Spain turns to Bitcoin, prompting incoherent discussion on Today

There are problems with the currency. But not those problems.

Wired's Ian Steadman reported yesterday about the surge in downloads of Bitcoin apps in Spain, noting that:

Three iOS apps – Bitcoin Gold, Bitcoin Ticker and Bitcoin App – each jumped up the App Store charts in Spain, all on the same day, as the news broke from Cyprus. Compare their download histories to those from a country like the UK and it's clear that the upward trend is more pronounced in the more at-risk nation. Bitcoin Gold's all-time high ranking of 83 in Spain came on 17 March; for Bitcoin Ticker, 68 on 17 March; Bitcoin App reached a high of 147 on 19 March. The highest rankings for those apps in the UK are lower – 293, 201 and 48 –and they were all records set months or even years ago.

That surge has been noticed by others, too – including Radio 4's Today Programme, which had a little interview with an economist about the fledgling currency. Sadly, they didn't really do themselves proud. A choice excerpt:

INTERVIEWER: A currency supply has to be limited, otherwise it can be devalued and copied. Who limits it? Who controls it, if there's no central bank?

INTERVIEWEE: Well, it's all controLled by users of the bitcoin community, and that's the reason why it has become so popular in recent years.

INTERVIEWER: What, they're all unbelievably virtuous, they all control it? What's the mechanism?

INTERVIEWEE: Any currency, and any asset class, is basically predicated on trust. We trust the central bank, we have full faith in credit, so we go into a shop and we trust that our £20 note is freely exchangeable for £20 of goods.

Now, heaven knows I'm not the biggest fan of the digital currency, but this is doing it an enormous disservice.

The reason why gets a bit technical, but if you want to know more about the currency, it's worth learning how it works. If not, skip the next five paragraphs.

The heart of bitcoin is based on something called public-key cryptography. This technique – used throughout the web, whenever security is needed – uses very large prime numbers to create a form of encryption where the key used to lock data is different from, but related to, the key used to unlock it. What that means is that you can send copies of the first key far and wide, and so long as you keep the second key hidden, other people can encrypt information which only you can then decrypt.

But there's a second thing the technology allows. If you use your private key to lock the data, then anyone can unlock it with your – and only your – public key. That lets you sign messages in a way which, so long as people are certain that it really is your public key they have, proves it was you who wrote it.

A bitcoin is, in its purest form, a list of past transactions signed with private keys and verified with public keys. So long as you keep your private key secret, it is impossible for other people to "spend" bitcoins which the network knows are held by you, because those transactions wouldn't be accepted.

It bitcoin were a centralised currency, that would be that. But it's decentralised, and that means that there's a second problem to overcome. I could send one bitcoin to Alice with her key added to the end, and the same bitcoin to Bob with his added on. Until the two of them spoke, they wouldn't know who had the "real" coin and who had the fake one.

The way bitcoin solves this is the really clever part of the whole thing. All transactions are broadcast throughout the network, and then certain computers – called "miners", analogously to gold – work to group them into a timestamped block every ten minutes. Multiple computers do this at once, because the calculations required to make a new block are, deliberately, very difficult. Honesty is therefore enforced by the fact that the easiest group to co-ordinate is the one telling the truth about which transactions came first.

OK, back to the non-tech stuff. How is this linked to inflation? Well, if your computer is the one which solves the puzzle and makes the block, you get some free bitcoins. Currently, it's 25 every block, but that number halves every four years until it drops to 0.00 in the year 2140.

And that's it. That's the only way new coins are created, and there's just over 1.25 million made each year. So there's nothing to do with "trust" in the whole system: low inflation is inherent to the entire idea. In fact, that's actually one of the things used to attack bitcoin; orthodox economics holds that a low level of inflation is good, because it encourages people to spend rather than horde. If there was a bitcoin economy the size of a nation, it would be in a permanent state of recession, and there would be no possiblity of monetary policy saving the day.

The worst thing is, the interviewee apparently knew this, because later on in the segment, he said:

They're so popular because they offer a little bit of something new, a little bit of security, an anti-inflation side of things, as well, because they've built something into the trading algorithm which means that it actually deflates over the cause of the lifetime.

Bitcoin might or might not work as a currency – you can tell what side I come on – but if Today is going to cover it, they ought to cover it well.

Of course, none of what Today actually discussed helps address the real question: are the panicky Spanish savers doing the smart thing by moving their money into bitcoin? (That's assuming they actually are; as Steadman points out, iOS is small fry in Spain, and three apps increasing their sales figures does not an exodus make.) It depends what they are fleeing.

