This week, Mat walks through one of his long-time favourite conversation topics: Bitcoin. I might have been a sceptic at first but judging from a selection of recent news stories here, here and here – he’s won, I’m finally taking notice. So, without further ado: welcome to the new Wild Wild West… read on for more below:

What is Bitcoin?

Bitcoin is a new type of money: it is a virtual currency, meaning it’s purely digital. You download and use software on your desktop computer, your smart phone, or go to an online service to send and receive Bitcoins.

Importantly, a distinguishing feature is Bitcoin’s decentralised nature. You don’t need a government or some company’s approval. You don’t even have to sign up on a website. It’s literally just software, and the decentralised nature of Bitcoin sets it apart from all other digital and fiat currencies.

Where can people use Bitcoin at the moment?

At the moment, Bitcoin is in its infancy. It was first released about three and a half years ago, and since then there are days where maybe ~$10 million AUD worth of Bitcoins are being traded. Despite that impressive growth, there are only maybe several hundred websites where you can actually spend Bitcoins. A good place to start is the Bitcoin Wiki at https://en.bitcoin.it/wiki/Trade, and there’s also my new service, http://platform.bitpiggy.com, where people can pay for IT services with Bitcoins. 😉

What are some flaws with fiat currencies?

I should explain what fiat currency means. Fiat means ‘by law’ or ‘by decree’. Basically most government money, like US Dollars, Australian Dollars or Euros, are fiat currencies – they exist because governments passed laws.

There is one main ‘flaw’ of fiat currencies that leads to several consequences, which depending on who you talk to, are either good or bad. This main ‘flaw’ of fiat currencies is the money supply can be increased ad infinitum.

Some consequences of this are…

Firstly, since the money supply of fiat currencies is not limited, whoever controls the currency, e.g. the government and/or central bank, can increase or decrease the money supply at will. Since controlling the money supply is extremely powerful (half of every transaction is money), then it follows that governments and central banks can have tremendous impact when they make decisions to increase or decrease the money supply. Thus a criticism of fiat currencies is they give whoever controls them a huge amount of power.

Furthermore, it should be pointed out that most central banks and governments embark on inflationary policies. By that, I mean governments and central banks purposefully increase the money supply over time, which often leads to higher prices. Hence a related criticism of fiat currencies is they tend to lead to rising prices. Historically this is overwhelmingly true for fiat currencies. For instance, £1 GBP used to be worth 1 pound of sterling silver (that’s where the currency gets its name from). $20 USD used to be pegged to 1oz gold. Today both currencies are worth much much less, less than 5%. Thus a consequence and criticism of fiat currencies is savings (historically) lose value over time.

What does Bitcoin’s future look like from a best and worst case scenario?

For me, a best case scenario would be wide-spread adoption, while some problems of Bitcoin I haven’t mentioned (namely it’s only pseudo-anonymous and has scaling problems) get fixed. Being able to pay or be paid for anything directly in Bitcoin would be great. But a more realistic best-case scenario for me is Bitcoin will cause citizens around the world to question whether fiat currencies are really better then free-market currencies.

In the worst-case, Bitcoin is copied by governments, but tweaked to have both the properties of fiat currency (like unlimited money supply) while making the currency easily trackable. Then governments have a new, huge amount of power to shutdown or benefit anyone they choose.

What is BitPiggy, how long have you been working on it and what are some challenges you found with starting this project?

BitPiggy is a Bitcoin to Australian dollar exchange service. Technically it’s not an exchange, as Bitcoin is not a recognised currency, but nonetheless it’s a simple website where Australians can buy and sell Bitcoins for Australians dollars.

It’s been going for about one and a half years now. The Bitcoin community in Australia is only a small percentage of the global community, however the community in Australia is definitely growing, and fast!

The biggest challenge with BitPiggy has been everything to do with the fiat money system. Since people buy from and sell Bitcoins to me with Australian dollars, I have one foot in the Bitcoin world and one in the fiat world. Everything, and I mean everything, is harder in the fiat world. Setting up bank accounts is a pain; managing them is pain; the information banks give you about transactions is terrible; the fees are way higher and your money loses value; banks can take days to process transactions; and finally bank accounts get hacked – apparently – routinely! This last point was a surprise to me – I thought by only accepting bank-to-bank payments from other Australian banks I would be safe, but boy was I wrong! I’ve had to return thousands of dollars of stolen money that was sent to me, for which the banks in some cases took weeks to notify me and promptly reversed the transaction, thus forcing me to take the loss since the Bitcoins had since been long sent. I’ve since had to tighten security and limit my exposure via a number of methods, which is disappointing for me and my customers.

Why is cryptography becoming more important than ever?

Cryptography has two main applications. It can be used for privacy, and it can used to guarantee something, e.g. ‘Was this email really sent by Alice?’.

For privacy, cryptography is becoming more important as more of our lives such as communication are moving into the digital world. Its not that privacy is important now and wasn’t before, it’s simply that privacy was inherent in our lives before, while now we use digital technology that only has privacy if we build it in. Compare trying to having a private face-to-face conversation versus how would you go about ensuring privacy with a phone conversation.

Since building privacy into a system is difficult, it’s not done unless specifically asked for. For example, standard email does not guarantee privacy, but my bank’s e-fraud department communicates with me via email, likely because it’s cheap.

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If you’re interested in discovering more about cryptography – there are upcoming meetups (aka a ‘CryptoParty‘) happening around the globe. Check The Fetch or the wiki here.