By Donna Bartee
One day during lunch I heard some colleagues talking about BITCOIN. When I asked them what it was, they responded that it was the future of global currency. Do you know what BITCOIN is? I certainly didn’t, so I decided to do some research and share my findings with you. I hope after reading my blog today the next time you hear someone mention BITCOIN or cryptocurrency you can join the conversation with some interesting facts.
BITCOIN is actually a brand name for a type of cryptocurrency.
Cryptocurrency is defined by the financial industry as a digital or virtual currency that uses cryptography for security.1 Now you may be wondering what the heck is cryptography? Well, it is a fancy name for the practice of the enciphering and deciphering of communications in secret code in order to make them unintelligible to all but the intended receiver. Cryptography may also refer to the art of cryptanalysis, which is the practice of how cryptographic codes are broken.2 Basically we are talking about encryption. If you recently watched the academy award winning movie the Imitation Game you saw one of the fathers of cryptology invent part of the process that is still in use today, Alan Touring. Why would a process developed during WWII it be considered something new for currency today? In general cryptocurrency is difficult to counterfeit because of this cryptographic security feature. A defining feature of a cryptocurrency is that it is not issued by any central authority, rendering it theoretically immune to government interference or manipulation. This feature is very appealing to some people. The anonymous nature of cryptocurrency transactions makes them well-suited for a host of nefarious activities such as money laundering and tax evasion. The first cryptocurrency to capture the public imagination was Bitcoin, which was launched in 2009. Bitcoin's success has spawned a number of competing cryptocurrencies such as Litecoin, Namecoin and PPCoin.
How common is cryptocurrency today?
When the virtual currency bitcoin was first released, in January 2009, it appeared to be an interesting way for people to trade among themselves in a secure, low-cost, and private fashion. The Bitcoin network, designed by an unknown programmer with the handle “Satoshi Nakamoto,” used a decentralized peer-to-peer system to verify transactions, which meant that people could exchange goods and services electronically, and anonymously, without having to rely on third parties like banks. Its medium of exchange, the bitcoin, was an invented currency that people could earn by lending their computers’ resources to service the needs of the Bitcoin network. Once in existence, bitcoins could also be bought and sold for dollars or other currencies on online exchanges. Initially this network seemed like a useful supplement to existing monetary systems by letting people avoid the fees banks charge and take part in noncash transactions anonymously while still guaranteeing that transactions would be secure.
BITCOIN in 2013-2014
More recently BITCOIN and its competitors has been trumpeted as a competitor to current monetary markets. Promoters have conjured up visions of markets where bitcoins are a dominant medium of exchange. Tens of thousands of bitcoins are traded each day (some for goods and services, others in exchange for other currencies), and several hundred businesses, mostly in the digital world, now take bitcoins as payment. Although that is good for a new and growing monetary system, it has not reached the level of disruptive growth.3
Before cryptocurrency can become a solid alternative to nation state backed currency the system will have to overcome a major, and surprising, problem: people have come to see it primarily as a way to make money. In other words, instead of being used as a currency, bitcoins are today mostly seen as (and traded as) an investment. This happened after the website Slashdot ran an item that introduced the currency to the public (or at least the public enthusiastic about new technologies), which resulted in the value of bitcoins jumping tenfold in five days. Over the next eight months, the value rose tenfold again. This attracted an enormous amount of publicity. More important, it also made people think that buying and holding bitcoins was an easy way to make a buck. As a result, many—probably most—Bitcoin users are acquiring bitcoins not in order to buy goods and services but to speculate. That’s a bad investment decision, and it also hurts Bitcoin’s prospects.4
If people can stop thinking of cryptocurrency as an investment and start thinking of it as a currency it could become a major player in monetary markets. The challenge for cryptocurrency now is whether, having become popular because of the cycle of media hype, it can somehow avoid being devoured by it. Only then might we be able to say, Good-bye, asset; hello, electronic currency.