Satoshi Nakamoto

Bitcoin and other cryptocurrencies

The bankruptcy of bitcoin's famous Mt. Gox exchange has raised doubts about the cryptocurrency's future. We look at the latest developments in the world of cryptocurrencies and visit the world's first Bitcoin Embassy in Montreal.

Around three years ago Amir Taaki, a London-based code-writer linked to the free software movement, and Donald Norman, a young American entrepreneur, set up the British bitcoin exchange Intersango. In an E&T interview at the time, they were both full of youthful idealism and keen to ensure Intersango was secure and ticked the right regulatory boxes.

Today, Taaki lives in the Calafou commune in Barcelona and works on the Dark Wallet bitcoin project backed by Cody Wilson of Liberator 3D-printed gun fame, named by Wired Magazine as one of the '15 Most Dangerous People in the World'. Both Taaki and Norman are also subjects of a $500,000 lawsuit filed in August 2012 in San Francisco by four bitcoin investors who lost money on an exchange called Bitcoinica, which was acquired by Intersango that year. Bitcoinica was a cloud-based exchange – built in five days by a Singaporean teenager – that was hacked before and after Intersango acquired it.

Such a heady mix of idealism, amateurism and lawsuits, and the chance to make and lose oodles of cash, is a microcosm of the bitcoin world. That some of bitcoin's movers and shakers seem to have come straight out of a cyberpunk novel is part of the buzz. It is also why no one can be too surprised at the bankruptcy early in March 2014 of Tokyo-based Mt. Gox, the longest established bitcoin exchange.

Mt. Gox went into meltdown after a document was leaked saying that 744,408 bitcoins were found to be missing from the exchange. Hackers, the bane of bitcoin exchanges, had apparently siphoned off the coins by creating bitcoin transactions and changing the transaction IDs. Shortly afterwards, Flexcoin, a Canadian bitcoin bank, also closed under claims that hackers had stolen $600,000 worth of bitcoins.

Poloniex, another digital currency exchange, lost 12.3 per cent of its bitcoins around the same time, although its security systems noticed the unusual activity and froze affected accounts.

Only a month before, there were signs that bitcoin was shedding its associations with the digital badlands. In an interview with the Financial Times, New York's banking regulator Benjamin Lawsky said bitcoin had reached a "tipping point" where its potential benefits outweigh the risks of illegal activity.

During the same week, there were the high profile arrests of Charlie Shrem, CEO of US bitcoin exchange BitInstant, and Robert Faiella, a virtual currency trader, who were both charged with money laundering associated with the underground drugs website Silk Road. Silk Road's owner Ross William Ulbricht, known as 'Dread Pirate Roberts', was also indicted with running a criminal enterprise, which added to earlier charges of computer hacking and money laundering.

Life in the bitcoin yet

Predictions about bitcoin's imminent demise in the wake of Mt. Gox's troubles are premature. Lawsky has said that the Mt.Gox collapse is a "shaking out" of the weaker operators, prompting more supervision and regulation of the virtual currency. Nevertheless, it is hard to escape the irony that bitcoin was developed as a response to the erosion in trust of banks, governments, and established investment companies caused by the 2008 financial crisis.

Bitcoin rocketed in value from £20 in March 2013 to a peak of £660 in November of the same year. After the Mt. Gox news, the price dropped to £300 before beginning to rise again. It sits at £381 at the time of writing, suggesting the currency has some resilience. Investors, as well as hackers, have been understandably excited by the 12 months of rapid growth.

Take the Gold Money Group, a leading British precious metals storage firm which has been watching the cryptocurrency industry for a couple of years. In January 2014, it established a business called Netagio to specialise in bitcoin and, potentially, other cryptocurrencies (there are now over 100 such currencies but bitcoin and litecoin represent the vast majority of trades). "We had initial discussions a year ago but needed to work out the business model and what the opportunity might be before committing to it," explains Simon Hamblin, CEO of Netagio.

Netagio will initially provide customers with a free service to encrypt bitcoins and store them in offline devices in secure vaults. It is not, however, the only company offering storage in the UK; Elliptic Vault is another new arrival. In this case users have to pay for the service. Over the next few months, Netagio aims to offer customers the ability to buy and sell bitcoin, as well as other asset classes, directly through its platform. In effect, it will be a professionally built exchange. "That's where the revenues will come from," says Hamblin, who previously developed the technology platform behind ASOS, the hugely successful global online clothes retailer.

On Bitcoin's current troubles, Hamblin says: "Businesses operating in this space need to learn lessons from Mt.Gox's demise. Without robust, tried-and-tested processes in place they could suffer the same fate. They also need to reassure their customers that they have adequate safeguards – and that these are being monitored effectively – in order to protect their business."

The bitcoin miners

Bitcoin is, in effect, a distributed bank based on a peer-to-peer (p2p) computer network in which validated transactions become entries in a shared p2p ledger called the block chain.

Central to the ecosystem are the miners who use their computers to validate transactions by taking the information in each transaction block (a block is made up of recent transactions and is no more than 1Mb in size) and turning it into a unique, shorter random sequence of letters and numbers in a process called SHA-256 hashing. The hash result is stored with the block at the end of the block chain.

Because a hash is easy to produce, the bitcoin protocol also has a 'proof of work', which requires the hash result to be below a certain target. Miners try to reach the target by constantly changing a 32-bit string of meaningless data called the 'nonce' and hashing it with the transaction data.

