Bitcoin: The Digital Currency Invented by Thomas Edison?

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Bitcoin: The Digital Currency Invented by Thomas Edison?

American inventor Thomas Alva Edison was incredibly prolific, with his name on nearly 1,100 (1,093) patents. Some of his inventions include the phonograph, motion picture camera, kinetographic camera, incandescent light bulb, universal stock ticker, electric power system, electric railway, electric locomotive, alkaline batteries, at least three types of telegraphs, a perforating pen, carbon telephone, and many more. Many of these changed our society as a whole, how we lived, how we were entertained.

There’s also a claim — in a certain video infomercial hosted on YouTube (by MoneyMorning.com) that Edison also invented a “renegade currency,” and the implication that it is essentially the same as the increasingly popular, disruptive digital currency system Bitcoin. Bitcoin has climbed in value from $13 per 1 BTC (one bitcoin) in Jan 2013 to over $1,000 in Jan 2014, with a brief high of $1,240 in early Dec 2013, just before it lost nearly half its value, then started climbing again, surpassing $1,000 in Jan 2014.

Edison’s Currency Plan

Did Edison really invent the basis for Bitcoin? A paper published by University of Washington (Tacoma) indicates that a lesser-known Edison invention was a “… ‘commodity reserve’ monetary plan… to guarantee price stability” and to help American farmers. His plan was revealed in 1922 (despite claims elsewhere of 1921). Edison was not a fan of a gold-backed financial system nor interest.

The paper describes Edison’s plan in detail, the gist of which is as follows:

  • American farmers could store recently-harvested, eligible commodities (36 of them) in a government warehouse (12 of them) for up to 1 year.
  • They would receive a mortgage certificate recording quantity and quality, and an equity certificate recording ownership.
  • The mortgage certificate could be used at a National Bank to 50% of the value of the commodity based on the 25-year average price.
  • To retrieve the commodity, they would the equity certificate and 50% in cash of the equity value.

The system was design in a manner as to benefit the farmer, regardless of the current price and 25-year average price of a commodity. However, Edison was unable to persuade anyone in the government to use the system.

If you read the paper describing Edison’s currency system in detail, very little of it resembles Bitcoin — except for not using a gold-backed currency. Now, in addition to being a prolific inventor, Edison was also a very persistent person, working on inventions until he got them right. Since he was not the first person to think of a commodities-backed currency, he was already working to improve an existing idea. So it’s entirely possible that this genius inventor late improved upon his currency idea and maybe thought of a way to remove the government’s involvement and to decentralize the system.

However, as much of a genius as he was, if he did later come up with a more Bitcoin-like currency system, there was no way, of course, for him to implement the idea. At best, though, he might have inspired a chain reaction of people, like the infomercial claims, which eventually resulted in the Bitcoin system.

Bitcoin: Facts and Figures

General Data

Here are some facts and figures about the Bitcoin system and bitcoins:

  • Bitcoin is a digital currency, but not the first nor only. The first appeared in the early 1990s, and at least 80 such currencies have been created in total.
  • Bitcoin is the most commonly used, at the time of writing. However, Litecoin actually outperformed Bitcoin in ROI, at least in 2013, climbing from about $0.07 per unit on Jan 1, 2013, to $23 at some point in Dec 2013 — a multiple of about 328 times, compared to Bitcoin’s 95 (at it’s Dec 4, 2013 peak of $1240).
  • Some of the alternatives (aka “altcoins”) are now defunct, including the very short-lived Coinye, which used music celebrity Kanye West’s caricatured likeness in their logo.
  • The Royal Canadian Mint even launched an “electronic currency” called MintChip in 2012, which is backed by the Canadian government. More recently, this government said Bitcoin is not legal tender. (China also said it is not legal tender. Both Canada and China, despite government stances on bitcoin, have at least one startup company whose product or service is bitcoin-related.)
  • Bitcoin appeared in 2009, supposedly invented by someone named Satoshi Nakamoto — which is possibly a pseudonym — who is supposedly from Japan, but evidence suggests he was in Germany at the time. There are many speculations of his true identity, with one theory that his name is a mashup of four Asian electronics companies: SAmsung TOSHIba NAKAmichi MOTOrola =? SATOSHI NAKAMOTO (Google only purchased Motorola Mobility, not the entire company).
  • Nakamoto has not been heard from by other Bitcoin developers since 2010.
  • Bitcoin is an international payment system.
  • Bitcoin requires a network of contributors and their computers to maintain the system, to keep it decentralized.
  • Bitcoins are not debt-based, nor “backed” by anything — just as gold is not.
  • Bitcoin prevents double-spending, which would result if the same bitcoins were spent in two different places simultaneously, either through some form of digital copying, or some other means.
  • Double-spending is avoided by having the transaction ID and amount of bitcoins exchanged in each transaction displayed publicly. No further information is displayed, so the transaction is still anonymous.
  • The only way bitcoins can be double-spent is if one organization ends up owning/ managing 51% or more of all available bitcoins in the system.
  • Bitcoins are relatively easy to verify, secure and transfer.
  • Bitcoin is based on computer-generated algorithms that involve cryptography for security, and allows for anonymous currency transactions — at least in theory.
  • The bitcoin system uses “SHA256″ and “ECDSA” cryptographic algorithms, the first of which is endorsed by the U.S. government and is a FIPS standard — the same as what is used for credit cards and electronic bank transfers.
  • Bitcoin is a granular currency and can be used to make micropayments. The smallest fraction of a bitcoin is one-one hundred millionth (1 divided by 100M), which is known as a “satoshi”.
  • 1 mBTC = 1 milli-bitcoin = 1 one-thousandth BTC; or 1,000 mBTC = 1 BTC.
  • 1 μBTC = 1 micro-bitcoin = 1 one-millionth BTC; or 1M μBTC = 1 BTC.
  • There are numerous other bitcoin units.
  • Bitcoins are created at a rate of 25 approximately every 10 minutes, with over 12M in circulation at the time of writing.
  • Only about 21M bitcoins will ever be created, in total. This is just over 2 quadrillion atomic units (satoshi), or about 2.1×10^15 = nearly 21M bitcoins.
  • Satoshi Nakamoto is said to own about 1.15M bitcoins, having mined 32,485 blocks of 50 bitcoins each in 2009, most of which he held onto. This would make him a billionaire if Bitcoin price holds at about $1,000.
  • The next largest single collection of bitcoins now belongs to the U.S. Justice department after seizing a stash of 144K bitcoins from the alleged founder of the black market Web site Silk Road — an event that possible inspired an episode the TV drama “Person of Interest.” The stash was worth about $28M when seized.
  • The Winklevoss brothers are estimated to own about 1% of the available 12M bitcoins, or about 120K.
  • Exante, a Maltese Bitcoin hedge fund (first of its kind), launched in Mar 2013, started with 80,000 bitcoins.
  • Bitcoin Investment Trust owns 53K bitcoins.

