The Courier & Advertiser (Perth and Perthshire Edition)
Is Bitcoin the new bebo?
The value of your investments may go down as well as up is the coverall line trotted out by financial services companies whenever they reel in a new customer. But, like the safety announcement on an aeroplane, the warning often drifts over heads unheard as the prospect of backing the next big thing overrides natural caution.
That’s what has happened with Bitcoin. Fervour and fever overtook sensible financial decision making as investors saw the digital currency’s value soar and wanted a piece of the action. From a baseline of around $1,000 12 months ago, Bitcoin topped $20,000 at the turn of the year as the hype grew,
Prudent questions such as ‘what is this value built upon?’ and ‘is this anything more than a speculative bubble?’ appear to have gone out the window as the rush continued.
At the time of writing, Bitcoin was trading at circa $6,000.
That’s still a huge upside for the relatively small number of people who have held Bitcoin long term.
But there will be far more licking their financial wounds right now and desperately hoping for another surge in popularity to recoup their losses.
Whatever the future holds, what is clear is that Bitcoin’s sudden spike in value has shone an unwanted spotlight on the rather murky world of cryptocurrencies.
What that tractor beam may ultimately find in the coming months can only be speculated upon.
But there are suggestions of organised criminal gangs using various cryptocurrencies to effectively launder cash through an unregulated financial system. That cannot be tolerated.
And, aside from potential criminality, there is also the incredible amount of computing power – not to mention the enormous drain on electricity resources – needed to operate these emerging financial systems.
Bitcoin is underpinned by a digital record of its transactions known as a blockchain. It is produced by a ‘mining’ process which involves thousands of computers simultaneously compiling new Bitcoin transactions while attempting to solve an incredibly complex mathematical problem.
After the global financial crisis hit and the reputation of banking fell to an all-time low, there was always going to be a place for a smarter, more flexible and unregulated way in which to invest and move money
The owner of the first computer to solve the problem gets a reward paid out in new Bitcoin.
The efforts of all the other powerhungry computers is wasted.
Environmentally it is a horrible system, but you can see why it exists.
After the global financial crisis hit and the reputation of banking fell to an all-time low there was always going to be a place for a smarter, more flexible and unregulated way in which to invest and move money.
Bitcoin is the poster boy of that movement and its longevity depends on two things: being untouched by the financial establishment and being totally secure.
However, the rewards are there for hackers to pursue. And, given the brouhaha Bitcoin’s move into the mainstream has caused, I suspect regulation will come sooner rather than later too.
Whether Bitcoin can retain its value and allure in the face of such significant challenges is yet to be seen.
But what I’m not betting on here is the death of digital currencies as a concept.
Instead, my guess is it will take a second and third generation of cryptocurrencies to emerge before the technology is fully accepted and assimilated into everyday society.
Sadly for the buccaneering Bitcoin I suspect history may well look back on its contribution unkindly.
In much the same way as the Instagram and Pinterest generation view Myspace and bebo, I can see the day when Bitcoin is viewed as nothing more than an interesting but ultimately insignificant curiosity.