Bitcoin surfaced in 2008, and ever since has threatened to change the way we make transactions and pay for things. By removing the need for a middle-man to act as a trusted authority and regulator, crypto-currencies like Bitcoin could represent how we will pay for things in the not too distant future. The main problem with any digital currency is implementing a system which ensures that nobody spends the same money more than once. Without a trusted central authority Bitcoin instead uses the consensus of its enormous peer-to-peer network to verify and record all transactions. What you’re left with is a system with little or no transaction fees, and almost total anonymity…  

By Laura Cox

Because of the way that bitcoins are ‘mined’, the currency is limited to 21 million, and 13 million bitcoins are already in circulation. There is no way to track Bitcoin transfers, as users verify transactions with their own personal keys and no contact details are involved. Currently you can use bitcoins to buy anything from hard drugs to Dominoes pizza, with the only mark left on record being the blockchain, or general ledger, which reveals only that transactions have taken place, not who they were between or what they were for.

So could Bitcoin lead to the decline of traditional currencies?

Why are central banks (and governments) so wary of Bitcoin? For starters, they can’t control it, and they can’t tax it. This is due to the anonymity of transferring bitcoins – users can set up a new key per transaction, and as long as everything goes swimmingly they can remain a faceless recipient or sender. There are also fears over the corruption of the miners who create the hashes. Not only this, but the limited supply of bitcoins could lead to inflation of the main currency. If this isn’t enough to cause an official headache, Bitcoin is also associated with criminal activities such as the buying and selling of illegal items on the Dark (or Deep) Web. The Dark Web mirrors Bitcoin in its anonymity, and it is virtually impossible to track somebody who is using both a platform and currency which are by their nature invisible. We don’t even know if Satoshi Nakamoto, the creator of the currency, is a singular person, a group, a pseudonym or an anagram.

However, for the user, Bitcoin presents a number of clear benefits. It’s a very advanced and secure way to keep your money under the mattress, so to speak. Despite worries about the integrity of miners, each successful hash creator receives 25 bitcoins, which is a very good incentive to keep the chain going. As for the limited value of the currency, Bitcoin is fluid. Unlike legal tender (AKA fiat money) it can deal with small values because it is digital. For example, if a car devalues from 10 bitcoins to 1 bitcoin then the value of 10 bitcoins is now 1. This can’t be dealt with using fiat money as if an item devalues from £1 to 1p then there is no way out and the currency becomes worthless. Bitcoin avoids this problem via its ability to devise down to no less than 8 decimal places.

At the moment, it is estimated that there are £60 million Bitcoin holdings in the UK. That might sound like a lot, but it’s only 0.1% of the total sterling notes in circulation. But this doesn’t mean that the rise of Bitcoin is something that won’t happen within the near future. Users need access to a computer (and the Internet) to make transactions using bitcoins, and one of the sceptical arguments that Bitcoin won’t pose a threat to fiat money centres on the fact that not everyone has Internet access. But if you apply Moore’s Law to current computing power, suddenly this seems to fall flat. In 1995, less that 1% of the world population had access to the Internet. In ten years, this figure has quadrupled. This means that within the next 5 years, the vast majority of people will be able to use the web. As well as this, it has been suggested that Bitcoin has not and will not take off in the retail sector, and functions as a form of investment rather than anything else. However, the scope of Bitcoin is broadening – for instance, you can now book a hotel stay with Expedia using bitcoins.

This isn’t to say that Bitcoin is necessarily going to replace legal tender – it seems more likely that it will run alongside it. Bitcoin resembles something like a ‘currency for the tech savvy’, so it’s doubtful as to how useful the general public will view this complicated and somewhat mysterious programming. Many people are still wary of online banking – these are the people who will never ever buy into bitcoins.

Will Bitcoin sit alongside Visa and Paypal as a viable and trusted payment option? Expedia certainly thinks so, and it sounds plausible enough. As to whether the currency poses a real threat to global fiat currencies is doubtful, but perhaps within the next couple of years, it might be time to start thinking about investing…

Written by Malek Murison

Malek Murison is a freelance tech journalist working closely with clients in the drone industry.

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