What’s a Bitcoin and Why Do We Need One

We’ve all heard the phrase “money is power”. But financial crises over the last decade or so have left many ordinary people feeling completely powerless over their finances. When financial systems stop working for the people they are supposed to serve, does cryptocurrency provide us with a viable alternative? Alexandre David, Paris’ resident cryptocurrency expert and founder of Bitcoin school “Eureka”, gave us his take on whether Bitcoin has the potential to empower people to take their finances into their own hands and shake up the banking system for good.

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PART ONE: IN WHICH I DEMAND AN EXPLANATION OF BITCOIN EVEN A FIVE-YEAR-OLD CAN UNDERSTAND

Alexandre David is a Bitcoin expert and the founder of a unique Paris-based company offering training in Bitcoin, Ethereum and other technologies. I, on the other hand, am a Humanities graduate with a GCSE in IT who has decided to learn about Bitcoin because, well, it sounds quite cool.

In the interests of professionalism, I decide to impress Alexandre right from the start of our interview with how much I already know about Bitcoin. This does not end well. “So Bitcoin is a cryptocurrency—” I venture, before he stops me. “The term cryptocurrency is not accurate in my opinion.” Undiscouraged, I present him with another snippet of information I have learned from Googling cryptocurrency for five-year olds: “Bitcoin is a decentralised—”

“Decentralised? I prefer the terms neutral and balanced. Because not all so-called cryptocurrencies can be
referred to as decentralised”. I continue to blunder in this way, hopefully suggesting apparently useless
comparisons between email attachments and Bitcoins (“I wouldn’t say that’s a good analogy”) and at one point even describing Bitcoin as a “company”, which elicits a look of horror from my now positively exasperated
interviewee. This rocky start to our interview, I come to realise, is due to the fact that it takes time and patience to understand Bitcoin, or, for that matter, any financial system.

If you’ve ever ventured into the world of Bitcoin to find out what on earth it’s all about, you, too, might have felt daunted by the terminology and obfuscated language used to explain the system. To me, the technical
glossaries available on bitcoin.org seemed rife with tautologies; a blockchain, for example, is described
rather unhelpfully as “a chain of blocks with each block referencing the block that preceded it”. But just as I was about to throw the towel in and return to less troublesome currencies, Alexandre made some
interesting points about the banking system we use today that made me think twice. How much do most people know about our banking system and how it works?

MONEY IS POWER… OR THIN AIR

One of the most common reservations people have regarding Bitcoin is that it isn’t based on anything of value. Whether or not we consider it to be the case (which, as Alexandre later assures me, it is not), could the same not be said for all digital currency? In the fractional reserve banking system used in almost every country across the globe today, less than 10% of the money in circulation actually exists in any tangible form. As for the money that does exist in physical form, what is its value based on? If you take a British £5 note, you’ll find the inscription: “I promise to pay the bearer on demand the sum of”, yet most of us don’t think twice about what this promise represents. “It’s not even based on debt,” says Alexandre, “because debt is supposed to be refunded. In our current system we don’t refund debt.” When you think about it, even the value of something tangible like gold is based on a subjective measure of how popular it is, and in that sense, is completely arbitrary.

With entire library sections dedicated to understanding the banking systems of the modern world, it doesn’t make sense to dismiss a new currency system based solely on the fact that it is difficult to understand. Putting our earlier misunderstandings aside, Alexandre makes a valiant attempt to describe Bitcoin to me in the simplest terms possible.

WHAT’S A BITCOIN AND WHY DO WE NEED ONE

In Alexandre’s words, “Bitcoin is an IT protocol, a peer-to-peer network, and has its own programming language called Bitcoin Script.” Bitcoins are created (and the Bitcoin system maintained) through a process called mining. According to the Bitcoin website, “mining is the process of using hardware to do mathematical equations to confirm transactions that have been carried out on the Bitcoin network.” Miners are then rewarded for this work in Bitcoins. “It’s like mining for gold,” Alexandre explains. The more people there are doing it the more difficult it gets.

