1. Introduction
  2. Bitcoins, What Are They?
  3. Bitcoin vs other means of exchange
  4. How to use Bitcoin
  5. Buying Bitcoins
  6. Selling Bitcoins
  7. Bitcoins ATMs & Debit Cards
  8. Appx. 1 – A History of Cryptocurrency
  9. Appx. 2 – Bitcoin Legality & Regulations
  10. Glossary

Appx. 1 – A History of Cryptocurrency

8.1. In Many Ways it all Started with the Cypher.

A cypher is no more than a secret way of writing, a code. Writing in code as a way to conceal messages and protect secrets has been around for thousands of years, with the earliest known examples of cyphers being non-standard hieroglyphs carved into the walls of a pharaoh’s tomb in Egypt, dating from around 1900 BC in the days of the Old Kingdom. These early cyphers were believed to have been designed as a form of amusement for literate onlookers. Guess the pharaoh’s scribes had a bit of a sense of humor.

By the time of the Romans, coded messages were regularly employed in military campaigns. With messengers having to cross great distances on foot or horseback, often through hostile territory, to convey the Emperor’s commands. Julius Caesar invented a cypher, known as the “Caesar Cypher”, and used it to send secret messages to his officers in far off lands without fear of giving away his plans to his enemies were the messenger caught.

By the end of World War I, machines had entered the game, with perhaps the most famous being the “Enigma Machine”.

Enigma-machine-illustrationInvented by the German engineer Arthur Scherbius, the enigma machine was adopted by the Nazis in World War II to transmit secret, coded diplomatic and military communications. The Enigma code was eventually broken by cryptographers working at at a secret codebreaking facility known as Bletchley Park in the UK, an achievement that was said by the official historian of British intelligence to have shortened the war by two to four years. The nature of this work was considered so vital that it was kept secret until the 1970s.

By then, we were at the height of the Cold War, and cyphers and code, at least to the general public, were the stuff of comic book decoder rings, Hardy Boys mysteries, Scooby-Doo cartoons and John Le Carré novels. The real thing was largely the domain of the military, intelligence and national security agencies. The writings of the cryptographers who worked with the military and those who had come before them were classified as “top secret” and buried deep in military archives, far from prying, public, eyes, out of sight and out of mind.

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8.2. From Military to Civilian

That all began to change in 1975, when a curious young computer whizz kid from Washington D.C. by the name of Whitfield Diffie came onto the scene. Interested since his early childhood in cryptography, or more like obsessed, by the time he entered the Massachusetts Institute of Technology (MIT) and joined its hacker community in the mid-60s, Diffie was a civilian leader in the field.

As it happened, his passion for math puzzles and technology was only matched by his concern for personal privacy. Diffie was one of the people charged with looking after the university’s computer system and was concerned that the work and personal information on this multi-user system could be easily compromised. The traditional approach, assigning passwords kept centrally by a trustworthy administrator, bothered him a great deal, as it placed an inordinate burden of trust in the administrator protecting your privacy.

Remember this was the 60s, the Grateful Dead were touring, LSD guru Timothy Leary was encouraging a generation of youth to “turn on, tune in and drop out”, the hippie anti-war movement was in full swing, good young men were dying in drives in the jungles of Vietnam, cops were shooting students, President Lyndon B. Johnson was in the White House and faith in the benevolence of government at an all-time low.

Diffie was concerned that if the government leaned on the administrator, most likely someone you never even met, that he wouldn’t hesitate to throw you under the bus and cough up your password if it would keep his ass out of jail.

There-in lay the problem. How to make a multi-user network secure without a centralized authority? To answer the problem Diffie imagined a system in which every user would have a way to encode a message on one side, then send it across the unsecure network to a person on the other side who had a key to decode it.

The problem was, you’d have to send the key to the person on the other end. What was to stop someone from stealing it from the unsecure network and using it to decode your message? Okay, he reasoned, the only way around this was to have registries of keys, a digital key depo of sorts, where they would be safely stored. But this merely brought him full circle, as you’d still be in the position of having to trust the person or people in change of the registry (the gate keeper at the depo), little different from trusting the administrator. In other words, the system was still centralized.

Despite the work of countless cryptographers, there seemed no way out of this centralization problem until the mid-80s, when a former activist and software engineer named Phil Zimmermann decided to devote his considerable skill to tackling the problem. Zimmermann created a two-key system that came to be known as PGP or the “Pretty Good Privacy” program.

Public-key-private-keyZimmermann’s answer to the problem posed by Diffie was to have one public key, available in an open registry on the network, and one private key, held as close to your chest as possible until the day you die.

This would allow a user to encrypt their text using their private key on one end, send it across the unsecure network as random gibberish (encrypted) to a recipient on the other end, who would then use the public key to decode the message. This, in effect, gave public network users sending encrypted messages “pretty good privacy”.

