Alternatives to bitcoin have been around almost as long as bitcoin itself.  Since bitcoin is open source anyone can take the code, make a few minor or major changes and start their own alt-coin with its own block chain.

Given this it might seem that bitcoin itself has no value. It may be impossible to produce more bitcoins thereby making the currency itself deflationary but the production of other cryptocurrencies with their own blockchains that can essentially fulfil the same job and have all the same benefits might dilute bitcoin's share of the cryptocurrency market?

The problem with this viewpoint is it entirely discounts the role that momentum plays in the use of cryptocurrencies.  Litecoin may be technically able to operate in the same way as bitcoin and may even have a few minor advantages like the faster transaction confirmations but bitcoin is what people hear about first and judging on a variety of metrics it is what they will consider to be the 'primary' cryptocurrency.

This initial momentum has propelled bitcoin far further than any alt-coin.  Infrastructure is growing around bitcoin-only services in a way that alt-coins can only dream of.  Merchants and blogs accept bitcoin but not litecoin, the finance industry is creating funds around only bitcoin, mobile apps are being developed purely for bitcoin.  Even the main exchanges trade only bitcoin.  This growing infrastructure feeds the price of bitcoin which further widens the gap and helps to cement bitcoin's position at the top.

For anyone choosing to buy a bitcoin or a bunch of alt-coins, their decision will have to be backed by a judgement of the value of each.  For them to choose bitcoin is pretty straightforward - they can spend bitcoins online, they see bitcoin's value going up, bitcoins are in the news, there are bitcoin apps and they can transact with others that have them.

Choosing an alt-coin would imply that there is some benefit to the alt-coin over the bitcoin but alt-coins generally introduce no improvements to the bitcoin protocol and instead make simple tweaks like changing the hashing algorithm, claiming that it is better in some way than SHA-256, or tweaking other numbers like the confirmation time.

These efforts are minor and introduce no substantive benefit over bitcoin, so the decision is really down to which one is more widely accepted and/or has the best potential to make gains (if bought for speculation).

Alt-coins then that are nothing more than a tweaked carbon copy of bitcoin don't appear to have a rosy future.  But in the same way that Facebook started later and overtook MySpace and Friendster despite their momentum to become by far the dominant social network, it doesn't mean that bitcoin is unchallengeable.

What it does mean is that an alt-coin will have to replicate the advantages that bitcoin already has.

In terms of the infrastructure this will mean:

• Duplicating (and maybe improving) mobile apps across multiple devices
• Creating an exchange system worldwide to allow people to easily swap fiat currencies to and from the coin
• Publicising it / providing it with backing equal to the wide range that bitcoin has currently. 
  
• Somehow providing a secure hashing network

Such a currency isn't going to appear by someone altering a hash method in the bitcoin code and then uploading the software to a website.

If it comes from anywhere it will come from one or more well financed corporations.  Such a corporation could start their own coin, provide it with a lot of hashing power (perhaps centrally located initially but given enough cash and a well chosen hashing algorithm they could entice enough people in to build a critical mass of miners), create slick mobile and desktop apps to use it, provide exchange facilities both over the internet and maybe also on the ground via shops etc.

If orchestrated well enough and sold hard enough it could be seen as a viable alternative to bitcoin or even pushed as bitcoin's "successor".  

Even given this play though there are some hurdles that won't be easy to overcome.

Firstly, any developments that feature in the new coin may well be portable to bitcoin, meaning that bitcoin can update, pick up the improvements and carry on with all its entrenched users and infrastructure, leaving the alt-coin with no technical advantage.

Next, the hashing power of the mining network is crucial in securing it.  The higher the difficulty to find a block, the more difficult it is to attack the network and therefore the more secure it is.  In the earlier half of 2013 bitcoin's mining network was made up of graphics cards and ASICs were just starting to get going.  At such a stage it might have been possible for a corporation to provide a viable alternative but as ASICs have taken off so has the hashing power and difficulty and now replicating the bitcoin network would be a very difficult and expensive task indeed.  In addition, the hashing power of bitcoin is distributed and therefore safe from manipulation whereas a competitor would almost certainly have to be centralised as least to begin with putting it at a disadvantage.

