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Bitcoin, a financial revolution?

1st October 2013

The Bitcoin was designed and developed by Satoshi Nakamoto in 2008, although the specifics are shrouded in secrecy. It is thought the name is probably a pseudonym used by a group of people who were responsible for devising this new form of currency.

What is the Bitcoin?

A currency existing only in cyberspace and completely outside governmental control, Bitcoins are ‘mined’ through sophisticated computer algorithms designed to keep producing more Bitcoins until the optimum level of around 21 million Bitcoins is reached. The mining programs will then cease to operate leaving the currency immune from the possibility of inflation.

Its principle advantages

The Bitcoin operates as a digital currency in cyberspace and is free of controls from governments and banks, which given the current economic climate makes it an extremely popular and desirable form of currency to huge numbers of people.

The power and authority of banks has been credited by many people for creating the recent economic crisis and so a new form of currency which bypasses the system of traditional financial institutions taps into the zeitgeist by offering a whole new financial concept. The ongoing backlash against big businesses and corporate ownership of public sector services strengthens the appeal for a modern form of currency which freezes out the big financial players.

As the first internet currency, the Bitcoin represents an important development in the future of finance and it has already spawned a number of copycat currencies although none have been able to match the success of the original.

The system makes use of peer-to-peer file sharing technology, bringing the subject of currency into the modern digital age. Every bitcoinmining operation helps to create more Bitcoins, making it an ongoing investment opportunity for speculators.

Consumers and businesses can conduct transactions without having to involve any of the current banking organisations or practices.

Disadvantages

Since it operates outside traditional financial rules, it is open to misuse by drug dealers, arms dealers and other criminal activities as it makes money laundering easier. There is no regulation so you have no consumer protection in the event of fraud.

The Bitcoin is designed to behave in a similar way to gold, but this makes it subject to similar negative issues such as great expense and a tendency to deflation.

Although the Bitcoin is designed to keep the currency circulating, there are a number of investors hoarding large amounts of the digital currency which keeps it out of circulation and defeats the object of the exercise.

At present it is impossible to predict whether the Bitcoin will become a global success story or whether it will crash and burn within a few years. Its widespread appeal to a public tired of the failings of financial institutions and big business make it likely to succeed. However, its detractors believe it to be too ‘conceptual’ to function as a workable currency with the ability to make actual purchases in real time.

Whether it becomes a technological success story or a warning for our times, it is safe to say that the  is challenging the financial status quo and shaking up the financial world. Best advice at the moment for potential investors –as with all investments – is not to use money that you can’t afford to lose.

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