If you haven’t heard about Bitcoin yet it is the first ever global digital currency that is completely decentralised and anonymous. The currency has been around since 2009 and was first mentioned in a paper written by the person or persons thought to have developed bitcoin, the mysterious programmer(s) Satoshi Nakamoto. The paper describes bitcoin as a peer to peer electronic cash system.
Bitcoins are transferable from party to party without the need of an intermediary; this also means no fees or commissions. Each bitcoin can be divided into 100 million smaller units (eight decimal places), these smaller denominations are called satoshis.
Bitcoins are acquired by “mining” them, this is accomplished by allowing your computer to perform complex calculations which when completed earn you bitcoins or fractions of them. One of the most intriguing aspects of this new digital currency is that it bears some interesting similarities to a commodity. This is because the number of bitcoins in circulation are finite and are due to be capped at 21 million.
With no central bank to control them, or indeed to create more out of thin air thus devaluing all those currently in circulation, the dynamics governing bitcoins are very much like those of a finite natural resource. Also the way bitcoins have been set up mean that it becomes progressively harder to mine them as time goes on. Every four years the number of new bitcoins created, or mined, is set to half until the year 2040, beyond which no new bitcoins will be available. At this point there will be 21 million bitcoins in circulation globally or, 2.1 quadrillian satoshis.
So is this an experiment? A statement? A ruse? No-one seems to know but people are taking bitcoins very seriously, especially in the wake of Europe’s sovereign debt crisis which saw a single bitcoin being worth 13 dollars in January of this year, to 190 dollars at the beginning of April, right after the Cypriot bail-in fiasco. In fact the Cypriot haircut led to a fervour of bitcoin activity in Spain as people feared that their own bank accounts would be next. Argentinian bitcoin use is also said to have risen as an alternative to the official currency. Even the big boys are sitting up and taking notice. A while back Reuters ran a story stating that Morgan Stanley and Goldman Sachs IPs have been visiting bitcoin exchanges upwards of 30 times a day. In fact traders have shown a significant amount of interest in bitcoins, as much proof as any that this currency is now an important addition to the world’s markets. There are now, believe it or not, bitcoin hedge funds, bitcoin derivatives, and bitcoin ATM machines!
The neo-currency that transcends national borders and banking systems has come under fire recently from all fronts, some choosing to focus on the fact that it is being used to fund illegal activity such as the purchase of drugs, others stating that it is a Ponzi scheme of sorts and others criticising the sharp changes in value it has under gone as being very indicative that bitcoin is a bubble that is soon to burst. Whether or not all these accusations are true it is certainly growing in popularity and credibility in the midst of a banking fail of quite epic proportions that has seen the global public lose faith in traditional banking. Will we see a day where we all use bitcoin? It’s unlikely but stranger things have certainly happened.