If the fear is that the Spanish banks might implement a Cypriot-style deposit tax, then bitcoin would help. As a potentially anonymous currency, it's a tax avoider's – and tax evader's – dream, but only insofar as taking money out of the bank and keeping it in cash under the bed is. You can keep your money hidden from the tax man, but when you come to spend it, you're going to raise questions. In fact, the whole thing comes back full circle, because with Cyprus on lock-down, money laundering got a bit harder to do.

If your fear instead is Spain exiting the euro and devaluing, then bitcoin is a slightly better choice – but again, only so good as holding your money in dollars in a safe. But the exchange rate matters here. If I'm right, it's actually considerably worse than holding dollars in a safe. The bubble will burst, the exchange rate will plummet, and your bitcoins, measured in a currency you can actually use to buy food in, will lose all their value.

If I'm wrong, and the 100 per cent month-on-month increase continues, or even just levels off, then moving all your money into it could leave you rich. Who knows? That's the gamble you're taking

But fundamentally, the reason for switching to bitcoin from any other currency is that you have lost trust in the very concept of governments looking after money. If you are sitting in the eurozone at the moment, that might be an understandable belief. But I still have very little hope that switching from a currency with bad monetary policy to a currency where monetary policy is deliberately impossible will help matters to any great deal.

Spaincoin! Bitspain? Spitcoin. Image: Wikimedia Commons/Alex Hern

Alex Hern is a technology reporter for the Guardian. He was formerly staff writer at the New Statesman. You should follow Alex on Twitter.

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Commons Confidential: Dave's picnic with Dacre

Revenge is a dish best served cold from a wicker hamper.

Sulking David Cameron can’t forgive the Daily Mail editor, Paul Dacre, for his role in his downfall. The unrelenting hostility of the self-appointed voice of Middle England to the Remain cause felt pivotal to the defeat. So, what a glorious coincidence it was that they found themselves picnicking a couple of motors apart before England beat Scotland at Twickenham. My snout recalled Cameron studiously peering in the opposite direction. On Dacre’s face was the smile of an assassin. Revenge is a dish best served cold from a wicker hamper.

The good news is that since Jeremy Corbyn let Theresa May off the Budget hook at Prime Minister’s Questions, most of his MPs no longer hate him. The bad news is that many now openly express their pity. It is whispered that Corbyn’s office made it clear that he didn’t wish to sit next to Tony Blair at the unveiling of the Iraq and Afghanistan war memorial in London. His desire for distance was probably reciprocated, as Comrade Corbyn wanted Brigadier Blair to be charged with war crimes. Fighting old battles is easier than beating the Tories.

Brexit is a ticket to travel. The Independent Parliamentary Standards Authority is lifting its three-trip cap on funded journeys to Europe for MPs. The idea of paying for as many cross-Channel visits as a politician can enjoy reminds me of Denis MacShane. Under the old limits, he ended up in the clink for fiddling accounts to fund his Continental missionary work. If the new rule was applied retrospectively, perhaps the former Labour minister should be entitled to get his seat back and compensation?

The word in Ukip is that Paul Nuttall, OBE VC KG – the ridiculed former Premier League professional footballer and England 1966 World Cup winner – has cold feet after his Stoke mauling about standing in a by-election in Leigh (assuming that Andy Burnham is elected mayor of Greater Manchester in May). The electorate already knows his Walter Mitty act too well.

A senior Labour MP, who demanded anonymity, revealed that she had received a letter after Leicester’s Keith Vaz paid men to entertain him. Vaz had posed as Jim the washing machine man. Why, asked the complainant, wasn’t this second job listed in the register of members’ interests? She’s avoiding writing a reply.

Years ago, this column unearthed and ridiculed the early journalism of George Osborne, who must be the least qualified newspaper editor in history. The cabinet lackey Ben “Selwyn” Gummer’s feeble intervention in the Osborne debate has put him on our radar. We are now watching him and will be reporting back. My snouts are already unearthing interesting information.

Kevin Maguire is the associate editor (politics) of the Daily Mirror

Kevin Maguire is Associate Editor (Politics) on the Daily Mirror and author of our Commons Confidential column on the high politics and low life in Westminster. An award-winning journalist, he is in frequent demand on television and radio and co-authored a book on great parliamentary scandals. He was formerly Chief Reporter on the Guardian and Labour Correspondent on the Daily Telegraph.

This article first appeared in the 23 March 2017 issue of the New Statesman, Trump's permanent revolution