What is the Future of Bitcoin ?
The decentralised currency has a flurry of developers engaged and the backing of young tech-savvy investors. But banks, governments, experts and the establishment don’t seem quite so sure. So is Bitcoin the money of the future, or a high-tech scheme that could come crashing down ?
What is Bitcoin ?
For anyone who still doesn’t know, Bitcoin is a digital, decentralised, peer-to-peer payment network.
The first specifications were revealed in January 2009 by the pseudonymous Satoshi Nakamoto. It is the first implementation of a concept called ‘crypto-currency’, intended to create a new form of money that uses cryptographic codes to control its creation and transactions.
Developed with a finite number of 21 million Bitcoins, the coins are “mined” by solving complex computer problems. And as each new set gets mined, they become harder and harder to access, as the computing problems become increasingly difficult.
However, all a user needs is an internet connection and virtual wallet.
A Divisive Currency
But whilst a little over 12 million coins have so far been mined – with one such coin currently valued at $814 -, and with a growing number of real-world businesses and individuals using them, Bitcoin is a divisive topic. There are very vocal fans, including developers and tech-savvy investors, who believe it has the potential to change how global payment systems work. And there are very vocal critics, who predict crippling financial panic and a gateway to unmonitored illicit dealings.
In more official terms, division is also strong. The last year has seen governments such as Germany and the US recognise Bitcoin as a currency, and the UKs HMRC is expected to change its classification of Bitcoin to a private currency this February. World leading banks are talking about Bitcoin as a rival to real currency, (although one would be wise to remember they may have ulterior motives). And a former Federal Reserve chairman, Ben Bernanke, has released a statement saying he believes that digital currencies like Bitcoin “may hold long-term promise, particularly if they promote a faster, more secure and more efficient payment system.”
However, the Chinese government has prohibited the country’s banks from handling Bitcoin or related products. Thailand has declared the currency illegal. The Dutch and Swedish governments have all warned against the currency. The Bank of France has released a report calling the currency “highly speculative”, posing “certain financial risk” for owners. And the Norwegian government has said the currency doesn’t qualify as real money.
The Pros and Cons of Bitcoin
Indeed, there are certainly down-sides to Bitcoin. By removing the role of any government or bank, the system doesn’t allow for controls or regulations to be enforced. By being private and anonymous, with untraceable transactions, Bitcoin has been associated with illicit dealings; from drugs, arms and porn sales, to money laundering. Just last October the FBI closed the notorious Bitcoin only website, The Silk Road, which was being used to trade £1.25 million in drugs each month. Hacking is also a real concern.
However, opposed to traditional banks, credit companies and money transfer businesses, Bitcoin allows users to transfer and make payments tax free, without a charge (or minimal fees), across the whole world. Every payment that is made is also approved and then logged on an open document. This means Bitcoin acts like cash, and users can make transfers securely and safely, without risk of insufficient funds, fraud or any challenge to legitimacy. The Bitcoin system also means transactions can’t be cancelled.
There are also advantages to Bitcoin for those with money in unstable economies, or for investors who have lost confidence in banks, the property market and governments. For example, the value of Bitcoin escalated when the government of Cyprus confiscated deposits to bail out the country.
Building a Trust Loop
Critics are also concerned about the very volatile stock prices. For example, in January 2013, Bitcoin was valued at $14. By November 2013, Bitcoin value hit $1,124. But one month later it plummeted to $539.
This is because Bitcoin fundamentally works on a trust loop. It has value only because we think it does, and needs us to trust it, pay with it, and accept payments in it, to exist. Floundering trust creates these massive swings in stock prices. And without any trust, Bitcoin will cease to exist. This is perhaps a fragile foundation.
Signs of Growth
But, following the launch of the first ever Bitcoin ATM in Vancouver, Canada, – which processed Bitcoin purchases and sales of a combined amount of more than $1 million in its first month – Brazil has announced its first ATM is due at the end of this month, and five new ATMs are set for London in February. These could be signs the currency is moving away from illicit and untraceable dealings, towards an open and trustworthy future.
However, Roger Willis, an expert on digital currencies at Ernst & Young cautions that Bitcoin’s future should be seen as one of a payment system, not a currency. He comments: “Fiat currency is essentially currency the government decrees to be legal tender. Bitcoin wasn’t really developed to be a replacement for fiat currency. You see a lot of people talking about how Bitcoin is going to take over, or how Bitcoin doesn’t have the properties that lend to it being used widely. But it was really developed to be used in e-commerce and for micro transactions. It wasn’t really to replace our sterling, our US dollars, and our euros.”
The Future of Bitcoin
But whether Bitcoin is to be the open and trustworthy currency of the future, a payment system, an asset just like gold, or a passing fashion, Bitcoin is clearly a breakthrough in computer science. Like personal computers in 1975 and the Internet in 1993, this is an important and far reaching innovation. The future may well not be Bitcoin, but whatever happens, things have now changed. Bitcoin will have precipitated something new. And really, as every other part of our lives move online, the emergence of a digital currency was perhaps inevitable.