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.

Getty Images.
Show Hide image

David Cameron's speech: a hymn to liberalism from a liberated PM

The Prime Minister spoke with the confidence of a man who finally has a full mandate for his approach. 

At every one of his previous nine Conservative conference speeches, David Cameron has had to confront the doubters. Those Tories who rejected his modernisation of the party from the start. Those who judged it to have failed when he fell short of a majority in 2010. Those, including many in his own party, who doubted that he could improve on this performance in 2015. Today, rather than confronting the doubters, he was able to greet the grateful. As the first majority Conservative prime minister for 18 years, he rightly savoured his moment. "Why did all the pollsters and pundits get it so wrong?" he asked. "Because, fundamentally, they didn't understand the people who make up our country. The vast majority of people aren't obsessives, arguing at the extremes of the debate. Let me put it as simply as I can: Britain and Twitter are not the same thing." Labour should pin that line to its profile. 

With a full mandate for his approach, Cameron went on to deliver his most unashamedly liberal speech to date. Early on in his address, he spoke with pride of how "social justice, equality for gay people, tackling climate change, and helping the world's poorest" were now "at the centre of the Conservative Party's mission". A lengthy section on diversity, lamenting how "people with white-sounding names are nearly twice as likely to get call backs for jobs than people with ethnic-sounding names", was greeted with a standing ovation. Proof, if needed, of how Cameron has changed his party beyond recognition. The former special adviser to Michael Howard, who avowed that "prison works", told his audience that prison too often did not. "The system is still not working ... We have got to get away from the sterile lock-em-up or let-em-out debate, and get smart about this." From now on, he declared, the system, would "treat their [prisoners'] problems, educate them, put them to work." 

There were, of course, oversights and lacuna. Cameron reaffirmed his commitment to a budget surplus but glossed over the unprecedented, and many believe undeliverable, that will be required to achieve it (and which may fail to do so). He hailed the new "national living wage" with no mention of the tax credit cuts that will leave the same "strivers" worse off. His "affordable" starter homes will be unaffordable for average-earning families in 58 per cent of local areas. But it is a mark of Cameron's political abilities that it was easy to forget much of this as he spoke. Like George Osborne, he deftly appropriated the language of the left ("social justice", "opportunity", "diversity", "equality") to describe the policies of the right. Cameron is on a mission to claim ownership of almost every concept associated with Labour. The opposition should not sleep easily as he does so. 

There was little mention of Labour in the speech, and no mention of Jeremy Corbyn by name. But when the attack came, it was ruthlessly delivered. "Thousands of words have been delivered about the new Labour leader. But you only really need to know one thing: he thinks the death of Osama bin Laden was a 'tragedy'". The description of Corbyn as the "new Labour leader" shows the Tories' ambition to permanently contaminate the party, rather than merely the man.

There are plenty of potential landmines ahead for Cameron. The comically lukewarm applause for his defence of EU membership was a reminder of how divided his party is on this issue. But today, he spoke as a man liberated. Liberated by winning a majority. Liberated by not having to fight an election again. Like a second-term US president, he was able to speak of how he was entering "the second half of my time in this job". Tributes to Osborne (the "Iron Chancellor) and Boris Johnson (greeted with a remarkable standing ovation) alluded to the contest to come. But whoever succeeds him can be confident of assuming a party in good health - and more at ease with the modern world than many ever thought possible. 

George Eaton is political editor of the New Statesman.