On Bitcoin and the future of digital currency

Last week I attended the Pioneers Festival in Vienna. One of the topics was Bitcoin, a peer-to-peer digital currency based on cryptography and distributed transaction records. The number of Bitcoin is limited to about 21 million, of which over 14 million have already been “mined”. The word mining is somewhat deceptive; miners do not discover bitcoin exactly, rather they are rewarded for solving hard mathematical problems that confirm the validity of a block of Bitcoin transactions. The system provides for a decreasing number of Bitcoin to be generated until 2140, following which miners will be rewarded by transaction fees; at least, that is the idea as I understand it.

Bitcoin is interesting on multiple levels: mathematical, political, financial and practical. The currency has real value, but this tends to be volatile; it is widely enough accepted to be useful, but not enough that you can be sure of its future. There are intense debates even within the Bitcoin community about what should happen to it technically (forks are under discussion) and the extent to which it is safe from manipulation. There is a strong incentive to get in early on any Bitcoin alternative since it would be so profitable.

At Pioneers Bitcoin evangelist Roger Ver spoke and gave away $125 worth of the currency during his talk; he also gave me $5.00 when I spoke to him later. He describes himself as a Bitcoin investor, meaning one who invests in Bitcoin initiatives as well as hoarding the currency itself. That Ver predicts a bright future for Bitcoin is as surprising as the sun rising; his world depends on it.

Ver is also a libertarian who did jail time for selling explosives on eBay and renounced his US citizenship; you can read his own account of the incident here, where he adds:

Currently, I am working full time to make the world a better, less violent place by promoting the use of Bitcoin. Bitcoin totally strips away the State’s control over money. It takes away the vast majority of its power to tax, regulate, or control the economy in any way. If you care about liberty, the nonaggression principle, or economic freedom in general you should do everything you can to use Bitcoin as often as possible in your daily life.

The implication is that if you believe that taxation and regulation are not entirely evil you may be wary of Bitcoin, either because of worries over its use by criminals (it is commonly requested for the payment of ransoms by the purveyors of ransomware like Cryptolocker, for example), or through concerns that regulators, banks and governments may try to make it an illegal currency if its usage grows, or try to find ways of regulating it that remove its advantages.

Another possibility is that Bitcoin will be replaced by some other digital currency and lose most of its value.

Nevertheless, the ability to send digital cash to another person anywhere on the internet without involving a bank or a currency exchange is a powerful and disruptive concept.

Bitcoin in practice

What about the practical aspect of Bitcoin? If you want to try it out you can take a look here. There are several problems confronting the ordinary person who wants to get started, including which Bitcoin wallet (a means of holding Bitcoin) to choose and how to acquire some currency. Lack of regulation means that you either have to trust a web entity to hold your Bitcoin for you – perhaps losing it if the site gets hacked – or hold it yourself, which requires good backups and strong security since your own computer might get hacked and your Bitcoin stolen. Alternatively you can maintain low balances so that not much is lost if the worst happens.

Once you get set up though, Bitcoin is useful. Using Bitcoin, you can make payments with either zero or very low fees either for sender or recipient. Payments are non-reversible by design. Bitcoin is ideal for micropayments, and some companies prefer it for that reason. At Pioneers I met Parkt, which runs a scheme enabling one or more retailers to pay for your parking if you shop at their stores. They like Bitcoin because it is cheaper for them.

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Bitcoin is also good for international payments since it is internet-based. There are some win-win scenarios, like the ability to purchase Amazon gift vouchers at a discount, said to be around 20%. The way this works, I was told, is that some workers for Amazon’s Mechanical Turk service (perform tasks for payment into your Amazon account) have difficulty converting their Amazon balance into cash. They can buy Amazon gift vouchers though, and sell them at a discount for Bitcoin.

How is Bitcoin doing? Its value has been stable since the beginning of the year, but it has fallen in value substantially since its peak in November 2013. Here is the chart for the past year:

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At this point, all you can say for sure is that the future of Bitcoin will be interesting to observe.

One thought on “On Bitcoin and the future of digital currency”

  1. I’m not an expert on Bitcoin, but I have been following it a while. When you talk about Bitcoin alternatives, I’m not sure of you mean a future fork, yet to happen, or one of several alternatives that have been around for a while. There seem to be several, but none have taken over much mindshare from Bitcoin, so you’d probably need to buy all of them in order to stand a chance of making a profit.

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