What is Bitcoin? A Guide to the Digital Currency close

Lisa-Marie Leitner
Lisa-Marie Leitner
In Online Innovation
15th May 2013
What is Bitcoin? A Guide to the Digital Currency

A few months ago Bitcoin was just one of these internet phenomena exclusively used by tech-savvy libertarians. Today, everyone has at least heard of it in the news. Bitcoin has come to mainstream attention after its boost in value and the financial crisis in Cyprus. Here we clarify what the fuss is all about, which issues it has brought up and how it may challenge the finance industry.

What is Bitcoin?

Bitcoin is a decentralised digital currency that lets you exchange money worldwide. It is designed around the idea of establishing a new form of money using cryptography to control transactions rather than depending on central authorities.

So what does that mean? Basically, Bitcoin is virtual money you can use to buy goods and services online. Unlike traditional currencies it does not have a central bank, instead it is managed by a P2P network. As a result money transfers happen between people, going straight to the beneficiary without any intermediary.

A Little More Background...

Bitcoin was first introduced in 2009 by a developer under the pseudonym of Satoshi Nakamoto. Satoshi left the project one year later and never revealed his or her identity. The roots and motivations behind Bitcon are still a mystery.

From its beginning Bitcoin has been a community-driven, open-source project. Today it is one of the largest distributed computing networks worldwide with 50,000 daily transactions. The total value of all circulating bitcoins is said to be over 1.3 billion USD... although that might change within hours. Here’s why:

Bitcoins Have No Fixed Value

It trades like a share or commodity and should be viewed as a high risk asset. As bitcoins are not issued by a monetary authority, it is an unregulated currency. Unregulated resources generally behave wildly. And so it happened that at Bitcoin’s value, which amounted to 20 USD in February, reached record highs of 266 USD, just to fall down to 105 USD virtually overnight in April. Such volatility shows that it is not money, some financial experts are certain and warn against Bitcoin.

Bitcoin themselves say:

“Bitcoin price is volatile. [...] you should never store money that you cannot afford to lose with Bitcoin. If you receive payments with Bitcoin, many service providers allow you to convert them instantly to your local currency.”

Who Accepts Bitcoins?

Theoretically, you could buy any product using bitcoins. However, none of the mainstream retailers accept them yet. It is currently offered as a method of payment by WordPress, WikiLeaks and some web hosting and online gambling services. Also, some sites offer gift certificates for online shops like Amazon. The dark side is that the opacity and intricacy of the system is an ideal vehicle for illegal activity, such as drug dealing and money laundering.

The Future of Digital Currencies

Of course hard currencies, such as the euro, the pound or the dollar are vastly bigger than bitcoin will become in reasonable time. Nevertheless, governments should pay attention to the happenings around Bitcoin as alternative currency. But whilst the software continues to be complex and it’s value remains volatile, most people will probably stay away from Bitcoin. However, it is likely to be a pioneer in the sector of digital currencies. There’s obviously room for improvement and competing products that are easier-to-use. It’s going to be a development worth following and I’m looking forward to seeing what is yet to come.