You could argue that all money is imaginary. After all, that dollar, pound, euro, whatever it is in your wallet, has no individual value, it’s just a physical representation of a symbol we all agree to believe in that allows us to exchange goods for services and vice versa. But at least you can touch that five-dollar bill. Bitcoin takes things a little further. Bitcoin is virtual reality money, it has no physical presence whatsoever but, and here’s the interesting part, this non-real Internet money can be exchanged for real stuff, just like any other currency.
Coming from the concept that money can be anything that is accepted as payment for goods and services, Bitcoin is the first cryptocurrency. The key elements of any currency are that there be a limited supply and that it can’t be forged. If it’s easy to replicate, then we’ll all just start printing or producing our own. Then the marketplace is flooded, inflation goes through the roof, the money becomes virtually valueless and pretty soon prices are skyrocketing. With traditional money, the proof against forgery rests on elaborate minting and printing, special papers, watermarks, serial numbers, holograms, and ultraviolet and infrared inks. Bitcoin’s protection is military-grade cryptography (hence “cryptocurrency”). So when you’re paying in Bitcoins on the web, the transaction relies on encryption technology to prove that you’re using a genuine Bitcoin and not some clumsy forgery.
It might sound complicated but it isn’t. In reality it’s not much different to paying for something with cash or card on the High Street. You reach into your digital wallet, hand over the agreed price in Bitcoins and then you use a private key (that’s the encryption bit) to prove it’s yours to spend – not dissimilar to typing in your PIN number at the supermarket checkout. You can even exchange Bitcoin for more traditional currencies – at the time of writing, one Bitcoin goes for $122 or £79 or €92.
So how else is Bitcoin different to other currencies?
Well, apart from being digital, Bitcoin is decentralised, which is to say no one owns it or controls it. Yes, there is a Bitcoin Foundation set up to promote and standardize things but this is a community effort, very open source in spirit. With Bitcoin there is no equivalent of the Bank of England deciding the value of sterling.
What’s more, transactions are peer to peer. With Bitcoin there are no banks, which means no bank accounts, which means no fees or no freezing of accounts (although a voluntary fee can be paid purely to speed up your transaction).
Who uses Bitcoin?
The bitcoin.org website (another community effort) says, “Bitcoin is changing finance the same way the Web changed publishing. When everyone has access to a global market, great ideas flourish.” Now that’s a lovely statement with virtually zero information content. But get surfing and it becomes clear that an enormous variety of businesses are accepting Bitcoin in payment. You can buy anything from cars, electronic goods, home decor products, pornography, clothes, games and software, jewellery, food, travel, and advertising and design services.
Put simply, Bitcoin is popular and getting more so. Hundreds of online businesses accept it already and the number is growing rapidly and Bitcoin has already been acknowledged as a legal currency by Germany. What’s interesting is the timing. Bitcoin emerged in the wake of the global banking disaster(s) of 2008-09 and it’s tempting to see it as representing some sort of popular vote of disapproval against the traditional monetary system. It certainly raises the questions about the nature of money and how we use it. This may be why Bitcoin is not so popular with certain global interests; more on that in Part Two.
Part two of this article about Bitcoin: The New Currency is available here.