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Bitcoin: A digital currency for a digital world

The advent of the internet has changed the world in countless ways, but perhaps most significantly, it has brought nations closer together and allowed people separated by thousands of kilometres to communicate in real time.

A consequence of this is that consumers are no longer limited by the shops and services based in their particular city or town. Now, it’s just as easy – if not easier – to purchase goods from a retailer in a distant country than it is to get in your car, drive to the mall and buy something.

It’s only natural, then, that people have begun to question the idea of physical currency as a practical way of trading and building wealth. In a world in which more and more goods are bought and sold digitally, will there continue to be a need for banknotes and coins?

This has opened the door for a new form of currency, a digital currency that uses online peer-to-peer technology to operate independently of governments or banks. Bitcoin is new, bitcoin is controversial, bitcoin is maybe even dangerous… but it might just be the future of currency as we know it.

Bitcoin: A new kind of money – an unofficial information site owned and maintained by several of the core developers and community members behind bitcoin – defines the online currency as an “innovative payment network and a new kind of money”.

In short, bitcoins are digital coins that can be generated and transferred person-to-person over the internet. Bitcoins are created by anybody with an internet connection using a free application. However, the number of bitcoins created is strictly monitored in order to ensure they are generated at a predictable rate.

This process of bitcoin generation and the fact that the currency is still in its infancy has led to a significant increase in bitcoin value since becoming officially operational in early 2009. At the start of 2012, a single bitcoin was worth less than eight US cents. By April 2013, at the height of a notable price rally, each bitcoin was worth US$266.

Over the last few months the value of bitcoin has been as low as $300 and as high as $1,000. As a result, a number of lucky early adopters have made huge profits from just a small digital wallet of bitcoins mined during the initial development of the currency.

On social media, stories have emerged of people discovering forgotten bitcoin wallets and uncovering unexpected riches as a result. But many see bitcoin as more than simply a novelty or a get-rich-quick scheme.

Bitcoin offers a number of advantages over traditional currency and money management systems, including fewer restrictions around payments, lower transaction fees, and potentially greater security and transparency. Perhaps most importantly, bitcoin offers an alternative to banks and financial institutions that many people are beginning to see as outdated and out of touch.

An alternative to the banks

A key factor driving the debate around the concept of money is the idea of security and trust. There was a time, long before terms like “sub-prime mortgages” and “government bailout” became part of the public vernacular, when people trusted banks. They had faith in monetary institutions to protect and grow their wealth.

Those days are over. In June 2012, Gallup reported that the average American had less trust in their bank than ever before in recorded history. Just 21 per cent of respondents said they had a “great deal” or “quite a lot” of confidence in their bank, while 35 per cent said they had either “very little” trust or none at all.

Australian banks have fared slightly better, thanks to the fact that this country’s economy has survived the GFC storm relatively unscathed. However, the statistics still make dire reading. According to Roy Morgan, over 1 million Australian banking customers made the decision to stop dealing with a financial institution at some point during the 12 months to September 2013.

Therein lies one of the biggest appeals of bitcoin. Users of this cryptocurrency need not rely on banks or financial institutions to manage their money. Furthermore, all bitcoin software is open source, meaning there is no authoritative body behind the currency.

Nobody ‘controls’ bitcoin in the sense that the Australian government and the Reserve Bank control the Australian dollar, and this has some industry experts up in arms about just how tangible the concept is.

A replacement or a companion?

On December 11th, the Guardian newspaper reported on an interesting speech that Ernst & Young Forensic Data Analytics Roger Willis made regarding the future of bitcoin. Mr Willis stressed that bitcoin was never really going to be “a replacement” for traditional fiat currency. Instead, he sees bitcoin having a future as purely an ecommerce tool.

“You see a lot of people talking about how bitcoin is going to take over, or how bitcoin doesn’t have the properties that lend to it being used widely. But it was really developed to be used in ecommerce and for micro transactions. It wasn’t really to replace our Sterling, our US dollars, and our Euros,” he said.

However, bitcoin is already spilling out of the constraints of the World Wide Web and into the physical world. In Europe, a number of pubs have begun accepting bitcoin over the counter alongside coins and credit cards. The actual payment process is as simple as scanning a QR code.

Obviously there are marketing and promotional drivers behind offering such a service at such an early stage. But it does give us an interesting glimpse into the practicality of bitcoin as a day-to-day payment option.

Already, common people are retiring their credit and debit cards in place of mobile wallets and using NFC technology to shop for goods in traditional brick and mortar outlets. With that in mind, is the idea of using bitcoin to pay for the weekly groceries that far outside the world of possibility?

The foggy future of bitcoin

The earliest form of human currency dates back to 2,000 BC, when ancient Mesopotamian and Egyptian civilisations traded primitive receipts that represented grain stores. Today, every established country on earth uses some form of currency, unique to their little corner of the earth.

However, over the last decade the arrival of new technologies has steadily broken down the once-undeniable geographical and theoretical borders that divided mankind. That raises the question: Are physical currencies, unique to the individual nation in which they were created, still a practical tool in the information era?

The future of bitcoin is unclear. Debate rages – and will continue to rage – as to whether investment in this currency is a smart move or a quest for fool’s gold. Bitcoin may continue to grow in popularity  and in value, or it might crash and become worthless. It’s impossible to really say.

What is clear is that bitcoin is a significant development in the concept of money. The theory of using a non-coin-based currency system is nothing new, but bitcoin is notable as being the first real digital currency to gain widespread mainstream recognition – even if it is yet to win over a significant number of sceptics.

As Associate Content Editor of the Business and Finance team here at Castleford, I write about money every day. I also write extensively about technologies that are affecting the business world, such as cloud computing, big data and unified communications.

Bitcoin, as the convergence of those subject matters, is a concept that I personally find fascinating. But more importantly, it’s also an innovation that may be seen in years to come as a significant milestone in the history of ecommerce, an important step forward towards a world in which currency knows no borders.

By Zak Wash