Lastly, and particularly with centralised hashing power, any such alt-coin would be seen as being under the control of the organisation, much like Ripple. Its difficult to judge how many people out of the worlds population would care about the coin being under the control of an organisation rather than decentralised but decentralisation is a core concept of bitcoin.  Most people may not care but more tech-savvy users will.  In order to get around this the currency would have to fight technical users and appeal direct to end users.  This may be feasible with the right marketing effort but it is an avenue for strong criticism which is not available for bitcoin and therefore yet another disadvantage.

There are a lot of organisations that might be a good candidate in terms of their ability to start a CorporateCoin; Banks, Western Union, large end-user focused multinationals like Amazon, but one key question remains: what would their motivation be?

For small time alt-coiners the motivation is in most cases quite apparent, when we see stories in the news about someone buying 5,000 bitcoins for $25 and then using some of their new $850,000 value to buy an apartment when he remembered them a year or two later there is no doubt a strong feeling of envy and a desire to replicate the same conditions only with you as the early adopter.  If this is the only motivation for the alt-coin though it is doomed to fail.

For a corporation the motivation is less clear, although a corporation could have the same motivation (to place themselves as an early adopter - again like Ripple) to pose a real challenge to bitcoin would require a large investment and it would amount to no more than a risky gamble that gets more difficult to pull off with each passing day.

Whether an alt-coin will appear that really introduces something significant enough to make a dent in bitcoin is anybody's guess but the currently available alternatives aren't the ones to do the job.

The news recently has been awash with stories about how the FBI has confiscated bitcoins from Ross Ulbricht, operator of the illegal site Silk Road.

The most recent confiscation is of 144,000 bitcoins (around $29m at current prices).  The previous amount was 26,000 bitcoins (around $5m at current prices).

There's no question that Ulbricht has been detained by the FBI and has some major problems on his hands, he will almost certainly go to jail for a very long time, PopeHat estimates jail time of around 10 to 30 years.

The question though is what does 'confiscation' mean here?  The FBI may have encrypted wallets that contain the private keys to control these bitcoins but without the key to access the wallet they are useless.  I could stand outside Fort Knox and claim to have 'confiscated' all the gold within it.  Its within my sight so I've confiscated it right?  Except I can't actually get at the gold right now... and if the US government wants to come in and move that gold somewhere else then I can't stop them.

Both of those conditions potentially apply to Ulbricht's bitcoins.  Bitcoins aren't store anywhere, they are part of the network and blockchain.  The real 'owner' of the bitcoins is whoever knows the private key to make transactions with the wallet that holds them.

If the FBI doesn't know that private key (because its encrypted and they can't crack it) then they don't have any more control over the coins than you or I.  If Ulbricht has memorised or has a copy of the wallet seed then even now he retains control over the bitcoins (although his ability to exercise that control is no doubt currently limited).

Whether this changes in the future will likely depend on what mistakes Ulbricht made, what precautions he took and what leverage the FBI has to get the keys off him but it's quite possible, maybe even likely, that the FBI hasn't confiscated anything.

The speculation is that maybe the FBI has the encryption keys but is keeping the bitcoins in the same wallet but given the architecture of bitcoin this would leave them open to removal by anyone else at any time.  If Ulbricht did know the wallet seed he could get a message to someone to move them to another wallet and the FBI would lose them - why would they take that risk?  Instead it would make more sense that if they had the keys they would immediately move them to an FBI-controlled wallet.

I'm no fan of Ulbricht or Silk Road but in the past it hasn't been possible to claim that you've seized assets of a criminal without actually having control of them.  The new-to-the-world architecture of bitcoin and, perhaps more so, the relative lack of understanding of that architecture make this possible.  

Whether the FBI is using the term seize in a meaningful way or whether they will find in the coming years that their 'seized' bitcoins start disappearing through their fingers will be interesting.



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Bitcoin has been on an accelerating run for most of October now and has gone over $200 on the major exchanges leading many to speculate that it is in a bubble.

Last night though Bitcoin saw a large correction down from $230 to $190.  Despite this though the trend has picked up again and is edging towards $210 again.

If the current increase were fuelled purely by speculation then such a large and sharp correction would undoubtedly pop the bubble, likely provide a 'bounce' and allow bitcoin to settle at a reasonable value again, however the drop has worked out more like a blip in a long run.

