Let’s be honest: do you really know how Bitcoin works? What it is exactly? Probably not. 99.9% of the people do not really know how this new currency works. But then, should we?
The money we know, the Euro, dollar or other currencies, derives its value from government regulation or law; it is called fiat money meaning that its intrinsic value is not based on the physical matter it is made of but rather the trust we as users have in the money and the issuer of the money (most often this is the government, but not necessarily so). As such, fiat money can be paper money, scriptural money, electronic money, or … Bitcoins. Bitcoins are regarded as the digital currency for the 21st century. It is different from regular currencies in a couple of ways:
- there is a maximum number of Bitcoins of 21 million of which some 15 million have been mined (issued). By 2040 all Bitcoins will have been mined
- Bitcoins are not issued, regulated or guaranteed by a central authority
- all transactions are kept in one big ledger (the transaction- and blockchain) that is shared amongst users
- oh yes, and it is based on a smart algorithm.
But other than that it is just another currency that can be used as a means of saving and spending. By now, five years after its start there is little doubt that it works in the sense that it has value and can be exchanged. The reason it works is the same as for all types of money: because there are people who have put trust and value in it. As Adam Smith once pointed out: “all money is a matter of believe”. But is that enough given the fact that that there is no government that guarantees the money. Does Bitcoin have a future?
The fact that its value compared to the dollar or euro fluctuates, indicates that confidence in Bitcoin is not stable. Given the rate of incidents (China bans financial institutions from Bitcoin, Bankruptcy of Bitcoin exchange Mnt Gox, Silk Road wipe-out) and subsequent negative media exposure over the last 6 months, the drop in value of Bitcoin against the major currencies does not surprise. Negative exposure undermines the trust that is necessary to survive. Even more for Bitcoin since it is new and has no central regulating body. What does surprise is that after all the turmoil, Bitcoin did not completely implode.
But will it survive in the long run? This one is hard to predict. The Bitcoin has all the makings of real money in a 21st century digital format: Bitcoin transactions are the very digital equivalent of cash transactions: peer-to-peer, transparent and potentially anonymous. Banks and governments do not like the idea of currencies that do not originate outside their controlled zone, especially not peer-to-peer. But given the way our economy is morphing from a physical economy to a digital economy, a digital currency such as the Bitcoin seems to fit perfectly. One of the biggest perceived advantages is that they could replace the expensive creditcards because its transactions are cheaper and they provide potentially untraceable payments. But also the chances of fraud are smaller due to the Bitcon protocol itself. And not unimportant, setting up a Bitcoin account is much easier than opening a bank account: no passport, photo’s or social security id’s necessary.
After the initial success of Bitcoin, more crypto currencies have emerged. They are popping up like mushrooms. Cryptsy, an altcoin trading exchange, claims it trades more than 60 crypto-currencies. Cryptocurrency.org claims to track the exchange rate of 225 crypto currencies. The most important so-called altcoins are Litecoin, Ripple, Peercoin and Dodgecoin. It remains to be seen however if these altcoins proof to be viable alternatives. When it comes to crypto currency marketcapitalization 90% of the total marketcap of 7 billion dollars is held by Bitcoin, 5% by Litecoin and the other three have less than one percent of the total marketcap. The first mover principle seems to apply for Bitcoin.
Bitcoin may or may not survive but it has certainly proven the need for digital currency. Crypto currencies fit perfectly into our increasingly digital economy. Bitcoin is only the beginning of new digital ways of saving and spending money. Traditional banks and governments will no doubt have issues with currencies that have no issuer or regulating authority but they better start thinking about how to treat these new currencies because digital money is here to stay.