With banks, and even entire countries, at the mercy of their devalued currency, could the Bitcoin be a serious part of our financial future?
What is the fastest growing currency in the world? The American dollar? Or maybe the Chinese Yuan? Actually - no. The winner of that title is the Bitcoin.
Originally Bitcoin was purely the domain of computer geeks, but it is increasingly finding its way into mainstream financial culture. People are using it to buy everyday items like food, while a Canadian man has just become the first person to put his house on the market with a Bitcoin price tag.
What is Bitcoin?
Bitcoin is a virtual, decentralized (meaning neither the Government nor the banks have any influence or control over it) form of money. Created by an anonymous developer calling themself Satoshi Nakamoto in 2009, it is an innovative and complex currency that has the experts arguing over what part it might play in our mainstream financial future.
Bitcoin has become increasingly popular over the years and has tripled in value in the past month. In February this year one Bitcoin was worth around £22. Now each Bitcoin is selling for around £60.
Part of the reason for this recent increase has been the Cypriot banking crisis, which has spurred the general public to show an interest in a currency that their Government cannot snatch from their savings accounts when the going gets tough! Read Can banks take your savings?
Is Bitcoin really money?
The primary purpose of money is to exchange it for goods and services, so theoretically anything can serve as money.
Whilst it can be difficult to reconcile the idea of a currency that has no physical presence (no notes or coins to grab hold of), it is not actually that different to how we already use our money. Most transactions these days are done via credit or debit card (or mediums like Paypal) where no actual cash changes hands. Numbers are either added or subtracted from your bank balance accordingly.
Bitcoin is used in the same way, and as demand for it rises, so does its status as a ‘real’ form of money.
How do I get hold of Bitcoins?
There are two principal ways to acquire Bitcoins. You can simply buy them at the current exchange rate (one Bitcoin is currently worth around £63, but it fluctuates daily just like mainstream exchange rates) or, if you are a computer savvy individual, you can ‘mine’ for them.
As you might imagine, this is rather a complicated process and should only be attempted if you know what you are doing. Essentially you set up your computer with special software that performs mathematical calculations for the Bitcoin network. These calculations confirm transactions and increase security for Bitcoin and they pay you (in Bitcoins, of course!) for providing them with this data.
Be warned: ‘mining’ eats up the space on your computer, and the chances of earning much this way – unless you join up with other super-geeks and combine your computing power to ‘mine’ together – are slim.
Pros of Bitcoin
People are attracted to the idea of the Bitcoin because hated banks and Governments will have no power over your Bitcoin bank-balance.
With ‘traditional’ debit or credit card payments your bank or credit card provider ultimately dictates what you can and can’t purchase. They will also frequently charge you for transferring money or – as recent Cypriot events show – try to dip into your savings when in dire straits.
Bitcoins can give people the freedom to shrug off all the restrictions and worries associated with our modern day banking system. No one but you can get their hands on your Bitcoin money. Bitcoin transactions are usually free and are also instantaneous, unlike many traditional banks.
Another advantage is that, due to the highly technological nature of this currency, it is also nigh on impossible to counterfeit.
Cons of Bitcoin
As there is no central bank or organisation in charge of the Bitcoin, there are no safety mechanisms in place. Trust in banks is low at the moment, but in the UK we do have some semblance of a safety net – however flimsy it may be in reality!
Under the Government-backed Financial Services Compensation Scheme if you save your money in an FSA-registered bank you will be protected up to £85,000 per person if the bank fails. So, in theory, we are not just throwing our money into a bottomless pit every time we make a deposit.
It is also worth noting that over its short life the value of the Bitcoin has fluctuated dramatically. It is probably not a safe place to put any major savings.
The anonymity associated with Bitcoin (you don’t need a bank account to receive Bitcoins, so the identity checks associated with opening one do not apply) means they are inevitably used in ways which are neither savoury nor legal. Concerns are raised that they are being used by criminals to buy firearms, drugs and child pornography. This sort of thing happens already though, just with cash being used for these transactions instead of Bitcoins.
There has long been a ‘hidden’ section of the web, originally developed by the military but now also used by those selling illegal goods such as drugs and firearms, and within this ‘Deep Web’ there are sites where transactions are conducted almost exclusively using Bitcoins.
Where next for Bitcoin?
Bitcoin is a totally legal and innovative challenge to the monopoly that our banks and Governments have over our finances. Its peer–to–peer lending premise obviously holds its attractions, but the complexity of the current system has made many financial experts doubtful that this currency can ever become mainstream.
However, others argue that this is merely the first incarnation of the Bitcoin, and as the general public become increasingly interested in the system it will be tweaked and altered until it is accessible to all.
What do you think? Have you ever used Bitcoin? Could you see yourself using it? Let us know your thoughts in the comment box below.
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