Many are speculating as to what the source of the increase in value might be and most point to the recent story that Baidu (dubbed the 'Google of China' since it is the largest search engine in China and the 5th most visited website in the world) has started accepting bitcoin for its CloudFlare-like Jiasule service.   The idea is that this has increased public knowledge about bitcoin and a slightly larger share of the masses are once again gravitating towards buying a few.  Certainly the increase picked up speed after the Jiasule story broke around the 16th but bitcoin was already making significant gains since SilkRoad closed around the 8th.  While it is perfectly possible this is exactly the driver of the recent increases it ignores an entire section of growing and large scale buyers.

What we may be seeing is simple buying pressure from the wealth of startups around bitcoin.

Not every startup needs to retain large sums of bitcoin but some certainly do.  Recently Bitcoin Magazine reported that Western Union recently presented at a payments conference and assessed bitcoin as being 'not ready for primetime'.  Their criticisms though centered largely around the end user experience of bitcoin citing taxation issues, liquidity and consumer interfaces as the problems.

Western Union though are in a position to resolve all of these problems and install themselves as the 'go-to' place to make in-person bitcoin exchanges around the world.  Bitcoin Magazine themselves point out that Fox News ran an article back in April about bitcoin drawing Western Union but the article has since been deleted.

It is quite possible that Western Union can see the writing on the wall and, while publicly downplaying bitcoin are preparing internally to launch themselves as a large scale worldwide exchange or provide bitcoin based remittances in some other form.

Regardless of whether we think this is the case or not we know that VCs are investing heavily into bitcoin businesses right now and we will see a lot of startup activity over the next 12 months.  If we use Western Union as an example of this activity and as an example of some business that is adopting bitcoin to provide a service which does need to retain a large store of bitcoins for liquidity purposes it becomes easy to see how even one such business could cause significant price movements for bitcoin.

Looking at BitStamp's order book today with the price at $193 we can see that it would take just $250,000 to move the price by $10 to $203.  This would equate to a purchase of around 1,250 bitcoins.  While this is a large sum for an individual if Western Union were fulfilling an internal plan to soak up bitcoins to use for liquidity in a worldwide exchange / remittance service they would need far more than this and could alone end up pushing bitcoin prices tens of dollars.

Whether Western Union is the culprit or not it isn't difficult to imagine that some startup might be quietly filling its boots to launch its liquidity-sensitive service.

Richard Brown, IBM's executive architect discussed bitcoin in an excellent interview with Finextra, it's available at the following links (Finextra's servers are slow at present):

Bitcoin was invented by Satoshi Nakamoto, but who is he?  The name is just a pseudonym and probably has no connection to the actual author.  Satoshi was careful to remain anonymous and understood a lot about modern security so there is every reason to believe that the pseudonym was carefully chosen precisely because of its lack of connection (rather than cobbled together from something outside the authors window or sitting on their desk).

The suspects have typically been known cryptographers that fit the profile based partly on the type of language and formatting he used.  Britishisms in his communications led The New Yorker to finger Michael Clear (he has denied being Satoshi) and question whether other well known crypto experts might have invented it.

Others have suggested that since the communications also included American spelling the author behind the pseudonym might actually be a group of people collaborating.  This would help explain the high level of competence across multiple disciplines needed to invent Bitcoin and displayed by Satoshi in communications.

Bitcoin is seen as generally anti-government.  Realistic or not this is understandable since the creation of a new monetary system which technologically supersedes the current one but which has a cast-iron limit on the final quantity produced can be viewed as a challenge to fiat currencies around the world.

Governments are held to rely on fiat currencies since they can print money and devalue their own currency.  This reprices debt held in their currency in real terms (making it cheaper to service and also eventually inflating it away entirely - even with relatively small inflation the rule of 72 takes care of this in a time frame acceptable to a government).

Taking away this ability leaves governments with more politically volatile methods of raising money such as increasing taxes. This is especially problematic since in recessions and depressions - times when tax hikes are most needed - people already feel under financial pressure and are less likely to accept even more financial pressure from their elected representatives.

The invention of peer-to-peer networks to share content has had an indisputable and lasting effect on all content industries.

We are all aware that file sharing caused a major shake up in the record industry and film industry and the lengths they have gone to to shut down sites like Napster and The Pirate Bay.  However no amount of lobbying, court cases and even technological attacks has managed to make any real dent in file sharing or the peer to peer networks it uses.

