What Is a Cryptocurrency? – Over the past few years, the term cryptocurrency has become a well-used term in financial circles, new business plans, and news headlines. Often the term is associated with criminal activity on the so called “dark web,” but more recently with the increasing value of currencies like Bitcoin, the word, concept, and products are entering mainstream consciousness.
But what really is a cryptocurrency and how does it work? In this chapter, we will examine the concept, the history, and the uses for cryptocurrencies and look at how to set up a Bitcoin trading node.
Why does an investigator need to know this? Understanding the concept of these online currencies can help you form a good foundation to build a more comprehensive technical understanding. It can also help you to see the criminal uses of these currencies.
What Is a Cryptocurrency?
A New Concept?
In the far western Pacific region of Micronesia is a tiny cluster of islands named Yap. Conspicuous against the deep blue of the ocean, this tiny group of “high islands” comprises rolling hills covered with dense, lush forest. The islands share a coral reef that provides sustenance for the islanders from the fish that seek protection from ocean predators.
As far back as the thirteenth century, the sultan of Egypt referenced islands at the far east of the Persian Empire, where the only currency was millstones. This was later confirmed by the Spanish when they “discovered” the island group in 1528. If you visit today, you can still see the stone coins that made up the primary currency of the islanders for many centuries; in fact, they are still used today in trades involving land or marriages.
The stones are a variety of sizes—some as small as 3.5 centimeters—but the ones that draw the most attention are up to 4 meters in diameter The Internet boasts many pictures of tourists standing next to these vast doughnut-shaped disks of calcite named Rai coins.
What Is a Cryptocurrency?
The stones do not originate on Yap but are mined and shipped from other islands such as Palau, which is 450 kilometers away. For centuries, these coins were loaded onto sail-driven rafts, and brought across the open ocean to the island, unloaded, and moved to a location somewhere on the island where they would generally stay put forever.
So why does a large stone disk have value? Let’s say that Bob from Yap wants a 3-meter coin. First, the coin must be mined. Consider the difficulty involved. Workers have to be employed and sent in boats to an island 450 kilometers away. Calcite must then be mined, and the resulting stone carved into the distinctive doughnut shape. This final “coin” must then be loaded onto a boat and sailed back across the stretch of Pacific Ocean with its obvious dangers. The work and considerable expense involved to mine the coin are what gives it its perceived and agreed value to the islanders. Indeed, the bigger the coin, the higher the difficulty—so the value is commensurately greater.
What Is a Cryptocurrency?
Leading Currencies in the Field
It was tempting to write an investigations book about Bitcoin since, at the time of writing, it is the brand synonymous with the word cryptocurrency in the public mind. However, as I spent more time with Monero, Litecoin, Ethereum, and others, I realized that although they were all subtly or sometimes significantly different and set out to provide certain abilities to their users, for an investigator, they all worked in the same fundamental way. When you consider that technology is a hard taskmaster and that online services hit the proverbial fan almost as fast as they spend their venture capital money (MySpace anyone?), will Bitcoin still be valuable and newsworthy in two years, or even a year? Could Ethereum be the next Facebook of the currency world and become the default choice for transactions and contracts of all types? Only the future will answer that question, but the methods of investigating crime involving a cryptocurrency will remain basically the same. So, although Part II of this book deals with investigations that are focused on tools for Bitcoin with its spin-offs and altcoins, and Ethereum, this is only because tools are available for them. Should Monero take the limelight in a few years’ time, undoubtedly an investigator will be able to find similar tools to help them investigate effectively.
In late 2017, investopedia.com, the world’s largest financial educational website, named Litecoin, Ethereum, Zcash, Dash, Ripple, and Monero as the best investable cryptocurrencies aside from Bitcoin, but that should not necessarily drive research by an investigator. Some of the new breeds of currency lend themselves to criminal uses. For example, Zcash offers “shielded” transactions where the sender’s and receiver’s details are hidden, and Dash provides increased anonymity over Bitcoin. It is more likely that these features, rather than Bitcoins’ burgeoning value, would attract someone with the need to hide his or her transactions for nefarious purposes.
I should be clear that I am in no way accusing these companies of deliberately attracting a certain type of client any more than Tor (which was partly developed and funded by the U.S. government) was designed to hide terrorists and pedophiles. However, if you, as an investigator, are aware of the specific security and anonymity features of a particular currency, you may be more prepared to research and ultimately exploit them during an investigation.
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