The roller coaster riding bitcoin is scaring the banks – and not just them. A guide to understanding its potential as well as its limits

December 1, 2017
Editorial Open Society
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The last few days saw bitcoins reaching the record value of USD 11,000. Apart from this last peak, happening in a market that is proving quite volatile, currently between 9000 and 10000 US dollars are needed to buy a single unit of the most popular – not the only one – of all cryptocurrencies to enter a market worth roughly 170 billion dollars that exist, are handled and exchanged within the blockchain public register, that is the technology that lies behind bitcoin and allows all transactions, without any central authority supervising or controlling the process.

The greatest innovation when it comes to bitcoin, according to many, is indeed represented by blockchain, a technology that, using sophisticated cryptographic algorithms, can guarantee the security and transparency of all operations; it is no coincidence that it is attracting the eyes of both the big financial operators and the world’s largest banks, as for the R3 case (the consortium made up of more than one hundred international banks born to develop the Distributed Ledger Technology, on which blockchain is based and which allows encrypted transactions), but also of all of those who consider this technological process as a secure basis on which to initiate processes such as electronic voting.

What seems to be the biggest obstacle to the widespread diffusion of this technology today is represented by the computer skills that are needed to carry out all transactions, as they’re of the non-obvious variety.

 

What is the blockchain technology and how does it work?

Instead of having a registry managed by a single authority, such as an account in a traditional bank, blockchain distributes said registry to all computers that are part of the bitcoin network. Every transaction, that is the moving of a certain number of bitcoins from one account to another, takes place publicly: all computers on the network are informed and update the totals of both accounts involved. To make an example, let’s imagine the blockchain as the ranking of the Serie A football championship: each team has its own score, which is nothing but the result of a sequence of games (transactions), all public and recorded since the beginning of the season. The security of such a process is represented by the fact that anyone can monitor the results of all matches and, above all, check whether the total number of points of the teams in the league table is correct, simply by checking the results of matches since the beginning of the championship, ie. by consulting the “transactions” in the blockchain’s public register. The championship ranking is available on all media (newspapers, radio, television, sites) and, even without the FIGC – the Italian championship’s governing body – we all would be able to say who won the Scudetto, the championship’s title.

 

What risks are there for an inexperienced user investing in cryptocurrencies?

Let’s face the question from a purely technical point of view: the procedure of installing and managing a “wallet” on your computer is certainly not suitable for inexperienced users. What’s more, even if we were able to install said wallet, there would still be the issue of populating it: to have bitcoins, in fact, you need to generate them (which has now become more and more difficult and certainly un-economical) or buy them. Therefore, at the moment, the simplest solution is to rely on companies that act within the bitcoin world and work as intermediaries between the business world of cryptocurrencies and those investors that we could call inexperienced, but who consider this virtual currency as an innovative and profitable way of investing their money. There are many companies of this type, among them the very Italian Conio, turning your mobile phone into a bitcoin wallet, or Inbitcoin – collaborating of the Autonomous Province of Trento – which is trying to transform the Trentino region into the first bitcoin-based economy, an ideal Bitcoin Valley <https://bitcoinvalley.eu/it/> where that cryptocurrency can be used to pay anything, from the top-ups to your phone to your dentist, accountant or school lunch fee.

 

Blockchain and electronic voting

Blockchain technology is able to guarantee a secure and reliable electronic vote, given that each voter would be able to verify that his or her vote (which would remain absolutely anonymous) was actually assigned to the candidate they had voted for; moreover, anyone could verify (could count) the votes received by each candidate. Blockchain technology offers broad security guarantees, but after the controversy <http://www.repubblica.it/esteri/2017/06/06/news/media_nuovi_documenti_nsa_hacker_russi_nel_sistema_elettorale_usa_-167357637/> on the US presidential elections of 2016, we do not know at present how much voters are willing to rely on an IT system for their voting.

 

The energy issue and the waste of resources

Bitcoins are generated through a process called “mining”, a term used to indicate the process of, indeed, mining diamonds. The term is certainly appropriate: it is estimated that to extract a diamond carat (a fifth of a gram), it is necessary to process about 4 tons of rock; In order to extract a bitcoin, instead, it is necessary to solve computational problems of ever-increasing difficulty, with a dramatic waste of computational resources and, consequently, of electrical energy: suffice it to say that the energy used in a year in the bitcoin circuit is greater than that used by the whole country of Ireland <https://www.theguardian.com/technology/2017/nov/27/bitcoin-mining-consumes-electricity-ireland> for the same period. This phenomenon, however, is destined to stop abruptly: at the moment bitcoins in circulation are just under 17 million, and the mining process will end when they will reach 21 million; the mysterious inventor behind this currency, hidden under the pseudonym of Satoshi Nakamoto, has in fact put a limit on the total number of bitcoins that can be generated. What will happen when we stop producing new bitcoins? Will those in circulation still increase in value?

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