Bitcoin has been getting attention recently due to its meteoric rise in value against fiat currencies. Just over a week ago the market capitalisation reached $1 billion. Overnight it cracked the $2 billion mark, with each Bitcoin valued at $US194.90. Nobody yet knows the true value of 1BTC, and no one knows what will happen when this 'price discovery' comes to an end.
Latest trade price (USD)
Eye-rolling critics argue that Bitcoin has no intrinsic value, and the deflationary nature of the currency will ensure its eventual demise (Alan Kohler even likened it to the 1637 'tulip bulb bubble' - see The Bitcoin bubble, April 8). I disagree on both counts.
Bitcoin's true value is derived from the genius of the technology. It was designed to be the ultimate digital currency: global, cryptographically secure, fast, anonymous and easy to use. Early in its history, 'The Silk Road' adopted it as its official currency with Bitcoin's anonymity the main drawcard for the clandestine online store.
But just as the adult film industry leads the way for video formats, Silk Road was on to something. In March 2013, BitPay (the PayPal equivalent in Bitcoin world) processed more transactional volume than Silk Road proving that legitimate uses were beginning to outnumber the illicit.
A fundamental property of Bitcoin is the predetermined controlled supply of new coins, and the eventual end of production when the total reaches 21 million. This seems tiny for a global currency, but Bitcoins are divisible into incredibly small units. The smallest unit is a 'satoshi' which is equal to 0.00000001BTC. Once every Bitcoin has been mined, there will be 2.1 quadrillion satoshis in circulation. Compare this to Australia's current money supply of 1.5 quadrillion cents. Obviously dealing in such small numbers is impractical, so common fractional units have been devised.
This hard limit gives Bitcoin the unique position of being part currency, part commodity. Instead of having to pay for your gold to be stored in a secure location, your Bitcoins are secure in an encrypted digital wallet. Need to quickly cash out part of your portfolio? Open up your Bitcoin wallet and send the required amount – not so easy with gold bullion. The best part, you can be sure that the 1BTC you own today will still be 1/21 millionth of the total Bitcoin economy in five years, the same of which cannot be said of any fiat currency or precious metal.
That said, It isn't all peaches and cream.
Bitcoin is the first of its kind – a prototype. The greatest threat to Bitcoin is a superior technology – and just as Napster, MySpace and Netscape Navigator all soared to the highest of heights, it only took the next big thing to usurp them from their thrones. At present no such competitor has emerged, but even if it did an alternative scenario is possible, where once Bitcoin garners widespread acceptance, other digital currencies could healthily coexist without detriment to one another.
There is also quite a steep learning curve for newbies. Over Bitcoin's short life there have been plenty of people who have been robbed of, or lost, their BTC.
- Hollywood screenwriter Bruce Wagner lost over BTC25,000 when an online wallet service called 'MyBitcoin' simply disappeared from the internet without a trace.
- Another had a similar amount stolen when his computer was compromised by an attacker, and his unencrypted wallet was emptied.
- The operator of Poland's largest Bitcoin exchange accidentally deleted the wallet storing the deposits of all their members, losing BTC17,000.
All of those events occurred in 2011, and the lack of more recent high-profile incidents indicates that people are now taking security more seriously when it comes to their coins. Unfortunately the onus still lies entirely on the individual to protect their Bitcoin holdings. With the recent influx of speculators jumping aboard, people need to take great caution as Bitcoin has once again become a prime target for those looking for an easy BTC. Encrypt your wallet with a strong passphrase, and make sure you have backups.
Regardless of how the story of Bitcoin plays out in the long term, it is certainly an unprecedented social, economic and technological experiment that is keeping me on the edge of my seat.
Nick Santamaria is a digital consultant and IT professional.