Transactions are recorded by miners in records similar to accounting ledgers in “a chained data-structure”. Many people refer to these this structure as the blockchain (though Alexandre does not think this is an accurate or useful definition). There is an interesting mechanism in place here, he explains: “Miners are in coopetition with one another. They are competing with each other to prove that their block is correct, but they are also cooperating to maintain the system.

 BITCOIN: A (VERY UNOFFICIAL) GUIDE

What to say:

  • Coopetition: Portmanteau of “cooperation” and “competition” used to describe how miners work together (and against one another) to secure the Bitcoin network.
  • Cryptography: Dictionary.com describes cryptography as “the art of writing or solving codes”. In Bitcoin, the term refers to the method of using computers to solve complicated series of code.
  • IT protocol: According to Dictionary.com: “a set of rules governing the exchange or transmission of data between devices.”
  • Peer-to-peer network: With regular monetary transactions, the bank acts as an intermediary. In Bitcoin, there is no intermediary and transactions are made directly between individuals.
  • Mining: the process of making computer hardware do mathematical calculations for the Bitcoin network to increase its security. Miners collect transaction fees for this process, which is how Bitcoins are generated.

What not to say:

Blockchain: a public record of Bitcoin transactions, comparable to a page in an accounting ledger. Alexandre prefers to refer to these records as a “chained data structure”.

Cryptocurrency: a digital or virtual currency that uses cryptography for security. “Crypto” comes from the Ancient Greek for hidden or secret. Alexandre finds this definition confusing because “Bitcoin isn’t just based on cryptography; it also uses other technologies like peer-to-peer technology and an architecture called the unspent transaction output system.”

So now you know.

 Now that we all fully understand the workings of Bitcoin, the next logical question is: why did these tech types come together to create this baffling system of codes and transactions when we already have a
perfectly good system? “The idea to build a new protocol with a digital token that would enable users to bypass banks came up just after the 2007-8 financial crisis”, Alexandre explains. According to him, all the ingredients for Bitcoin have existed for years in various guises, but the driving force behind its creation was growing mistrust in the banking system. Essentially, Bitcoin was created in the interests of taking the power out of the hands of the banks and giving it back to regular people. “It’s a kind of common good that
provides financial tools for the most discriminated against in society. Bitcoin was made to bring the most basic economic functions to people that can really serve them. We want to bring the power back to the people.”

I ask Alexandre if the people who are affected by not having access to banking systems are likely to have access to the internet, a prerequisite for setting up a Bitcoin account. Alexandre acknowledges that they may not but also remarks that cryptocurrency is still very much in its nascent phase. It took less than thirty years for half of the world to become connected to the internet. Who knows what developments will take place over the next decade or two? Bitcoin is not necessarily seen as an immediate solution to global issues; rather, it has interesting potential to provide an alternative to our banking system in the long term. Alexandre also predicts improvements to system’s accessibility and user friendliness: “In the beginning, the system was a pain to use and was only suitable for people with expert skills. But as time passes, we’re enhancing the ways to interact with the system. There are developers constantly making new tools, so you can download the software and it does the job for you.”

DECENTRALISATION AND ANONYMITY

Those doubting that Bitcoin can be considered a serious threat to our financial system need only consider what happened to some of the early developers of cryptocurrency, Alexandre goes on to explain.

“In 1990, a man named David Chaum invented a company called Digicash, which enabled the transfer of value through cryptography. In the 1990s, cryptography was exclusively related to the military. It was forbidden for any citizen to use it. It was even considered to be a military weapon. Then a cryptographer called Phil
Zimmerman released an application called Pretty Good Privacy (PGP), the first of its kind that enabled every citizen in the world to encrypt messages. It became possible for anyone to exchange secrets.”

Zimmermann became the subject of a criminal investigation and faced serious consequences for developing the PGP application. Alexandre speculates that these early power struggles between developers and the authorities are one of the main reasons why decentralisation and anonymity remain some of the most important principles of Bitcoin. To this day nobody knows the true identity of Bitcoin’s founder(s) other than a pseudonym (Satoshi Nakamoto) which may represent an individual, or as many suspect, a group of developers.

