Why Does Bitcoin Matter?

26 Sep 2014

Our digitally dynamic world has afforded us the convenience of trading, buying and selling online.

This affordance has been accompanied by the emergence of digital currencies; a medium of exchange that is electronically created and stored.

Digital currencies are being rapidly adopted by all sized businesses and even governments as a legitimate and secure form of trade.

Ecuador’s government is considering adopting a form of Government-regulated digital currency for the 40 percent of their population who don’t have bank accounts.

Bitcoin is the best known and most widely used digital currency. It was launched in 2009 under the pseudonym Satoshi Nakamoto, using cryptic mathematical algorithms.

Dr Tom Smith, Professor of Finance at The University of Queensland, believes that the Bitcoin founders aspired to create a digital version of gold.

“I think the idea is that they want to create something like gold, that’s really scarce. That’s the idea behind the cryptology, the mining of each coin.”

There are several standout features of Bitcoin:

Names aren’t required to make or receive bitcoin transfers. All you need is your digital wallet ID and the details of the recipient. Though all Bitcoin transfers ever made are accounted for, names are withheld.

The ambiguous nature of Bitcoin records permits purchase and trade of drugs and other illegal goods.

Bitcoins are virtually mined. All an aspiring miner needs is a digital wallet and free-to-download software. The process is complicated and relies completely on mathematical algorithms and miners are required to solve these complex mathematical puzzles. There is a maximum of 21 million bitcoins to be mined. Twelve million have already been mined. 

“The way it’s set up is that as more bitcoins are mined, they become more valuable,” he says. Dr Smith points out a unique use for Bitcoins – buying a successful gamer’s account to play online games at an elite level,” Dr Smith said.

“There’s a whole other world on the internet called ‘Second Life.’ You have another existence – another job, house and family. You make transactions on these accounts and can earn bitcoins that way.

“Successful gamers who, for example, are really good at Star Wars games become ‘Jedi Knights.’ They have ten accounts where they become Jedi Knights ten times over.

“Some wealthy people who have little free time want to play the game at the Jedi Knight level, and they can buy the high-achieving account off the gamer using bitcoins for around the equivalent of $10,000.”

Using bitcoins to buy and sell cuts out the middle man: the bank, that is. Zero credit card fees and immediate payments are attractive features for businesses.

Dr Smith believes that there are some difficulties associated with individuals pursuing a Bitcoin account.

“In the real world, you’ve got the Federal Reserve, you’ve got the International Money Market, The Reserve Bank of Australia and other regulated things. In the internet space, there’s no one really doing that.”

Despite its strengths, Bitcoin’s history has not been hiccup free. In 2013, the FBI seized 26,000 bitcoins, worth $3.6 billion from Silk Road, a company which facilitated the trade of illegal drugs through the web.  

This incident was followed shortly by the crash of Mt Gox, a major Bitcoin exchange where cyber thieves stole $500 million worth of bitcoins.

Another disadvantage is Bitcoin’s instability. In December 2013, a bitcoin was worth $1,147. At time of writing, its worth $453 AUD. 

Right now, Bitcoin is a digital alternative to conventional currency trade. However its future is uncertain, due to the ambiguity of the market.

Dr Smith doesn’t know if Bitcoin will be the market leader in digital currency, but he strongly believes that there is a bright future and strong demand for digital currency.

“There are around 250 versions of these internet coins. Who’s to say which is going to be the one who takes over the space?”

Though Bitcoin is still in its early, shaky stages of development, one thing is certain – the need for digital currency is growing steadily.