Bitcoin: The Innovative Future of Currency…or Hyped Up Flash in the Pan?
Bitcoin (BTC) is fast becoming the
most talked about subject in financial markets. Can a virtual,
non-exchange backed currency depose long held views on what constitutes
wealth and the inherent process of exchanging goods and services using
‘money’? The core themes surrounding Bitcoin question the very concept of
what ‘money’ is.
Can stores of value underpinning global capital markets such as the US
Dollar and Gold give way to Bitcoin on a wider scale? Will it become the
preeminent medium of exchange among future societies?
are divided over the revolutionary idea that is swiftly becoming much more
than just an online craze. Regulators are beginning to move from outright
dismissal to considered integration into wider payments and savings
applications as a result of increased transaction speeds, lower costs and
Less than 1,000 Australian merchants currently accept Bitcoins as a form of
payment, indicating it has not moved beyond a method of peer-to-peer
payment. This number is expected to rise rapidly however, given the
increased focus placed by Bitcoin operators on merchant payment sectors.
Bitcoin now has a market capitalisation approaching US$5 billion, with
large scale interest from numerous investors, most notably a commitment of
over US$1.5 million by the Winklevoss twins, early investors in Facebook.
The virtual currency was anonymously created by an individual using the
pseudonym ‘Satoshi Nakamoto’, who disappeared in 2011 and has not been
associated with Bitcoin since. Following the first recorded transaction
using Bitcoin – a delivery pizza order - the concept developed a point of
valuation and has continued to grow quickly. A residential developer in
Shanghai, China is now accepting Bitcoins as settlement, and a young
couple successfully experimented travelling for over 100 days using
New Bitcoins are issued via ‘Bitcoin Mining’ - a process involving users
working together to decipher complex mathematical equations after which
they are rewarded with 25 Bitcoins per unique problem. Every four years
the amount a Bitcoin Miner is rewarded with is halved, and total Bitcoins
in circulation will eventually reach a limit of 21 million.
can be broken down into denominations of eight decimal places however.
Unlike sovereign currencies that are reserve backed and highly regulated
by a number of independent bodies to ensure transactional accuracy and
stability, Bitcoin markets are solely managed by peer-to-peer networks
Bitcoin miners provide the foundation
of confidence in the system and core dispute resolution procedures.
Bitcoin surpassed US$500 for the first time on November 18th 2013,
rocketing in value by 16 percent in a single day. Following months of wild
swings in value and price volatility that would make even the most
grizzled Wall Street trader blush, it is no surprise for Bitcoin market
participants to witness price swings of up to 25 percent in a matter of
The new record high was achieved after a surge in value from US$250
in less than a month, trading as low as US$96 in July 2013. Uncertainty
and instability among Bitcoin markets, coupled with a well-publicised
association with criminal transactions in the now banned ‘Silk Road’
network has limited the wider application of the virtual currency…until
One suggestion for the legitimate use of Bitcoin, or ‘crypto currencies’
in general that do not require personal details as credit card providers
necessitate, is for its use in FX services. Characteristics such as low
cost and high speed are distinct advantages for FX conversions and
transfers, but the need to ‘know your customer’ would require a number of
changes to the underlying protocol. Without a reduction in volatile price
action and lack of security however, Bitcoin would have difficulty in
becoming a viable risk management or business FX alternative, however the
potential is clear.
Critics have argued that without centralised oversight of any capacity,
security concerns and the high level of sophistication required by
peer-to-peer operators will limit its inclusion into mainstream
transaction banking and payments markets that cannot conform to the
‘crypto currency’ concept without fundamental changes.
Bitcoins essentially shift data from one location to another, but when
they are converted to underlying currency such as Pounds Sterling or US
Dollars, they re-enter the banking system. This is carried out at ‘Bitcoin
Exchanges’ that remain highly unregulated and open to criminal activity
such as hacking and identity fraud. It is this exchanges that provide a
clear entry point for regulators and banks seeking a method of
incorporating themselves into the burgeoning Bitcoin community, however
most cases of bank involvement with the virtual currency so far have
involved shutting down of deposit accounts linked to the virtual currency.
The threat of a ‘Bitcoin Bubble’ and potential for the market to collapse
is clear to those rushing to join the hysteria. As time passes and ‘crypto
currency’ continues to become more prevalent however, banks around the
globe will surely be asking themselves ‘if we can’t beat them…join them’.
Transactions per day
Transaction Volume (BTC)
Transaction Volume (USD)
Trade Volume (USD)
Market Price (USD)
Source: Blockchain.info – Bitcoin Wallet & Block Explorer
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