The government, however, was none too thrilled with Zimmermann’s invention. Previously, coded messages had been the business of the government and military. Releasing PGP threatened to break that monopoly and potentially unloose the furies, allowing every drug trafficker, people smuggler, Mafioso and terrorist to communicate with each other across public networks in complete secrecy. Fearing a government crackdown if he tried to sell the code, Zimmerman released PGP for free… and it spread like wildfire around the world. It didn’t take the government long to threaten to charge Zimmermann with violating the Arms Export Control Act, which classified cryptographic software as a munition, but in early 1996 they dropped the case without indictment. By that time, the cryptopunk movement had already gained serious traction and the birth of cryptocurrency was just around the corner.

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8.3. Enter Cryptopunk

Originating as a loose, online association of like-minded cryptofans in the late 80s, committed to coding, privacy and in many cases strong libertarian ideas, the cryptopunk movement was a serious enough force to make the cover of Wired magazine by 1993, in a story by Steven Levy titled “Crypto Rebels”, with articles in Whole Earth Review and Village Voice to follow.

Cryptopunks-illustration

Perhaps the first name to emerge from the cryptopunk consortium was a man named David Chaum. An early actor in the cryptopunk scene, Chaum earned his PhD in computer science from the University of California, Berkeley and was the first to propose a system that would allow users to obtain “digital currency” from a bank and spend it in a manner that could not be traced by the bank or any other party, using a concept called “blind signatures”.

With blind signatures, a person would deposit a “coin” as Chaum called it, into a bank bearing the original signature of the mint but not the same number the bank used to mint the coin.

This would allow the coin to be modified, i.e. transferred, untraceably, without changing the mint’s signature validating the coin, making the mint or bank “blind” to the transaction, much like cash but digital.

This invention led him to found a company called DigiCash in 1990 in the Netherlands, a place known for its love of privacy and penchant for freewheeling innovation. DigiCash sent its first electronic payment in 1994. Unfortunately, Chaum soon ran afoul of the big banks, and, after he declined a $180 million offer from Microsoft to bundle DigiCash with Windows, his company soon went bankrupt. But the cat was now completely out of the bag, and in no-time there were hundreds of start-up companies doing everything they could to get into the game. The era of digital currency was truly born.

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8.4. Then there was PayPal

PayPal would be the next major player to enter the fray. Riding DigiCash’s coattails, PayPal worked in the sphere of web-based money, allowing transactions to go from person to person using email and making the browser the supreme arbiter or digital payments. Still, PayPal wasn’t a true digital currency, but more a digital brokerage, in which e-money deposited in the system via your debit or credit card is transferred from account to account and can subsequently be deposited in your bank account to cash out.

Then came 9/11 and the game changed completely. Previously Americans had looked upon digital currency as the wave of the future and good for business. After 9/11 public perception looked upon cryptocurrency as the facilitator of great evil, providing the perfect cover for drug lords and terrorists to launder their dirty money in the dark corners of the internet. When it comes to privacy, Americans have traditionally been of two, rather opposing, mindsets at the same time. The “its none of your business what I do behind closed doors” attitude was contrasted with the “if you’ve done nothing wrong, what do you have to hide?” mentality.

This paradox of American independence and idealistic innocence, in the post 9/11 world, shifted far to the right, demonizing the budding cryptocurrency industry and shrouding it in suspicion.

After all, what did they have to hide? Well it’s none of your business. Then you must have something to hide! Went the train of thought.

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8.5. Bitcoin is Born

This would all begin to change in 2008, when someone named Satoshi Nakamoto published a paper online titled Bitcoin: A Peer-to-Peer Electronic Cash System. The paper would make waves, big waves, in the cryptopunk community and far beyond.

This completely decentralized system ensured almost complete anonymity and was a truly virtual currency, using complex mathematical algorithms run on competing networked computers to “mine” coins. Bitcoin was born. In January 2009, Satoshi mined the first Bitcoin, known as the “Genesis Block” and six days later released the first Bitcoin software, Bitcoin v0.1. Three days later, on January 12, Satoshi sent the first Bitcoins to Hal Finey, the first Bitcoin transaction was completed, and the rest, as they say, is history.

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8.6. Controversy and Early Setbacks

But the birth of Bitcoin was not without its setbacks and controversy. As adaptation of Bitcoin spread across the web and around the world, its anonymity began to draw the attention of a certain subset of people, namely those looking to skirt the law.

Bitcoin quickly became the currency of choice in the dark corners of the web, most notably on the Silk Road, a darknet market place used to sell every kind of illicit drug imaginable.

Eventually the FBI caught up with Silk Road, arrested its founder, a young man by the name of Ross Ulbricht, who went by the flamboyant online pseudonym “Dread Pirate Roberts” and shut it down in 2013.

Ulbricht was eventually convicted of drug trafficking, money laundering and hacking charges and is currently serving a life sentence without the possibility of parole.

In the process, the FBI ended up seizing 26,000 Bitcoin from Silk Road users’ accounts, worth approximately $3.6 million at the time, and an additional 144,000 Bitcoin that they said belonged to Ulbricht as well as another 144,342 Bitcoin (approximately $87 million at the time) from his personal computer.

