Two years ago, Newsweek famously ran an erroneous cover story on the true identity of Satoshi Nakamoto. And for the second time since bitcoin’s invention in 2009, many in the media last week made the same mistake.
The importance of Satoshi’s identity goes well beyond bragging rights. At its heart is how widely bitcoin’s value can fluctuate—and how much influence he (or she, or they) potentially has over that fluctuation.
“Bitcoin is a system where you have cash-like properties, and you can pay anybody, but you also have Internet-like properties where you can move money all over the world,” says Dan Kaminsky, one of the first security researchers to explore how bitcoin’s pseudo-anonymization and encryption actually work. “It’s like a dollar bill with a transporter.”
Most people have never (virtually) touched bitcoins, which have no form factor. But they might be aware of the currency’s increasing popularity for securely buying goods and services over the Internet. Providing an alternative to cash and credit cards, bitcoin is taking monetary power away from central banks and financial institutions.
“It acts as an alternative to the traditional financial system,” says Bailey Reutzel, a journalist and consultant who has written about bitcoin since 2013 for financial trade publications. “It pushes back on the system and makes the system have to innovate. Bitcoin is a cheaper, faster payment method. All the banks are scrambling to keep up.”
Wait, bitcoin’s not anonymous?
Bitcoin is not anonymous, as Kaminsky and others have proven over the years. But that doesn’t mean that it doesn’t have value to transaction security and user privacy, even in its pseudonymous state.
“It was really interesting working with a technology that had to be explicitly aware of its security properties,” Kaminsky says. “My hope is that bitcoin tech will force other security tech to be built that will be used outside of bitcoin.”
Bitcoins, currently worth $450 apiece, are traded through a mostly decentralized transaction system based on a public ledger called the blockchain of all currency transactions to date. Although how you buy bitcoin depends on what country you’re in, you can go to a secure broker to purchase bitcoin. Coinbase is one of several services, and it works for both U.S. and U.K. residents.
To pay a recipient for goods or services in bitcoin, you first need a bitcoin wallet because the blockchain only records transactions, it doesn’t tabulate how many bitcoins are owned by an address. The wallet can be stored on your computer, on your phone, on the Web, or in a dedicated bitcoin hardware device. Bitcoin transactions can vary in difficulty depending on whether you’re paying a dedicated bitcoin merchant or a private individual. At its most basic level, to complete a bitcoin transaction, you need the recipient’s bitcoin address and the amount of bitcoin you want to spend.
Bitcoin addresses can be thought of as ways of recognizing signatures, or public key, and each one has an associated mathematical machine that can generate this recognizable data—a private key. Users sign messages saying, “I send 20 BTC to Bob, signed Alice,” in the digital equivalent of writing a check.
But there’s no central bank backing the fact that Alice had 20 BTC to send. Instead, everybody can follow the chain that led to Alice having 20 BTC in the first place because that’s recorded in the blockchain. Then, because she signed over the money, they can follow the fact that Bob is 20 BTC richer. These individual transactions are the data points that are ultimately enshrined in Bitcoin blocks via the miners.
All bitcoin transactions are recorded and verified on a public ledger called the blockchain, which is updated about every 10 minutes.
Bitcoin expert Thomas Benjamin says most “adversaries” looking to track you don’t care about your one transaction on a gray- or even black-market site. They can even help by adding more traffic—more mathematical noise—to an already-complicated system. But, he cautions, “if your adversary is the NSA, give up and go home.”
Benjamin says using bitcoin “leaves patterns behind that sophisticated math can follow pretty easily, if your adversary cares enough.”
Note that there is no insurance, as with traditional banks. The collapse of Mt. Gox—one of the largest bitcoin exchanges until 2014, when it was discovered that hackers had looted 850,000 bitcoin from it—left its customers with no recourse.
Supply and demand
On average, there are currently about 230,000 bitcoin transactions per day between payer and recipient addresses, up from 109,000 transactions per day a year ago. That number can fluctuate wildly, and like shares of a company, the type and amount of transactions, as well as the sheer number of bitcoins available, affect their value. But unlike government-sponsored currency, where the government that minted the money can generally print more, there are a finite amount of bitcoin, so anybody holding a vast trove of bitcoin off the market could wildly affect bitcoin value.
Unlike the traditional financial and banking system, which depends on regulations to ensure that everybody more or less plays fair, bitcoin is a mostly self-regulating system. Bitcoin’s computer code is open-source, and changes made to the bitcoin technology are made by group consensus. But in terms of daily transactions, it’s hard to game the system because of how it uses its security code.
“Bitcoin’s clever trick was to use cryptography to limit how often changes are made so that only one person ends up changing it at a time,” and newly minted blocks of bitcoin are added to the blockchain, Kaminsky says.
The computers that compete to create the sections of the blockchain, known as bitcoin miners, solve mathematical equations millions of times per second to create a block of new bitcoin and bitcoin transactions. The system forces everyone to trust whichever miner “wins” that particular 10-minute round. The winning miner gets the newly minted bitcoins, currently around 25 per block.
“Gold is valuable because it is hard to find by digging into the earth,” Benjamin says. “Bitcoins are hard to find because of the mathematics behind minting new bitcoins.”
The importance of Satoshi Nakamoto’s identity
Satoshi, Robert Graham says, owns a “massive cache” of the currency, estimated at 1 million bitcoin, or 7 percent of the total supply. This person or group could wreak havoc on the currency if those bitcoin were suddenly sold into the market, potentially devaluing all bitcoin.
“Even if he sells only a few, others will notice, causing a crash as everyone panics and sells theirs before Satoshi can dump,” Graham says.
Bitcoin decisions are made by a community, and historically, consensus has been hard to come by, Reutzel says. “Adoption is a huge issue when the currency is quite volatile.”
While some companies, including BitPay, have attempted to create bitcoin debit cards, the implementation of transaction fees hasn’t gone over well. Even as more people gravitate toward bitcoin because of its differences from the traditional financial system, the inability of the bitcoin system to handle significantly more users could force it to be more like the traditional financial system from which its users are escaping, Reutzel says.
The revealing of Satoshi’s true identity could help push bitcoin technology beyond its current borders, says Kaminsky, who feels that for bitcoin to continue to provide secure, pseduonymous transactions for a growing user base, it needs a leader or small steering committee to make decisions.
“I’m not a particular bitcoin supporter,” says Kaminsky, and notes he owns no bitcoin. “I just don’t want to see people get robbed.”