Peer-to-peer networks by their nature, much like the internet itself, have no single point of failure.  It is this key attribute that gives them their resilience and allowed them to stand the test of time.  The sheer numbers win out over even the largest of wallets.

Whether you agree with file sharing and its effects on copyright holders or not, without accepting a severely restricted internet they and their effects are here to stay.

Bitcoin has been described as peer-to-peer money and the description is quite accurate.  The basis of the bitcoin network is a peer-to-peer network with no single point of failure where consensus determines the course of the currency.

The gradual tailing off of bitcoin production is designed to ensure deflation of the currency (holding or increasing its value in real terms as opposed to losing it for fiat currencies) and encourages those with a vested interest (the many that already hold bitcoins) to keep this the status quo.   Anyone therefore investing in bitcoin either for production or as a store of value is not apt to agree that they should be devalued by changing the algorithm to produce more.

This attribute of bitcoin then is set in stone, along with its other technological abilities.  Once bitcoin exists, there is no going back.

All this sounds like bad news for fiat currencies and governments across the world that rely on devaluing their currencies and inflating away debt.  If bitcoin was invented by an independent person or group then it is here to stay and might feasibly cause some trouble for governments.

But bitcoin isn't the first asset to hold its value in real terms.  Gold has been around and recognised as an asset (and frequently used as the basis for a monetary system) for millenia.  The existence of gold doesn't pose a threat to fiat currencies today so why should bitcoin?

The real issue comes if a deflationary currency becomes the world reserve currency and supplants the dollar.  If this were to happen then even the dominant superpower would be unable to inflate away their debts in what are (for them) real terms and other countries would be unable to take advantage of the same devaluation by keeping step - effectively repricing the value of all currencies around the world.  This sounds like a tall order in the extreme - and it is - but if bitcoin survives technological attacks then over the course of 50 years as new generations who are newcomers to both the dollar and bitcoin appear there is every reason to think they will treat bitcoin as the standard and fiat currencies as the dinosaur.

If bitcoin won't go away then much like the content industry change might simply be a matter of time.

If change is inevitable, then as many commentators have tried to point out the content industry, it is better to be in a position of strength than try to resist it and fail.

If the NSA with its world renowned cryptographers, lots of time and money on its hands, and eyes on all aspects of the world including the worlds financial systems and economies discovered bitcoin first they would be left with inescapable conclusions:

1. Bitcoin or its equivalent will be invented sooner or later
   
2. It will not be feasible to shut it down
3. Given the technological advantages it may (will?) eventually supercede traditional fiat currencies
4. It is better to be in the driving seat than watching from the sidelines

Faced with the discovery their best option would be to ensure that bitcoin turned out the way they wanted it to. They would want to be behind the invention and be in position to secure a majority of the currency before it became too difficult / expensive to do so.  This would cement their dominant position over time as the eventual effective owner of the new world reserve currency.

Certainly there is no doubt that whoever the creators of bitcoin were they were in a position to secure a very large number of bitcoins with minimal effort.  The bitcoin network may now run at 2 petahashes (roughly 25 exaFLOPs) and climbing fast but in the very early days any standard computer or network could compete and secure a large portion of the hashing power (and therefore bitcoins generated).  For an agency like the NSA it would be trivial to secure a large portion of the hashing power throughout bitcoin's early life.

This would leave the inventing government in a position of currency domination and while it would not be feasible to inflate the currency (print more of their reserve currency) they would at least have the vast majority of the reserves, perhaps orders of magnitude more than other countries.

So in the next few decades will bitcoin rise to become the dominant world currency while we will find that the USA inexplicably owns a large portion of it?  Maybe, but probably not.

In order for this scenario to work out a lot of things have to fall into place.  In particular the right people within the NSA have to both make the discover and come to the same possible conclusions and although the NSA has certainly surprised us over the course of the past few years there is little evidence that they were involved in any way.  An independent party disenfranchised by the recent large scale money printing is surely more likely to have invented the currency simply because they had a reason to try to do so - the NSA had no obvious reason to be investigating the possibility of a new deflationary technologically advanced currency.

Still, arguably more worrying is the thought that bitcoin could rise to dominance over time with one random computer programmer holding a large percentage of its value on his hard drive, although its probably no worse than the status quo.