The thing is, the FBI had no idea what to do with the seized Bitcoin. Apparently, they had value as a medium of exchange but were not an official currency. Moreover, the FBI knew full well that they could be used to facilitate criminal transactions. But so could cash in the real world, so what was really the difference?

In the end, the U.S. Marshalls Service auctioned off about a quarter of the seized Bitcoin, ironically, in effect, publicly legitimating the cryptocurrency they associated with criminality.

The bad press Bitcoin received in being the means of exchange preferred on the Silk Road did a fair bit of damage. The value of the digital currency plummeted after the Feds shut down Silk Road but Bitcoin miraculously bounced back, becoming more popular than ever.

Oddly enough, Bitcoin received another boost in 2013, when National Security Agency (NSA) whistle blower Edward Snowden leaked thousands of pages of classified documents about the NSA’s secret global surveillance programs.

The firestorm of debate caused by Snowden’s revelations polarized public opinion in the U.S. and around the world, with many vocally pointing out that the government had far over stepped its bounds in tracking its citizens and violating personal privacy, calling Snowden a hero, with an equally strong lobby referring to him as a traitor to U.S. national security.

These revelations and the surrounding debate seemed to embolden Bitcoin users, who felt more justified than ever in protecting their personal privacy and transactions against unwanted government surveillance.

The ascendency of Bitcoin and its growing popularity as a means of exchange forced a rethink on the part of government officials, especially regulators.

It late 2013, Benjamin M. Lawsky, New York’s top financial regulator, announced a series of hearings to discuss regulating Bitcoin. Lawsky acknowledged Bitcoin as a viable virtual currency and means of exchange that could facilitate business, while at the same time warning of its potential misuse for nefarious and criminal purposes such as the support of terrorism, money laundering and drug dealing.

The end result was a series of comprehensive regulations, released a year later, called the BitLicense.

While limited to New York residents building Bitcoin businesses, such as exchanges and online marketplaces, the impact of these regulations sent waves around the world, with regulators in Europe and elsewhere holding public hearings to discuss regulating Bitcoin.

At the same time, Lawsky’s rules were heavily criticized by the Bitcoin community as being too excessive, pushing small companies and start-ups out of the Bitcoin market, curtailing innovation and opening the doors to the big banks’ attempts to control Bitcoin and profit off trading it, the antithesis of what Bitcoin, as a decentralized, peer-to-peer network is all about.

As it stands today, Bitcoin remains a viable and growing cryptocurrency, capable of facilitating transactions around the globe and growing by leaps and bounds.

Debates still rage regarding its regulation, anonymity and the protection of personal privacy the cryptopunks were so passionate about. The truth is Bitcoin is a rapidly evolving technology in a rapidly evolving market. Perhaps it will be over taken by other virtual currencies? Perhaps it will turn into a global standard? It’s impossible to say. Its future will largely remain dependent on market players, innovators and the individuals who value Bitcoin as an effective alternative to a world controlled by the big banks that have so often lead us to financial ruin.

To use Bitcoin or not use Bitcoin, that is the question and the answer remains up to you.

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8.7. One last note… or coin?

And so Bitcoin continues to evolve, but that’s not quite the end of the story. Bitcoin still has its intrigues. The thing is, the person (or persons) called Satoshi Nakamoto remains a complete mystery. Clearly the most devout of privacy advocates and sharp enough to completely cover his tracks, Satoshi is a real-world phantom.

After releasing Bitcoin to the public, Satoshi would remain active in Bitcoin, creating the Bitcoin.org website and collaborating online with developers like Hal Finey until mid-2010, when he handed over control of the source code repository, transferred several domains to prominent Bitcoin community members and all but disappeared.

Speculation regarding his true identity, or the identity of the group going by the name Satoshi Nakamoto, has abounded and, while journalists such as Joshua Davis of the New Yorker among others, have claimed to narrow down Satoshi’s identity to just a few people, all those approached adamantly have denied being the real McCoy.

Bitcoin-face

So, to this day the creators of Bitcoin remain a mystery, perhaps just as the cryptopunks intended.

They had opened their Utopian dream to the world, a dream of personal privacy, liberty, peer-to-peer interactions and decentralization. Diffies’ idea of cutting out dependency on the middleman (centralized system administrators) who could be compromised by government interference, and the cryptopunk ideas of protecting personal privacy and liberty are alive in Bitcoin today, while its creator, the person (or persons) named Satoshi Nakamoto, remains, like Bitcoin itself, out there somewhere in the ether.

Frank West is a bit of an itinerant gambler. An avid traveler and freelance writer with a penchant for games of chance, Frank has hit the tables in casinos the world over and picked up a copious volume of knowledge along the way. Frank enjoys passing on what he’s learned in blog and magazine articles about gambling and teaching people how to beat the house. He also covets his privacy, authoring his articles only under the pen name Frank West.