And it’s not just a fear of persecution preventing the founder(s) of Bitcoin from identifying themselves. “If you want to build something that’s decentralised, it’s best if there’s no central personality. Because if everybody swears by this decentralised authority, then what you’re left with is something that’s not owned by the people. It’s very interesting concept: building a real decentralised common good where’s there’s nobody at the head. If we knew the true identity of Satoshi Nakamoto, Bitcoin wouldn’t be what it is today.”

Once Bitcoin was created, it took a while for people to begin adopting the currency in earnest. Alexandre tells me about a series of unlikely occurrences that sparked serious interest in Bitcoin for the first time. “In 2011, the US Congress prohibited the use of the dollar for online gambling. When gamblers discovered Bitcoin, they started to ask: why not use this system to carry on gambling on the internet? So some of the first users of Bitcoin belonged to this small online gambling community in the USA.” The next big milestone for the cryptocurrency came in Cyprus in 2013 when the country faced a financial crisis.

 “The banks went bankrupt and were not able to guarantee account holders their money. They tried to control the savings of the country’s population. So some investors decided to try and regain some control over their finances by investing in Bitcoin instead.”

The third surge in popularity for Bitcoin came in the aftermath of Wikileaks. “In 2013, Wikileaks had their bank accounts shut down because of the kind of information they were releasing. So those involved started to invest in Bitcoin. Because Wikileaks was known around the world, everybody got to hear about Bitcoin.” In fact, the system was barely able to withstand the influx of new users and almost crashed because there were not enough miners to secure the system. Bitcoin finally reached maturity in 2015 and has been growing ever since.

THE QUESTION OF TRUST

It is perhaps due to Bitcoin’s early association with gamblers and whistleblowers that people are reluctant to adopt this new system. Alexandre tells me he finds the number of misconceptions about Bitcoin frustrating. “Whenever you hear about blockchains or cryptocurrency, you’re always going to get someone telling you it’s about trust. But there is no trust in cryptocurrency. It’s should be based on cryptography, and cryptography is all about creating proof and verifying.” The courses available through Alexandre’s company, Eureka Certification, go some way toward dispelling some of these myths.

People also express reservations, says Alexandre, when they learn that Bitcoin is based on a deflationary system. People tend to jump to conclusions and start making comparisons that Alexandre does not think are relevant. “When we talk about a deflationary system, people talk about the Weimar Republic of the 1930s. They say it’s bad! Look at what happened to the economy, there were two wars! People only think about the bad connotations.” In any case, Alexandre stresses that the crises we have experienced over the last few years are not going to be solved with more of the same. If you are the issuer of trouble, you can’t be the one to solve it. Because the trouble is you. The problem was with the banks, so any solution provided by them does not
resolve the problem.”

POWER TO THE PEOPLE

I didn’t learn about Bitcoin with the intention of investing and it certainly isn’t my intention to encourage anyone else to do the same. What I do think, is that learning about a new financial system can, at the very least, help us to put into perspective just how much we take for granted about our own system. Money may be power, but so is knowledge, and perhaps attempting to understand the currencies we use and their alternatives might be a step towards empowering ourselves to make well-informed choices.

Alexandre tells me he is not on a mission to convert anyone to cryptocurrency either and acknowledges that time and effort is required to understand the system. One thing is for certain: he is very passionate about Bitcoin and its potential to help regular people to take their finances into their own hands. “Bitcoin gives you power”, he concludes. “What I like about it is that you become your own bank and you get sovereign back. That’s not the case with euros or pounds. Those are created by centralised and private companies so they can create and destroy money and make all the decisions about monetary and economic politics. That’s not the case with Bitcoin. There are some policies and there are some rules, but these have been written so that anyone can use the system. If you don’t accept the rules, you just don’t participate in the system.”

Finally, I venture a piece of information I think I have understood. “I guess with Bitcoin, you have the choice, at least.”

“Exactly”, he smiles.

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Find out more about Alexandre David’s work at www.eureka.co
Interview by Holly James
Illustrations by Eve Hebron and Holly James

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