Bitcoin – Online Currency with a Future?

The course of  Bitcoin from November 2011 until today 

Bitcoin, Litecoin,  Peercoin,  Dogecoin… So called crypto-currencies are springing up like mushrooms and their estimated value exceeded 7,5 billion€ in the beginning of February. Of this capital, 80% belongs in the hands of the Bitcoin owners. We are talking about 6,000,000,000€. To put this into perspective, that is at par with the valued assets of H&M, and easily tops  the GDP of such countries as Macedonia, Laos or Rwanda. Bitcoin would rank 139th right between Malta and the Bahamas.

Crypto-currencies are digital and global mediums of exchange that no group or individual can control. Otherwise, they function in a very similar way to money, but only online. They are not backed by a governmental central bank, but instead, their value is completely based on their market appeal. Simply, the more we want them, the 8753275612_96c1bd9f37_kmore they will cost. The pioneer of modern crypto-currencies is Bitcoin. It is not only a form of digital money, it’s a new technology that most other cryto-currencies are based on. Bitcoin was designed and introduced 5 years ago by a group, or individual, that we know as Satoshi Nakamoto. The currency itself can’t be dominated by even Nakamoto, but instead its basis lies in highly advanced technology and encryption with a software that is completely open-source for anyone to review.

With centralized money, the authorities decide when to print more notes. But with crypto-currencies new money is found by the users. New bitcoins are found through the process called mining. Bitcoins are mined with powerful computers that solve highly complex math problems. The mining itself is free, but the suitable equipment can be costly. The more bitcoins that are found, the harder the finding process becomes. Some of the users have made a 2-minute-video that explains the basic idea in a way that  can be easier to grasp.

There are a few key factors as to why Bitcoin and its followers appeals to the consumers.

  1. They can’t be counterfeited. Some digital currencies, such as Bitcoin, are called crypto-currencies because the basis of their security is military grade cryptography that, for example, the US  government uses. The transactions are as protected as any other type of electronic bank transfers. Unlike common money, however, copying bitcoins is not a possibility, because the cryptographic protocol makes it impossible to use the same bitcoin twice. Each one is unique and so is their position in the block chain. The block chain is the ledger for all bitcoins and it shows who has the coin at the moment by openly showing all transactions. Everyone can agree, where the currency is, because they can trace it down from the block chain.
  2. There is only limited amount ofcoins. The maximum amount of bitcoins is 21 million. This means that 99.9% of the bitcoins will have been found by 2040. Because more bitcoins can’t be produced after all have been found, the assumption is that this will raise their value.
  3. Usis cheap and anonymous.The benefit of using  Bitcoin is instantaneous, with global transactions costing very low to zero fees. Paying with bitcoins is as easy and cheap as sending emails. Though all transactions are public, perfect anonymity is provided by using nicknames. The virtual wallet, where bitcoins are stored, works similarly to an email account. Anyone can send you bitcoins, if they know your address. Since, all transactions are public, it is recommended to get a new address for every transaction. This way no one knows how many bitcoins you have. All assets can still be banked into the same wallet. As long as the wallet is encrypted or not connected to the internet, no one can steal your bitcoins. The downside is that the bitcoins can be stolen if safety measures are not taken care of. It is impossible to get them back afterwards since transactions can’t be cancelled.
  4. They can make you wealthy. Some early users of bitcoins have become rich after investing inthem before the sudden increase, and such booms are still possible. Bitcoin’s value is extremely volatile due to two key factors: its young economy and relatively small consumer group. The users are still experimenting with the currency in order to find out how beneficial it can be. In this sudden variation of value,  Bitcoin has more similarities with stock markets than with money in the traditional sense. The value of the currency can fluctuate between hundreds of Euros during a day. Many  Bitcoin investors hope to profit from this. The extreme changes in market value are one of  Bitcoin’s weakest points, as well.

Not all aspects of  Bitcoin are just future prospects and sudden success. It has had a rough road trying to attract a wider range of users since the name became synonymous with the internet’s most infamous online black market, called Silk Road. Bitcoin became affiliated with money laundering and drug trafficking, a reputation it has had a hard time abandoning. The original Silk Road, which was closed by the FBI in October 2013, has already had a successor as of early November – Silk Road 2.0.

Although, some believe that Bitcoin isn’t real money, it still possesses real value. And our authorities have become aware of this fact. Central banks throughout the world are jumping in to announce their negative opinion, now that they feel that crypto-currencies are trying to invade their territory. On January, Carl-Ludvig Thiele from the Federal Bank of Germany was one of the latest authorities to warn people of the possible deflation in the 11825340913_94dd852a4b_zvalue of  Bitcoin because the value  is not backed  by a state. This can be considered ironic, since the hyperinflation of the German mark in 1920s was mostly caused by the poorly performed fiscal policies of German government.

Bitcoin’s image faced another blow quite lately, when China and Jordan banned its use by financial institutes. Also, trading bitcoins is illeagal in Russia, Thailand and Iceland. But  these governments are not the only ones that are aiming to control the currency-without-a-nation. Many European nations and, for example, Singapore have issued a tax on  Bitcoin since it can be considered an asset. These new regulations have made users wary and have negatively affected the course of  Bitcoin, but have also given it some legal status since most Western nations have allowed companies to trade with it.

Lately the headlines have also been screaming  Bitcoin’s decrease in value when trading site MtGox,  the largest  Bitcoin exchange, didn’t function properly. The price of a bitcoin dropped as low as 70€ and was up again by about 200% during the course of last weekend. Similarities to the 2011 can be seen when MtGox faced security problems and  Bitcoin spent an entire year gaining back the trust of consumers after 600 wallets were hacked.

Despite the ups and downs, crypto-currencies have a greater user base and more power than ever before. Their status has been somewhat stabilised in Western markets and more people are willing to try them out. In a way, the media hype has served its purpose. There is no bad publicity.

 

By Elena Liski

Image Credit:

Picture 1: Zack Copley, licensed under CC BY-SA 2.0

Picture 2: scottks, licensed under CC BY 2.0