Is Bitcoin the future of digital money?

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Is Bitcoin the future of digital money? Global headlines tout Bitcoin as being the future for money transfers. But an electronic currency has no government control, central bank or legal regulations – reasons that are both positive and negative, depending on your point of view.

Is bitcoin the future of digital moneyFads come and go, enticing speculators and the hopeful to invest their hard earned money. So many of these fads end up making money for the originators, but lose money for everyone else. Whether it is a Pyramid Scheme, Ponzi Scheme or Nigerian banker trying to find the heir to a massive fortune, many unwittingly naive investors end up losing money that would better be served in paying off personal debt such as mortgages or credit cards.

When PayPal was first released in March 2000, at the zenith of the Tech Bubble bursting, online shopping was still in its infancy. Hackers predominantly attacked bank accounts and consumers were fearful of conducting transfers online. PayPal had been developed initially as a Palm Pilot payments system, but soon branched into a wider Internet system.

Consumers were sceptical with Paypal as they are with Bitcoin. But the two are poles apart in their use. Paypal allows payments and money transfers to be made through the internet as an alternative to paying by check and money orders. Bitcoin has been designed as a completely alternative currency.

Is Bitcoin the future of digital money?

Bitcoins have been around since 2009 (not very long) and were introduced by Satoshi Nakamoto.

As Nakamoto described in his paper “Bitcoin: A Peer to Peer Electronic Cash System” (2008) “A purely peer to peer version of electronic cash would allow online payments to be sent directly from one party to another without going through a financial institution.” He further outlines “Commerce on the Internet has come to rely almost exclusively on financial institutions serving as trusted third parties to process electronic payments.” Source: http://bitcoin.org/bitcoin.pdf

Satoshi Nakamoto is the pseudonymous person or group of people who designed and created the original Bitcoin software. The New Yorker attempted to identify who Nakamoto is, and arrived at Michael Clear, a young graduate student in cryptography at Trinity College in Dublin. However, another independent investigation identified a link between a patent application filed by Neal King, Vladimir Oksman and Charles Bry, with the registration of bitcoin.org domain name within a 72 hour period.

Science fiction movies such as Star Trek use a currency called “Credits”, which appears to be a cross between Bitcoins and traditional currency such as the dollar. And history has proven that the barter system of providing goods for service (and vice versa) supersedes even traditional currency.

Traction is gaining with the Bitcoin, however, as businesses start to accept the currency  in trade for services. This has created a small bubble in the value of the cyber-currency, peaking at $260 as recently as early April 2013. It is current trading around $130.

Reality is that the Bitcoin is actually not a currency for the average computer user. It is a currency for the realm of the computer hacker, the internationally corrupt and for reporters who are looking to grab extra headlines and online traffic.

You earn a Bitcoin through a process called Mining. Using your PC, you create a Bitcoin Wallet which is where you keep your Bitcoins. You can then choose to Mine on your own or join a Pool, where computing power is combined to make more Bitcoins. Bitcoins are awarded in blocks, usually 50 at a time. You have to solve algorithms to receive  coins, and Pooling usually results in easier algorithms to solve.

Our view is that a lot of interest has been raised by a high flying increase in the Bitcoin value, but when the average punter investigates further, creating Bitcoins for themselves is actually a lot harder than first suggested. You certainly can purchase Bitcoins through a few registered businesses, but as a long-term investment vehicle, the Bitcoin has a limited shelf life.

Unlike real currency which is managed by a Central Bank and has numerous influences that make its value rise and fall, the Bitcoin has a hard limit of 21million bitcoins, which is estimated to be reached in 2140. Currently, 25 new bitcoins are generated with every 10-minute block, which will be halved to 12.5 Bitcoins in 2017. One would expect the value of the Bitcoin to rise as supply decreases, but will there be a true need for a digital currency?

The Bitcoin reminds me of Tulipmania, where in the Netherlands in 1637, the value of a single tulip bulb sold for more than 10 times the annual income of a skilled craftsman. Tulips were considered  a sign of wealth and were a coveted item. The more bulbs you owned, the more flowers you produced, and the wealthier you were. Hence demand for tulip bulbs drove prices to extreme highs.

It might be that we see a bubble in Bitcoins over the next several years, but the future is unwritten and the ever changing world of technology will provide a very different landscape to the one we know today.

I, for one, will continue to receive my pay in traditional dollars and cents – a hard currency that I can use for my everyday goods and services. My view might change in the future, but I’d prefer to steer clear of any Bitcoin Bubble.

Since 1998, Matthew has been involved in the Financial Services industry providing stock, option and CFD advisory services, trading advice, funds management and education services. Matt is an Authorised Representative of Halifax Investment Services, providing analysis and recommendations for trading Covered Calls in the US markets and using Exchange Traded Funds (ETFs) ...
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