Explaining the mathematics behind how the Bitcoin system works is beyond the scope of this article. A more complete technical explanation is available at bitcoin.org, authored by Satoshi Nakamoto.

The Bitcoin Market and Its Benefits

There is a market for Bitcoin and anonymous digital currency in general, and usage and value show this to be true. The value of the system increases as more transactions occur in Bitcoin prices rather than the cash equivalent.

  • Personal information about Bitcoin transactions cannot be stolen, such as happened with Target Corp’s credit card data breach of millions of customers. Only an encoded digital address and the amount of the transaction is recorded.
  • Bitcoin’s security is upgradeable, if and when necessary.
  • The bitcoin protocol cannot be easily modified without community consensus.
  • As of the beginning of Jan 2014, Bitcoin market cap was almost $10B.
  • Bitcoin’s value has increased dramatically, reaching US$1240 on Dec 4, 2013, then fell to almost half after China cracked down and after China’s central bank was cyber-attacked.
  • As of Nov 2013, around 1,000 businesses with a physical presence accept Bitcoin. Over 35K online merchants accept the currency.
  • The things or services you can pay for with Bitcoin fills a fairly wide spectrum. Some of them are one-off transactions, such as a condo unit in New York City that was only purchasable with Bitcoin.
  • Other transactions to date include:
  • Paying the IRS, with something called SnapCard, part of a bill payment service.
  • Hockey games.
  • Space flight on Virgin Galactic.
  • College tuition in England and Cyprus.
  • WordPress.com upgrades.
  • Online news firewall access (Chicago Sun-Times).
  • In-app purchases in Zynga mobile app games.
  • Baked goods (Paris Baguette cafe in South Korea).
  • Automobiles (a $100+K Tesla S).
  • Salaries — a police chief in Kentucky became possibly the first government employee to receive his salary in digital currency (after taxes and deductions, of course).

The Downsides to Bitcoin

Many of the benefits of using Bitcoin can also turn into downsides in the wrong hands.

  • Losing your private key that unlocks a bitcoin wallet means possibly losing your holdings permanently.
  • Bitcoins could be lost, stolen or destroyed.
  • Bitcoin involves one way, irreversible transactions — e.g., no easy way to track heists, and fraud protection and chargebacks are not built into the bitcoin system. However, services similar to Paypal but which use Bitcoin could be created, who would offer fraud protection and chargeback services.
  • There have been at least 5 Bitcoin heists and one seizure, as of late 2013.
  • In early Dec 2013, between $6-40M in merchants’ bitcoins were stolen from Sheep Marketplace, a black market copycat that popped up after authorities shut down Silk Road and seized $28M in bitcoins}. The heists at least $6.2M worth of bitcoins (based on values at time of each event).
  • Potential volatility, due to there being a finite number of bitcoins.
  • Demonstrated volatility in 2013.
  • While Bitcoin is decentralized, if anyone gains 51% of the auditing power, they can “double spend,” which make the currency useless. There are checks and balances in place to at least *try* to prevent “51% power.” Interestingly, the U.S. government is the second largest holder of bitcoins, at the time of writing.
  • Bitcoin payment confirmations can take as long as 10 minutes, which makes transactions such as POS (point of sale) awkward, but double-spending would still be avoided because of the way the system is designed.
  • Mandatory “key disclosure” laws in some countries (UK, Australia, South Africa) have been used to jail people who refused to turn over cryptographic keys.
  • Members of the Bitcoin Foundation, a non-profit working “to standardize and promote the open source Bitcoin protocol,” were served a ceased and desist warning for allegedly engaging in the business of money transmission without a license. Given that’s not what this organization does, it’s worrisome for other bitcoin-based companies.
  • Holding bitcoins could be illegal in some countries.
  • In the future, Bitcoin might be regulated in some way.
  • One school of thought says Bitcoin could be used for speculation and money laundering.

