FIRST, there were seashells, livestock, silver and gold coins then paper and in the near future, if several tech gurus are to be believed, it will be zeroes and ones called bitcoin.
Bitcoin has been touted by its proponents as the next step in the evolution of money in the sense that it can be used to purchase real physical as well as virtual or digital goods and services. In fact, several websites acting as exchanges are now openly trading bitcoin in the real world against major currencies such as the dollar and the euro. Bitcoin is also being used now as a means to pay for products and services online in many parts of the world.
What makes bitcoin revolutionary?
Bitcoin is described by its main developers as the world’s first digital money and person to person currency and was initiated by a mysterious developer named Satoshi Nakamoto (believed to be not his real name) in 2009. It is designed to be used anonymously, similar to cash, and its transactions secured by strong encrypting systems.
What makes bitcoin so different and revolutionary is that it’s not issued, controlled and regulated by a central monetary authority, like a central bank or the government itself. Instead, the bitcoin currency system is run by the entire peer-to-peer network through the use of wallets, block recordings and predetermined scarcity.
Bitcoin transactions bypass banks, clearing houses and other financial institutions making it a complete and separate financial system by itself.
Another peculiar characteristic of the bitcoin is that it is not backed by any state or private guarantee nor any precious metal or commodity. The idea of a currency not based on the current and accepted monetary practices is too radical an approach leading skeptics to think that the entire bitcoin concept is unworkable and unrealistic.
However, despite these doubts, the underground internet community continues to use the bitcoin as a negotiable instrument of exchange.
Bitcoin: a community generated and managed currency
A bitcoin is produced by a user by downloading and installing the client software called the bitcoin miner into a computer. The miner software produces bitcoin units called blocks following a very sophisticated yet publicly known algorithm.
Each generated bitcoin block is reported to the entire peer-to-peer network which then makes the necessary adjustments to ensure that are the currency is produced in limited quantities with preset production rate.
Once generated a bitcoin is stored in a digital wallet similar to the ones used by online banking systems. Whenever someone transfers bitcoin to another party, a digital signature is added which will be verified quickly by a miner and updates the entire network. In the bitcoin currency system all nodes of the network have access to the data. It’s like everyone given a copy of the books and ledgers of each bitcoin transaction.
This open and yet seemingly impregnable system of generating, securing and verifying bitcoin transactions throughout the network solves the problem of “double spending” that has plagued past attempts to create a secure electronic currency system. Double spending occurs when a party is able to send the same electronic funds twice. This happens because digital data by nature can be easily duplicated.
Other characteristics of the bitcoin
Bitcoin advocates also cite other characteristics of the currency that would make it widely accepted in due time by users around the world. Among these properties are:
1. Absence of manipulation and intervention
Because the bitcoin is not issued by any central authority or created by government fiat, it is not subject to any human manipulation or intervention. This means that the chance of any corruption or abuse by governments to serve its own interest is zero. Bitcoin users do not need to worry about their account frozen or shutdown by authorities for any reason, legitimate or not.
2. Limited and predictable supply
The total bitcoin supply is already set at 21 Million based on the algorithm developed by founder its founder, Nakamoto. This publicly programmed production ensures that there will not be any bitcoin over or under supply unlike real world currencies where uncontrolled money supply can cause inflation.
3. Transparency and trustworthiness
Bitcoin uses open source codes making it easily read and understood by anybody who has knows coding and programming. This openness is significant because the software used by today’s banks and financial institutions are closed sources and not transparent as those used by bitcoin.
4. Low transaction costs
Without any monetary authority and intermediaries such as banks, the cost of using the bitcoin is very low. In fact, bitcoin developers estimate the true cost of generating and transacting the currency to be a fraction of a US penny.
Aside from these cited characteristics, the bitcoin also has the classical attributes that meet the definition of money. These are divisibility, non-countefeitability, durability and transportability.
In terms of divisibility, the bitcoin is divisible up to the eight decimal places which will soon be stretched according to its developers to infinity. The bitcoin is transportable as it can be stored in a computer, transferred to a thumbnail drive and other storage devices.
As each bitcoin unit has a unique digital signature that is recorded throughout the network, it is also considered to be impossible to counterfeit although this argument is still untested. Finally, because the currency is in digital form, the bitcoin cannot be destroyed or subject to the usual wear and tear.
Criticism against the bitcoin
While the bitcoin has received guarded approval by technology experts the digital currency has also its share of criticism from other sectors. Issues such as security, acceptability, potential for abuse and misuse by dubious elements have been raised against the bitcoin.
In mid June 2011, bitcoin prices in exchange websites that trade bitcoin versus real world currencies such as the Euro and the USD plummeted from a high of $30 to 1 bitcoin to just a few pennies when news that $ 500,000 worth of the electronic currency was “hacked” from users system.
This electronic breach turned out to be a hoax and while the value of the bitcoin eventually recovered (thought not yet to its pre-“hacking” levels), critics used the opportunity to cite need to have better security systems to inspire confidence and acceptance of the bitcoin by the general public.
The bitcoin also got a lot of bad press when a US senator denounced a website for accepting the currency for the purchase of illegal drugs. Law enforcement authorities are also very concerned that the wide acceptance of bitcoin will encourage criminals to mask their financial transactions and operations using bitcoin because if it is untraceable.
Another issue that’s blocking the widespread use of the bitcoin is that fact that governments (being the biggest purchasers of products and services in a country) accept taxes paid only in the mandated currency form (the fiat money).
Large private institutions that made significant investments in terms of resources, systems and manpower to work within the flat currency system will also find the bitcoin as too disruptive and expensive to adopt.