Miners compete to be first to present the block with the correct nonce value and the winner currently earns 25 bitcoins, value which halves every 210,000 blocks. Miners also get the fees paid by users sending transactions. To ensure the number of blocks found each day is stable and the currency made at a steady rate, the target can also be adjusted in difficulty.

Judging by the Bitcoin Mining Rigs website (, the typical miner operates from their bedroom using a hazardous spaghetti junction of gaming GPU boards or FPGA hardware, cooled by any old thing they have to hand. Miners generally collaborate over the Internet in large mining pools to make a reasonable return. But with bitcoin's rise in value, mining has been evolving into a more professional activity.

British company CloudHashing is one of a handful of new professional data-centre-based bitcoin mines set up as investment opportunities. Founded in London by Emmanuel Abiodun, a computer consultant who built trading and risk management systems for investment banks JP Morgan and HSBC, CloudHashing sells contracts that entitle the owners to a proportion of the bitcoins it mines. Higher value customers are investing from $500,000 to $1m with the company, Abiodun says.

Similar ventures include HashPlex, an American outfit founded by Bernie Rhin (previously at Microsoft), Jason Prado (from Google) and John Stockdale (from Facebook); and IceDrill, which was set up by PetaMex Ltd, a company registered in the British Virgin Islands, a tax haven. PetaMex's five partners include three former investment bankers based in Hong Kong and two bitcoin developers, Willem van Rooyen and Ludvig Oberg. There is also the nebulous Nimbusmining, which CEO Greg Bachrach runs alongside HashTrade and LiquidBits (which seem to do something similar) under an umbrella company called CoinWare, registered in British Indian Ocean Territory, another tax haven.

For super-fast SHA-256 hashing, data-centre-mines use Application Specific Integrated Circuits (ASICS). These are made by a somewhat baffling number of start-ups including BitFury, CoinTerra, HashFast, KNC Miner and TerraHash. Butterfly Labs is the best-known bitcoin mining hardware company (it started with FPGA boards) but it is currently under a cloud – and a lawsuit – having failed to deliver ASIC-based product on customer pre-orders. Note: If bitcoin died, all these chips would become valueless overnight.

To give a sense of scale, CloudHashing has already mined more than $4m in bitcoin using 160 computers based on a variety of ASIC hardware in an Icelandic data centre. A further installation planned for Dallas will add machines worth $3m based on 28nm ASIC chips from CoinTerra. CloudHashing's response to recent events was to offer an exclusive discount on mining contracts to distressed Mt. Gox customers. A number of CloudHashing's employees apparently lost thousands of dollars overnight in the Mt.Gox crash.

Alpaca socks and a pint

You can buy anything from a sofa to a computer using bitcoins from, an American company that also ships to the UK. A taxi driver, a private jet company, a bike shop, the website and four UK pubs owned by Stephen Early's Individual Pubs Limited group are among some of the British companies accepting bitcoin.

As Early explains, pub customers using the currency have one thing in common – enthusiasm. "We've taken about £1,000 worth of bitcoin per month since we started in June 2013. In the last couple of months it's been closer to £1,500," he says, which is less than 0.5 per cent of the pubs' trade. Early says bitcoin transactions are cheaper and less hassle than accepting cash and cards. He has been selling the bitcoins on various exchanges, and made some money personally doing this.

Until the Mt. Gox crash, keeping bitcoins made more sense than buying stuff with them. Now things are less clear cut, including the wager broadcast earlier this year on America's National Public Radio between Felix Salmon, a finance blogger at Reuters, and Ben Horowitz, a venture capitalist who has backed Airbnb, Facebook and Twitter among others.

Horowitz wins the bet if, in five years, 10 per cent or more of a representative sample of Americans say they have used bitcoin to buy something in the previous month. Salmon wins if the figure is below 10 per cent. The stakes? A pair of Alpaca socks – the first thing you could ever buy with bitcoin.

As far as regulation and the law goes, bitcoin is in a state of flux. The European Banking Authority warned a few months ago that anyone using virtual currencies to purchase goods has no legal protection for any refund rights.

The US Internal Revenue Service is pondering on whether bitcoin is a currency or a commodity, a security or something else, even debating whether it's a great big scam.

The British HMRC seems to think it is a currency, having announced shortly after the Mt.Gox collapse that income received from bitcoin mining and trading would be VAT exempt. In China, the government has cut through all potential confusion by banning Chinese banks and clearing houses from handling transactions in bitcoins.

The bitcoin network

Currently, it is quite profitable to mine bitcoins. But what happens as the number of people and companies mining increases and the reward for mining decreases?

CloudHashing's Emmanuel Abiodun is optimistic: "Predictions for value are between $5,000 and $10,000 over the next two years, which will produce another explosion in the hardware game," he says.

However, concerns have been growing that conglomerations of mining could control more than 50 per cent of the processing in the bitcoin network, with the risk of them putting out false transactions. Some of the larger mining pools, for example, have come close to this percentage, suggesting this may well be bitcoin's next crisis.

"The way to reduce the risk may be to have five or six large mining companies and some kind of cooperation between them, like OPEC in the oil industry," suggests Abiodun. "It takes away the decentralised nature of bitcoin but it is in everyone's best interest to make sure the currency is strong and stable and sustainable."

Sounds rather like regulation by a number of large banks – or back to where bitcoin started?

Further information

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