How Do You Get Bitcoins?

There are a few ways you can acquire bitcoins:

  • Buy bitcoins, using a Bitcoin exchange.
  • Get them from a special Bitcoin ATM. The first of these worldwide is said to be in Vancouver, British Columbia (announced around Oct 2013). Hong Kong is also expected to have Bitcoin ATMs in early 2014.
  • Get paid in bitcoins — sometimes for simple tasks such as web surfing or watching videos.
  • “Mine” bitcoins, using special software and, in some cases, hardware.

There are any number of online guides on how to use Bitcoin. To convert in either direction between cash and bitcoins requires a Bitcoin wallet, such as that offered by VC-funded Coinbase.com.

Bitcoin Startups

According to a database by Swedish venture capital firm Creandum AB, bitcoin technology already has a variety of startups and funding:

  • 334 startups involved with bitcoin in some way, at the time of writing.
  • 34 startups list any type of funding, for a total of just over $88M ($88,048,000). This includes venture capital, seed funds, and crowdfunding.
  • Coinbase tops the list with $31M, or ~35.2% of all funding listed in the database.
  • Of funded startups that list a country of operations (33 of 34), the United States is most represented with 21 startups. In second place are Australia, Korea and Singapore, each with 2 funded startups. All the other represented countries have one funded startup.
  • U.S. startups’ collective funding is just over $74M ($74,202,000).
  • 14 startups have funding of at least $1M, 12 of which are based in the US, and 1 each in Singapore ($5.5M) and China ($5M).
  • The Winklevoss twins (early investors in Facebook) not only have a (future) Bitcoin ETF (exchange traded fund) listed, but they’ve previously invested $1.5M in Bitinstant Bitcoin exchange — which is at least temporarily if not permanently shutdown. The twins said in Nov 2013 that the bitcoin market will reach $400B — 100 times what it was then. As of Jan 2014, the market cap was over $10B.
  • China has one of the largest bitcoin exchanges, BTC China, in terms number of coins traded in one day — 100,000, for a then value of $100M, and about double the next biggest exchange, Japan’s Mt. Gox.
  • This fact gained BTC China a $5M investment from a Silicon Valley VC. It was due to this startup’s growth that the Chinese government made it’s warning to banks, in early Dec 2013, about dealing in bitcoins. As a result, the currency lost almost half it’s value shortly after, but has since regained most of the top value.
  • Andreessen Horowitz has invested $25M into Bitcoin wallet startup Coinbase, on a $140M valuation (originally valued at $90M). This is possibly the largest funding round for bitcoin startups.
  • Andreessen Horowitz has invested in Facebook, Airbnb, Foursquare and Box, as well investing in another bitcoin startup, OpenCoin.
  • Coinbase says there are over 600K bitcoin wallets.
  • Cyber security company Kaspersky Lab says to expect increased attacks from hackers trying to steal bitcoins.

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References

Information for this article was collected from the following pages and web sites:

  1. https://en.bitcoin.it/wiki/Satoshi_Nakamoto
  2. http://bitcoin.knackhq.com/btcdb
  3. http://www.businessinsider.com/thomas-edison-inventions-light-bulb-and-30-more?op=1
  4. http://www.buzzfeed.com/mariahsummers/the-16-most-important-bitcoinaires
  5. http://www.forbes.com/sites/afontevecchia/2013/11/12/winklevoss-twins-say-bitcoin-market-to-hit-400b-urge-regulators-not-to-push-innovation-to-china/
  6. http://www.forbes.com/sites/jonmatonis/
  7. http://www.hongkiat.com/blog/bitcoin-questions/
  8. http://moneymorning.com/2013/11/22/why-virtual-currency-is-here-to-stay-bitcoin-or-no-bitcoin/
  9. http://www.policymic.com/articles/76453/how-bitcoin-works-in-5-easy-steps
  10. http://qz.com/150946/as-bitcoin-booms-so-does-bitcoin-bank-robbery/
  11. http://www.smartplanet.com/blog/bulletin/snapcard-lets-you-pay-the-irs-with-bitcoin/
  12. https://vimeo.com/63502573
  13. http://faculty.washington.edu/dtwills/resources/Edisons-Monetary-Option.pdf
  14. http://en.wikipedia.org/wiki/Thomas_Edison
  15. http://blogs.wsj.com/