July 13, 2015
|By Consulting Group|
Since the invention of Bitcoin in 2008, fintech innovators have been eager to follow the development of cryptocurrencies and their acceptance alongside traditional monetary systems. Bitcoin has returned to the news most recently after domestic capital controls in Greece led to many citizens turning to the digital currency. But what actually is Bitcoin and why are people using it?
What is Bitcoin?
Without delving too deep into its intricacies, Bitcoin is a decentralised, digital currency that is transferred from person to person without the need of an intermediary who takes a cut. Bitcoins don’t represent anything in the physical world and the only value attached to them is the willingness of people to trade a good or service for a higher number of Bitcoins next to their account, as well as the belief that other people will do the same. Bitcoins are created through a process of ‘mining’ whereby ‘miners’ solve complex mathematical calculations around the World.
Why Would You Use It?
An enormous amount of confidence has been lost in the traditional financial systems since the crisis of 2008 and this has been further exacerbated by Greece’s drawn-out negotiations and the Cyprus bailout in 2013. Bitcoin is attractive for a number of reasons:
Cheap and fast – It is possible to send money anywhere in the Word at any time for either no or very low fees
De-centralised – There is no central bank or authority which means the system can’t be manipulated by persons, organizations or governments
Anonymous – Personal details are not attached to a payment which keeps them safe from identity theft
Transparent – All transactions can be viewed in the public block chain
But Bitcoin’s life has not been all plain sailing…
Teething Problems – Since its creation, Bitcoin has had a fairly chequered history including information leaks from exchanges, software incompatibility, and the currency being used to fund illegal activities on the Silk Road
Protection – Bitcoin has no buyer protection, once the money has gone it’s gone. If a user loses their private key, it is effectively impossible to recover the lost coins
Volatile – Valuation has fluctuated massively since its creation. The currency lost more than 90 percent of its value between June and October 2011. This is partly due to its finite nature (only 21 million coins will be mined, running out in 2040) and the relative lack of acceptance by retailers.
What is the future of Bitcoin?
Bitcoin’s price should settle down as more retailers start accepting it as a method of payment; currently its valuation jumps around with events that affect digital currencies. Just this morning it took a hit after the announcement of a Greek deal. However with no central authority permissionless innovation allows developers to make the currency more secure and accessible. Its popularity is certainly on the rise as demonstrated by companies such as Microsoft, Dell and CeX now accepting it, and big institutions such as the Bank of England stating that it could have “far-reaching implications.” Whilst the masses may initially struggle to understand a currency with no physical state, as I did, write off Bitcoin at your peril; an early reviewer of the iPhone said “Apple should pull the plug on the iPhone. I’d advise people to cover their eyes. You are not going to like what you’ll see.” Bitcoin sceptics could find themselves in a similar position.
That being said, it is still unclear exactly what the future purpose of Bitcoin will be. While to those Greeks currently treating it as a reserve currency it no doubt appears a bastion of stability compared with a possible return to the Drachma, the reality is it remains incredibly volatile. This is as exacerbated by the fact that other crypto-currencies are being developed all the time (more than 3,000 at present, with the biggest being Stellar, Globe and Litecoin). At some point one is almost certain to be so much more user-friendly than Bitcoin that it takes its place as the crypto-currency of choice, which could lead to the value of Bitcoin collapsing to nothing. This risk is always likely to be present unless it becomes almost universally adopted as a reserve currency.
However, were it to actually become a true reserve currency, replacing national currencies, then many more countries would find themselves in the same position as Greece, uncompetitive, unable to pay debts and unable to rectify the situation through devaluation or printing money. The future of Bitcoin is potentially very bright, but who knows what that future may be?