by Joanne Masters

Like it or not, Bitcoins are becoming more mainstream – in their recognition, use, and integration in the day-to-day world. As more and more people learn what a Bitcoin is and how it can be used, the debate and discussion on a number of issues surrounding the Bitcoin has intensified.

Firstly, so we’re all on the same page, what is a Bitcoin?

A Bitcoin is a type of crypto currency (also referred to as digital currencies and cyber currencies), first launched in 2009.

A Bitcoin is a string of numbers that can be transferred peer-to-peer using a decentralised network of computers. The same network issues new Bitcoins to users who perform complex calculations (known as “mining”) and ensure the authenticity of the transaction. The Bitcoin is not issued or backed by any central authority or Government and can be traded anonymously and with little or no transaction cost.

Bitcoins are held in a ‘Bitcoin Wallet” on your computer. However, be wary, the wallet can be hacked and stolen and there’s no back up! Indeed, the largest Bitcoin Exchange – Mount Gox – filed for bankruptcy late last year after the theft of 850,000 Bitcoins belonging to customers and the company (about 6% of Bitcoins in circulation!). At the time, Mount Gox was handling 70% of all Bitcoin transactions.

The algorithm is such that the creation of Bitcoins is halved every four years. The last coins are expected to be generated around 2140.

Bitcoins can be:
purchased through various “exchanges”  and recently even ATMs.
accepted in exchange for goods or services.
“mined” (mining requires such extensive computer power that most mining is now performed by a group of users, or a ‘mining pool’).

Bitcoins are generally used for online purchases or speculative trading. Speculative trading can occur on one of the various exchanges, and there has certainly been sufficient volatility to excite those brave enough. Indeed, the US$ price of a Bitcoin went from US$5 in mid 2012, to US$13 by the end of 2012, to US$88 in mid 2013, before jumping in the space of six weeks or so to a high of US$1135 on 5 December 2013, before sliding back to around $440 currently.


Source: bitcoincharts.com

Aside from speculative trading, much of their activity was initially associated with illegal activities (due to the un-traceability of the transaction). The extent of this was highlighted when the US FBI shut down black market trading website Silk Road and seized over 170,000 Bitcoins, about 1.5% of all Bitcoins in circulation and equaling around US$34 million at the time.

That said, Bitcoins are becoming more commonplace for commercial transactions, particularly on the internet. There are over 100 places in Australia that accept Bitcoins, for everything from beer and pizza to car hire to electrical products to art galleries and a dentist. According to CoinMap, there are 4410 places globally that accept Bitcoins.  There are even several ATMs in Australia where Bitcoins can be purchased.

Bitcoin is the most recognised digital currency, but many exist. Other well known ones include Litecoin, Namecoin, Dogecoin, Peercoin, Mastercoin. Although to put it in perspective, according to Coinmap, Litecoin is accepted at only 396 places globally.

Proponents of Bitcoins argue that they are a safer way to transact over the internet as the anonymity reduces the risk of identity theft. You don’t need to hand over a credit card, a bank account number or a PayPal account. Transaction costs are minimal (if not zero), compared with 3-4% for using credit cards or PayPal. Moreover, with the Bitcoin quoted to eight decimal places, its divisibility allows for extremely small transactions.

Many believe the closure of the Mount Gox Exchange exposed a catastrophic fault with crypto-currencies, and confirmed that the Bitcoin is merely a fad.

There is much global debate about this, with some influential names on both sides of the argument. For example, renowned economist Paul Krugman is “unconvinced” and penned an article titled “Bitcoin is Evil”. On the other hand, former US Federal Reserve Governor Ben Bernanke believes the Bitcoin “may hold long term promise”.

Undoubtedly, it’s early days and the Mount Gox experience highlighted a significant deficiency. However, in my view, it is naive to write off crypto-currencies. Yes, there are significant shortfalls but this is just the first wave. Like any financial instrument, it will develop, change and mature.

Despite the current limitations, the possibilities are exciting. Secure transactions over insecure networks with no transaction cost. Sounds good, doesn’t it?

Bitcoins can reduce the mammoth problem of global fraud and identity theft. They can facilitate very small, frequent transactions, which could be used to fight spam.

Governments, regulators, financial institutions as well as vendors and consumers are all trying to work out how Bitcoins fit in to our global structure. They are new, different and untested. There are issues of tax, regulation, fraud, safety and security. But, there is movement under-foot.

Bitcoins won’t disappear, but the Bitcoin of the future will be more regulated and more transparent.