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David Cohen

Pace professor offers the basics on the Bitcoin

by Eric Coker

The Bitcoin phenomenon is not new, a Pace University professor said during a lecture on March 4.

“The idea that private actors — sellers and merchant banks — could create tokens that would have value and be used as currency is at least 300 years old,” said David Cohen, who teaches secured finance and bankruptcy at Pace. “What’s new is that the tokens are now virtual. They are no longer pieces of paper.”

Cohen spoke to a group of mostly students during his Bitcoin overview in the University Union. Harpur’s Academic Advising Office, Economics Department and Dean’s Office sponsored the talk.

For Cohen, who is writing a paper on the topic, Bitcoins are like a return to the mid-18th century, when English traders traveled around the world buying commodities. How to pay for those commodities was a challenge.

“They could carry gold, but it was heavy and there were risks involved,” Cohen said. “So they developed pieces of paper promising to pay money.”

Those “notes” could then be transferred from person to person. The Bitcoin concept is similar, Cohen said.

“Bitcoin is one example of a decentralized virtual currency,” he said. “They were derived from a paper written in 2008–2009 that described a system designed to eliminate the need for trusted intermediaries in financial transactions.”

“The Bitcoin format promotes a strong anti-state view of the world while reducing the cost of transactions,” Cohen said.

“We don’t want governments in our lives,” Cohen said in the voice of Bitcoin backers. “We don’t want central banks in our lives. We want to deal with others, peer to peer, and privately.”

Bitcoins are created through the development of algorithms. Programmers permit individuals to use computing algorithms to “mine” the currencies, and obtain units of the new currencies, which can then be traded by the owners, or used to pay for goods and services. The value of one Bitcoin (only 21 million can be “mined” — or in circulation) in U.S. dollars increased from pennies in 2009 to an all-time high of $1,100 in December 2013. The Bitcoin value during Cohen’s talk was about $657.

A Bitcoin is basically a series of numbers and letters, Cohen said. Bitcoins are stored in a virtual wallet on a personal computer or through a third-party website, such as an exchange. Bitcoin transfers are recorded in a log, but only the wallet identifications can be seen. The verification process takes about 10 minutes.

“You don’t know to whom you are transferring a code,” Cohen said. “The person who is getting the transfer need not know who you are.”

“You will pay money for a Bitcoin because you think it will be worth more tomorrow than it is today.”

Cohen’s talk came a week after the world’s largest Bitcoin exchange, Mt. Gox, filed for bankruptcy protection in Japan. The exchange shut down last month when more than 850,000 Bitcoins (worth nearly $500 million) disappeared.

Bitcoin exchanges are the “weak links” in the currency system, Cohen said.

“There are theft risks, hacking risks and bankruptcy risks,” he said. “These exchanges were just created; there is no regulatory framework at all. You give them your personal information — driver’s license, passport — and you give them your money. Just don’t let them keep your wallet.”

Cohen could not say what the future holds for Bitcoin, but he added that it has a “first-mover” advantage over similar currencies.

“I can’t predict whether or not it (Bitcoin) is going to be successful,” he said. “I think I can say it’s not going to be successful in the same form as it is now. There is no regulatory authority. There are just people engaged in activities. That’s not going to last.”

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Last Updated: 3/24/14