One of the most interesting tech stories of 2013 was the turbulent world of emerging virtual-currency Bitcoin. Derided by some as an anonymous form of cash used only by criminals who want to remain untraceable, others champion it as a currency that restricts the corruption and profiteering of governments and banks. Whatever your standpoint, this new virtual money has seen dramatic rises and falls in value, multiple hacking scandals, and has also been linked to various underworld activity, yet continues to gain popularity.
The concept behind Bitcoin is somewhat complicated, but in essence it’s a cash-like digital currency not owned by any country or bank. The Bitcoins themselves are created when computers generate a correct 64-digit code via special software. The process requires hugely powerful machines to break these codes, and is more commonly achieved through users joining a pool or guild where they share their machines’ computational power to ‘mine’ the Bitcoins. With the current complexity of the tasks needed to produce Bitcoins it's nigh on impossible to mine them yourself on your home PC. Plus, the amount of time it would take means the cost of electricity would negate any possible profit.
See: How to mine Bitcoins
Once created, Bitcoins are then stored in digital wallets either online at sites such as Coinbase.com or locally on your machine. Only a finite amount can be created (21 million) and the production rate is kept at a very steady, low, amount. This creates scarcity and ensures that a sudden flood of the currency can’t enter the market and devalue it in the process.
What makes Bitcoin unique is that it has no central bank, no government that issues or regulates the currency, but is instead held in place by the vast user base whose machines validate the creation and transactions that take place. This has been the main area of concern for many, as it allows Bitcoins to be exchanged virtually anonymously, which has made it the currency of choice for many nefarious individuals including the creators of the ransomware scam Cryptolocker, that hijacks victims’ data and demands payment in Bitcoin for its safe return.
The currency’s anonymity and non-regulated nature is also one of the main selling points for many legitimate users. In an age where governments spy on their citizens to quite extraordinary levels, and financial institutions are seen as culpable for the current worldwide recession, an increasing amount of people find the idea of a free form of monetary exchange very appealing. In fact such is the level of interest in Bitcoin that it’s now being suggested by some economists as a way to make some serious money.
‘The hottest investment in 2014 will be the virtual currency Bitcoin,’ states Jamie Dlugosch on the MSN Money investment site. ‘Take it to the bank. In fact, I wouldn't be surprised if Bitcoin doubles in value or more next year’.
This might seem a bullish prediction, especially when you consider that Bitcoin is seeing growing resistance from world powers. The European Banking Authority recently warned investors that Bitcoin was a substantial risk, while China went one step further and actually banned any trading of the currency at all, something Thailand had already enforced back in June after ruling that it wasn’t a valid form of currency. There was also research conducted at Cornell University by Professor Emin Gun Sirer, who published in his findings that the very nature of Bitcoin was broken and open to abuse from dishonest miners. But this hasn’t stopped a meteoric rise in the value of the currency, which started 2013 at around £9 and, by mid-December, had skyrocketed to £440, briefly topping out at £740 in November.
Of course this kind of rapid increase has led some to speculate that the currency is nothing more than the next internet bubble, akin to the dot-com disasters of the late 90s. Others point to the security issues involved when there is no central governing body, and that the user is at the mercy of advanced hacker groups which now see the highly valuable digital money as a lucrative target. All of these concerns are valid, and certainly the dangers are real, but slowly the Bitcoin phenomena is moving out from the shadowy corners of the web and finding its place in the real world.
In Canada the world’s first Bitcoin ATM machine was revealed in October 2013, allowing users to make deposits and withdrawals in traditional currencies converted from their Bitcoin accounts. It proved very popular and, in its first month of operation outside a coffee shop in Vancouver, the transactions processed totalled over one million Canadian dollars. The company responsible for the machine, Robocoin, has also reported that there is interest for more machines in over twenty countries around the world including Ireland, Australia, Kenya, and the Cech Republic.
Bitcoin now also has its first folklore heroes. Norwegian engineer Kristoffer Koch made a tentative 150 Kroner (£16) investment in Bitcoins back in 2009 when the currency was nothing more than a curiosity. He then forgot about the financial experiment and was only prompted to look at it again when he read a report four years later of how the currency had become increasingly popular and valuable. When Koch finally managed to remember his password he discovered that his initial tiny investment was now worth around £429,000. This allowed him to purchase an apartment in Oslo, while still having a sizable amount of his new found fortune in his Bitcoin account.
In the United States two newlyweds, Austin and Beccy Craig, also made a documentary in which they tried to survive solely on items, including food, that could be bought with Bitcoin. They managed to last for an impressive 101 days, and travelled from their home in Utah, to Stockholm, Berlin and Singapore throughout the experiment. The challenge wasn’t easy, but the fact that they survived for nearly three months illustrated how digital money is beginning to gain acceptance offline.
It may still be a long time before we see Bitcoin cash machines on the high street, or even find our favourite retail stores accepting the currency, but its rate of expansion makes these possibilities look more probable now than ever before. There still remains many hurdles for the fledgling currency to overcome though if it ever has a hope of entering the mainstream. Governments and law enforcement agencies see Bitcoin as a perfect vehicle for money laundering, and as such are resistant to it gaining a foothold. Norway has also recently announced that it regards it as an asset rather than currency and therefore will tax it accordingly.
In its initial four years Bitcoin has overcome the first challenge of a monetary system, that of being accepted by people as having an actual value, but the years ahead will be where it needs to prove whether it can be trusted upon as a serious alternative to Sterling or the Dollar. How this plays out, only time will tell, but in an age where technology is ever more entwined with culture, the prospects are more realistic than you might think.