blockchain". New blocks are added to the blockchain every 10 minutes or so, making the blockchain's information several hundred lines longer (it is currently more than 8,000 times longer than the Bible).

Proposed transactions included in new blocks don’t need to be approved by some central arbiter, as in traditional banking. Instead, a large army of computers work to keep the system running. The rewards are high enough for giant data centers around the world to want to participate. These centers, called “miners,” verify transactions by reaching a consensus on what the latest version of the blockchain should look like. In exchange, they are given newly minted bitcoins.

Arranging blocks in a chain in order prevents anyone from spending the same bitcoin twice, thus eliminating the bane of previous digital currencies. The system cannot be tampered with by any one party. Unlike a bank ledger, which can be altered by its owner (or a government), a change to the blockchain must simultaneously change all the tens of thousands of copies used by miners at that moment. The final version of the blockchain is the one that is agreed upon by the majority of the computers involved. And none of those computers are connected to any central authority. There is no Bitcoin central bank ruling them all. To overwhelmingly control the system would require someone to control 51% of the combined computing power of about 10,000 "miners." It's not impossible, but it's unlikely.

This system of reaching consensus through distributed cooperation sounds complicated, but it enables something of value to be transferred from one person to another without the need for an intermediary to confirm the transaction.

Why has studying Bitcoin become a popular subject?

The study of Bitcoin has become a popular subject. Amazon said that nearly 200 books on cryptocurrency were published last year, and more than a dozen are on the shelves this year.

To be worth reading, any book about Bitcoin would have to be profound: examining the cryptocurrency’s ideological and technological roots, for example, or what it adds to the story of money, or even what economic and political impact it might have.

Paul Vigna and Michael Casey, two Wall Street Journal reporters, are serious. In their new book, The Age of Cryptocurrency, they don’t waste time on millennia of political beliefs or the search for Bitcoin’s elusive creator, Satoshi Nakamoto, though they do think cryptocurrency’s religious-like “creation myth” is an important factor in building a community around the subject. Rather than a breathless description of how Bitcoin will change everything, the book opens with a brief account of the age-old debate over the nature of money. Advocates of using only metal money see money as a commodity with its own intrinsic value, and thus governments should be as hands-off as possible. Conversely, advocates of using only paper money see money as a complex system of credit relationships that allows value to circulate in society. For these people, money is just a symbol around which the monetary system is built. Governments have a role to play in managing this system and, therefore, the economy.

This philosophical divide plays out in the debate over Bitcoin, which libertarians see as a scarce commodity that needs to be “mined” (to create Bitcoins and maintain the blockchain, miners solve mathematical puzzles, which means that Bitcoins consume energy). But to a growing number of geeks and venture capitalists, Bitcoin is less a currency than a technology that allows people to transfer money and other assets cheaply and securely.

The main mission that Wegener and Casey foresee for Bitcoin is actually a disruptive payment system. Before cryptocurrencies, society had to rely on banks and other centralized institutions to keep track of payments and secure the financial system. This gatekeeping position allowed these institutions to extract a lot of economic rent. Blockchain technology took over the job of recording the ledger and cut out the middleman. "The core of cryptocurrencies is not the rise and fall of digital currency markets," the authors write, but "liberating people from the tyranny of centralized credit."

The book is most vivid when it discusses the potential impact of Bitcoin. It may not be necessary to use the currency in rich countries with mature payment services, but it could help connect the 2.5 billion unbanked people in the poor world to the formal financial system (the book opens with a short story about an Afghan woman who was paid in Bitcoin for writing articles for an American website). And because no one controls the blockchain, it has become the basis for a growing number of startups (the technical term is "platform"). The technology could also undermine other centralized institutions in the "trust industry" such as stock markets, and even boost the sharing economy (some foresee a future in which taxis are not only driverless but also self-owned, meaning they are effectively owned by the blockchain).

Wisely, Wegener and Casey don't expect this to happen overnight, and technology is no panacea. They write that as institutions and companies adopt Bitcoin and other cryptocurrencies to meet needs, such currencies will still grow, but not in parallel with the offline world but in addition to it. Bitcoin may well spark a revolution, but it will happen slowly.