Bitcoin

Bitcoin have created quite a stir. But what are they?

An alternative to currency?

Even that subtitle is misleading, as Bitcoin arguably is a currency too. You can exchange your national currency into Bitcoin and exchange it back again. And like currency, it has no intrinsic value. Its value is decided by the parties making the transaction. However, unlike currency (at least for now), Bitcoin has no physical manifestation, meaning it exists only in the virtual world with all the internet security implications which go with that. Neither does it have governmental nor bank backing. This might be an advantage, especially for those who distrust money, as it means it can’t be inflated by governments wanting to stimulate the economy. On the downside, there is no recourse to banks to reimburse any currency lost to fraudulent transactions. Once it’s gone, it’s gone.

Analogous to gold

Its protagonists imply that Bitcoin is like gold. They say Bitcoin can be “mined”. But this means solving complex mathematical puzzles rather than digging holes. They also point to a finite supply, where the decreasing rewards of Bitcoin mining, very much a feature of the Bitcoin ecosystem, is like the decreasing supply and increasingly expensive cost of extracting gold.

Who is behind Bitcoin?

This is a difficult question. The inventor was allegedly called Satoshi Nakamoto, however this is likely a pseudonym and possibly for an organisation. The cryptographic software is complex and efficient, leading some to speculate the involvement of not just a handful of enthusiasts. A full explanation of how it all works, and it takes some understanding, is in this video.

Importantly, there is no central computer system. All transactions are peer-to-peer, meaning that everyone relies on their own and everyone elses records to authenticate transactions. These are burried in passwords and keys, making fraud difficult but not impossible.

It is said that Nakamoto’s wealth runs to billions of dollars, having created Bitcoin for his/their account at the start of the project.

Who would want to use Bitcoin?

Some, mostly national governments, suggest that Bitcoin is mostly attractive to criminals hiding money from the authorities. It’s an interesting point, given that governments have no control over their usage. Others suggest that as people lose faith in the various fiat currencies around the world, Bitcoin could be a safe haven for wealth.

An emerging use for Bitcoin is its utility to settle transactions and transfer money. The point here is that there is no need to own any Bitcoin other than momentarily, as parties will convert to or from Bitcoin at their respective ends of the transaction.

How do I keep Bitcoin?

It’s a virtual currency, so it’s kept in a “wallet” on your computer. Because this includes a history of all your transactions, you can’t simply hack your wallet to increase the number. And because of the way transactions are processed, you can’t use the same Bitcoin to pay for two or more transactions at the same time.

A big problem is to understand that losing your wallet means precisely that. Yes, the wallet.dat file, or whatever it’s called, can and should be backed up. But if it’s irretrievably lost through hard disk failure or computer theft, it’s gone. Some reports suggest that there are a lot of lost Bitcoin dating back to the early days of the project because it was mostly a fun idea at the time. I have visions of people trying to locate old computers and drives to find these wallets like divers searching for sunken gold.

So, should I be interested in Bitcoin?

I would say ‘watch this space’. The entry of Bitcoin electronic wallet and exchange Coinbase into the UK suggests there is untapped interest there. And banks are watching developments too. Because the maximum amount of Bitcoin that can ever be created is 21 million, demand will mean their exchange value rising. A quick internet search suggests the rise could he a hundred-fold or more, including suggestions that some of the more fickle currencies could be replaced at least to some degree by Bitcoin.

Bitcoin ATMs have started appearing too. Not, as with conventional ATMs, as a means of dispensing currency but as a means of buying Bitcoin with cash. That the country’s first Bitcoin ATM is located in the same London site as Google is perhaps telling us that tech-savvy people are more ready to embrace the idea.

My own doubts about Bitcoin are centred mainly on my suspicious nature and a general distrust of humanity’s increasing reliance on technologies few understand. I am old enough to remember some people refusing to use ATMs because they distrusted the technology enough to believe their money was at risk. I feel a bit like that with contactless payments, and any talk of a cashless society really gives me the wobblies. On the other hand I am very tempted to buy a small amount of Bitcoin as the upside does perhaps seem to justify the downside.

There is money to be made mining Bitcoin, but as means of completing transactions, unless you are earning money denominated in Bitcoin, you might need some persuading.

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