Since its creation in 2009, Bitcoin has been one of the internet’s favourite talking points. It has made millionaires and billionaires of some, and completely emptied the wallets of others.
But, despite its glorious gains and eye-watering declines on a near-weekly basis, there are many who still argue that it is the future of money. Some countries have even gone ahead and adopted it as their official currency.
So is Bitcoin and the many other cryptocurrencies it has been followed by the future? We spoke to Brett Scott, author of Cloudmoney: cash, cards, crypto, and the war for our wallets to find out.
What is Bitcoin?
Bitcoin sits in a bit of a weird position. As a fairly new concept in the world of finance, it hasn’t really been classified into the world of currencies, and there is a good reason for that.
“Bitcoin is traditionally described as a decentralised digital currency, but I don’t find that a very informative description. If you look at how it works, it is essentially a system for issuing tokens,” says Scott.
“It is a way for a network of strangers to get together and follow a set of rules by which they will issue tokens and move them around between themselves. Historically, that has been a difficult task to do.”
Up until Bitcoin, the transfer of digital money from one person to another required a third person in the form of a bank. When you pay for something with a contactless card, you are asking your bank to send over some of your money to another account.
The aim of Bitcoin is to enable these transactions without the use of a middle party. However, it isn’t quite that simple.
“The technological aspect of Bitcoin is ingenious, but the actual monetary side is quite crude. Imagine taking a big sheet of glass and then punching a bunch of disks out of it and then handing them out, claiming that’s a monetary system, that’s similar to what Bitcoin is,” says Scott.
It might sound like a strange description, but it is an easy way to understand Bitcoin. At its core, Bitcoin is a pretty featureless token. In its early days, it didn’t have much of a use and could just be assigned from one person to another, it wasn’t until later that it was assigned a monetary value.
“When you hear a news story about someone buying a pizza with Bitcoin, they aren’t actually exchanging Bitcoin for pizza. They are using a system called counter-trading. This is where non-monetary objects are exchanged for a monetary value,” says Scott.
An easy way to picture counter-trading is to imagine you buy a jacket from a store for £100. You leave, decide you don’t like the jacket and go back to return it. The store says to you that they can offer a refund or swap it for something of a similar value, so you pick up a pair of jeans that have a similar value.
If an Alien was to watch this transaction, it could seem like jackets were a type of currency to be spent, but really you’re doing multiple transactions to get there: you’re buying a jacket, returning it for its full value and then using that money to buy another item.
“You’re taking two monetary transactions and superimposing them over each other to cancel out the money part. That’s in theory how Bitcoin transactions work. When someone says they bought jeans for Bitcoin, they first had to calculate how much Bitcoin they needed to buy to afford those jeans, essentially using a standard currency with an added step,” says Scott.
Will Bitcoin always fluctuate in price?
If you’ve followed the cryptocurrency market, or even just seen the headlines, you’ll know that Bitcoin has had a messy price history. But is that something that can be sorted out?
“The instability is inherent. In a traditional stock market, there is uncertainty around the stock in the company’s early stages as people try and work out what is happening. But as you get more information, a more realistic price is set. You calculate the future prospects of the company. Financial market bubbles occur when companies are wildly overestimated,” says Scott.
This is a problem for bitcoin because there is no underlying story or clear path. You can’t ever tell if it is under or overvalued, and there is no scientific methodology to measure it out as you see in the stock market.
“Cryptocurrencies are almost purely self-referential speculative markets so they can just crash out of nowhere unexpectedly,” says Scott.
This is an especially noticeable issue now that Bitcoin has been adopted as a currency in multiple countries, all of which will be at the mercy of those price swings.
Is Bitcoin a viable currency?
Bitcoin in its current state isn’t really a currency like the Dollar or Yen is, but could Bitcoin and other digital currencies transition to operating as currencies we use on a daily basis?
“Bitcoin has a number of structural problems where it is constantly having to try and create this mythology that it is some kind of commodity. At some level everyone knows that there is something dubious about that,” says Scott.
“That’s why it is so highly subject to these speculative flows because it has just become an object traded in the normal monetary system. It is this digital currency with no physical value. I don’t see how it will get out of that, especially with the wild price changes.” (Sciencefocus)
About the expert, Brett Scott:
Brett is an author who specialises in the world of finance, cryptocurrencies and money. He has spoken at over 250 events on these topics and published two books addressing the future of the financial system.
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