Bitcoins – Are They for Real or Just a Digital Fad?

Bitcoins – Are They for Real or Just a Digital Fad?

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    Bitcoin

    Are bitcoins for real or just a digital fad? If you had asked James Howells of Newport in the UK this question back in 2009 when bitcoins were first launched, he would probably have shrugged his shoulders and said they were just a fad. However, if you had asked him again in 2103, his answer, while wiping away the tears, would have been very different, and he would have told you they were definitely real. If you are wondering who James Howells is, you may well have missed the story of his somewhat tragic ‘encounter’ with bitcoins.

    When bitcoins first appeared as a digital currency, James became aware of their existence and, purely as an exercise, he set up a bitcoin mining program on his computer and let it run for seven days. At the request of his then girlfriend who was annoyed at the continuous noise of his laptop, he stopped mining, even though by that time he had amassed approximately 7,500 bitcoins. At the time, bitcoins were of next-to-no value and as a consequence, James thought little more about them. For those who mine for bitcoins today and know the complexities, you should know that in 2009 it was a very simple exercise to mine, and that to mine the same amount now would require an extremely powerful computer system.

    In 2010 James damaged his laptop when he spilled a drink on it, so he stripped it down, sold off the parts, but kept the hard drive in his desk drawer. Fast forward to some time between June and August 2013 and, during a clear out, James decided the hard drive was of no further use to him, so it was literally thrown out in the trash and yes, you are allowed to scream out in anguish here! As if it wasn’t bad enough that the bitcoins were worth approximately US $100 each in June, 2013 saw a massive spike in the value of bitcoins. This spike meant bitcoins became particularly newsworthy in November. As a consequence, it was at this time James heard that their value had just topped $1,000 each, and the realisation that he had thrown away $7.5 million dawned on him.

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    Despite checking all his data backups, USB keys and all other storage devices, he realised he had no copy of his bitcoin wallet, and therefore no copy of the securely encrypted individual code needed to access his bitcoin wallet. Without that, the bitcoins were inaccessible and, despite a few trips to the local landfill, without the original hard drive, all was lost.

    This, of course, is just one person’s view on the validity of bitcoins and, if anything, perhaps highlights one aspect of a number which may stop bitcoin from becoming a valid long-term digital currency. The problem with bitcoins is their value is not driven by economic conditions or the financial markets. In 2013 there was nothing spectacular happening on either of those fronts in the world, yet over the period of five months from the beginning of June 2013, to the end of November, the value of one bitcoin rose from $100 to an all-time high of $1,124.

    However, for a bitcoin to have value, it cannot be readily available but, like gold, it has to require effort to produce and cannot be easily forged or counterfeited. It also has to have an exchange value – in other words you have to be able to exchange it for goods or services the way you do ‘traditional’ money. Finally, it has to be popular and readily accepted, particularly as this type of currency has no cross-border boundaries – a bitcoin must be usable as easily in Alaska as it is in Azerbaijan or that would defeat one of the major advantages of a digital currency unit.

    Bitcoin certainly ticks all these boxes, albeit with differing sizes of tick. There is no limit to the number of bitcoins that can enter the digital economic marketplace, save for logistical barriers. Bitcoins aren’t just ‘printed’ in the way banknotes are. To a degree this protects the value from rampant devaluation through flooding the market with them. In a means to both protect their authenticity and to limit the number that can be produced, bitcoins can only be ‘mined’. This is a remarkable system where at the end of a given period of time, data is released which includes every single bitcoin transaction carried out in that period.

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    This is called a block, and every block forms part of a blockchain. However, all the transactions have to be validated and an algorithm applied to them to create what is called a hash. That hash is added to the last block in the blockchain, but with one different piece of data, called a nonce, added by the ‘miner’ who created the hash. The first miner to attach their hash to the last block in the blockchain receives 25 bitcoins in return for validating all the transactions. However, as an added security measure, all previous blocks are checked, so the longer the chain, the longer the process, and if anything is altered in a previous block, it will be noticed. Miners compete to be the first to attach their hash to a block, in a not dissimilar way to goldminers staking their claim during the American gold rush.

    As you can see, the more transactions using bitcoins there are, the longer the blockchain becomes, and the harder it becomes to mine bitcoins. This stops the market becoming flooded with them, thus giving providing a relative degree of stability to the “monetary base.”

    There is, of course, the other side to bitcoin’s drive to be seen as a valid form of currency, and that is its use. To begin with, the coins were more ‘swopped’ for their novelty value for low value products and services. From the first 50 bitcoins mined by the founder of bitcoin, Satoshi Nakomoto, mining was very simple and thus their value accordingly limited. In one notable transaction, 10,000 BTC (BTC being the recognized unit abbreviation) were used to indirectly buy two pizzas delivered by Papa John’s. While Wikileaks was one of the larger digital platforms to accept donations in the form of bitcoin, the first notable player in the commercial market was Richard Branson, who would accept bitcoin as a payment form for his Virgin Galactic enterprise. In 2014 Expedia, the world’s largest digital travel platform, announced that they would accept bitcoin as a legitimate form of currency. Today over 60,000 retailers accept bitcoin.

    Once a boulder starts rolling down a mountainside, it is difficult to stop it, especially when its momentum grows, and all the signs are that bitcoin may well have reached the point of no return as its growth in popularity is following the traditional exponential route. For sceptics who are more used to today’s rapid change in trends and who believe that bitcoin would have taken off to a greater degree by now, seven years after its first appearance on the scene, think on. In 1983 Motorola released the first commercially available mobile phone. Admittedly technology, or lack of it, held back the development of the device, but it was not until 2000 that Ericsson released the first smartphone. Since then smartphones have become the portable communication device of choice and today more people access the Internet via a mobile device than a computer. Even if you just take the rise of the smartphone, that has taken 16 years to develop and for us to adapt the way we live to maximize its potential. Remember, bitcoin has only been with us for seven years.

    If there is one final stumbling block for bitcoin to overcome, it is the fact it is not subject to any financial regulation or authority in the way, say, the US dollar or UK pound is governed. Bitcoin is a peer to peer currency, and therefore more prone to external influence as opposed purely to the economy.

    But let’s be honest with ourselves here. Since the dramatic fluctuation in value between 2013 and 2014, bitcoin has remained no less stable than the majority of worldwide currencies. The number of businesses and users is still increasing, and major players in the commercial marketplace are beginning to give it greater validity. So, in answer to the question at the very beginning of all this, it would probably be best to say that right now it isn’t a digital fad, but nor is it a valid currency. However, there is every likelihood on the very near future that it will become regulated, and then it will become the real deal in every respect.

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