From being a little known oddity confined to the geeks of Silicon Valley just four years ago, the Bitcoin is heading all the technology news boards and has even got some central banks running scared. So, what is it, how does it work and why does it matter?
The Bitcoin was created in 2009 by an unknown programmer called Satoshi Nakamoto, a name that is widely believed to be an alias. Although it is generally considered to be a crypto or virtual currency, it was originally just a means of exchange for online transactions. The way the transactions are processed is in the realm of the serious cyber boffins, I barely understand it myself, but suffice to say there is a definitive log of all transactions and when they occurred. Bitcoins are created by “Miners,” people who use computers or networks of computers to solve increasingly complex algorithms. If you think processing the transactions is complex, don’t even try and think about Bitcoin Mining. There are currently around 12.2 million Bitcoins in existence but there is an absolute cap of 21 million on the number that can be created. Bitcoins are also anonymous, they don’t have serial numbers like banknotes, and the people who own them are anonymous too – rather than a bank account, owners have a wallet which is accessed using a username and password.
So far, so geeky, but this is where it starts to get interesting. Although the Bitcoin is not a currency, in many ways it acts like one. Bitcoins can be used to pay for a huge range of online transactions, anything from school fees to casino chips, and increasingly they are accepted by physical retail outlets such as bars, bedding retailers and even burger stalls. Bitcoins can be bought using one currency and then sold in another currency, making them an effective medium for transferring money out of a country that enforces currency restrictions. Because Bitcoin owners are anonymous, there are widespread reports of them being used to fund drug deals, illegal arms trading and international terrorism. There are also claims that Bitcoins have been used for money laundering, though there is little evidence to support this. Most importantly, the value of Bitcoins fluctuates wildly. The first units produced in 2009 had a value of less than 2 cents. In November 2013 the value of 1 Bitcoin hit an all-time high of $1,250. A few days later the value plummeted by more than half in just one day when the People’s Bank of China, the Chinese central bank, banned the conversion of Yuan into Bitcoins.
It is worth considering what has driven this heavy demand for Bitcoins and the dramatic increase in value that goes with it. In China, citizens are limited to taking $50,000 of currency out of the country per year. The Bitcoin represents a heaven sent opportunity to get round this restriction. India also has similar limitations in place, coupled with a currency that is prone to serious inflation. It is no surprise that the Indian central bank moved to limit conversion of Rupees into Bitcoins. With such dramatic increases in value, speculators have inevitably jumped on the bandwagon, further fuelling the volatility in price. What is surprising is that, after the dramatic drop in early December, the value of the Bitcoin has already stabilised at about $800.
Despite everything that has happened, it looks as if the Bitcoin is here to stay. The US Treasury has made no move to outlaw it or limit transactions and the number of physical outlets that accept Bitcoins is increasing exponentially. Only when all 21 million Bitcoins have been mined will we know a realistic value for it, something that is estimated to happen by around 2017. In the meantime, it is an excellent example of technology being used to create genuine wealth and at the same time respond to a real need.
This article appears in Walmley Pages Magazine, a local magazine delivered free to Walmley, Sutton Coldfield and surrounding areas.