Spectator Money - Features

Is bitcoin a safe haven against mainstream money mayhem?

We unlock the mystery of the digital currency with a cult following

5 March 2016

9:00 AM

5 March 2016

9:00 AM

 
bitcoin/ n. A type of digital currency in which encryption techniques are used to regulate the generation of units of currency and verify the transfer of funds, operating independently of a central bank.
 
Eh? No wonder so many people are confused about bitcoin. What you see above is the Oxford Online Dictionary definition of what is probably the most fashionable currency in the world. I realise that’s not saying much: currencies don’t usually have cult followings. But if the euro is the nerd no one wants to be seen with, bitcoin is the coolest kid in the class.

Perhaps part of the attraction of bitcoin for techie types is the very fact that it’s such a mystery to everyone else, accustomed as we are to traditional currencies. That makes the bitcoin club very exclusive.

So what is a ‘digital currency’ anyway? How can any kind of real money exist only in a digital form? Well, the two things that enable it to work are a) the fact that there are a finite number of bitcoins in existence, and b) the clever bit of technology that underpins it: the blockchain.

The blockchain is, in a way, the best thing about bitcoin. Safe to say that whatever may happen to bitcoin in the ephemeral world of digital fads, blockchains have a serious future in the technology of payments and money transmission: central banks are already working on what that future might be. Essentially, a blockchain is a record of digital events: in the case of bitcoin, any change in ownership of any one ‘coin’. This record is impossible to change, so it can’t be edited after it has been confirmed. The only way of altering the blockchain is by adding to it, rather than erasing previous entries. And the record is not stored in just one place, but shared across hundreds or thousands of networked computers, making it harder to hack.

The other interesting thing is that the system is anonymous. Unlike a bank or Paypal, which request all sorts of personal details from you, bitcoin doesn’t care who you are. That makes it popular with people who don’t want their financial activities traced, whether because they are extreme libertarians or because they have something to hide. Many users feel a political affinity with the bitcoin concept of a currency that functions independently of any bank, government or institution full of men in suits. As one user told me: ‘Bitcoin doesn’t have a CEO; it has no ability to care either way about who uses it or why.’

But beyond those who want to hide, is bitcoin flourishing among everyday consumers? Well, it’s certainly a growth market. Plenty of people have given it a shot to see what the fuss is about, but it’s the drug-dealing and cybercrime fraternities that allegedly make up a large proportion of bitcoin turnover.

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When, for example, the first Silk Road online market-place (a site which mostly sold drugs on the ‘dark web’, the part of the internet inaccessible through normal search engines) was shut down in 2013 by the FBI, the price of bitcoin saw a short-term crash because so many coins had been seized by the US authorities.

But one aficionado who has lived off bitcoin trading for the last two years told me: ‘It’s very convenient to paint the whole [bitcoin user] group as one homogenous entity. But I’ve met people from all sides of the political spectrum in bitcoin forums on the internet.’

What else is bitcoin good for? Charities are keen to use it, especially when transferring money to, say, Africa, because the transaction costs are much smaller than with services such as Western Union. A number of places and websites also accept bitcoin payment (full list at www.wheretospendbitcoins.co.uk), including the Pembury Tavern in Hackney, which was the first British pub to join this new marketplace.

But bitcoin, as with any other currency, is still at the mercy of exchange-rate fluctuations. Even the most dedicated bitcoin users agree on this point: it’s no more reliable than any other currency, and possibly less so. In the past, bitcoin prices against US dollars have fluctuated massively in short spaces of time — and with no central authority in control, its market is vulnerable to manipulation.

The same applies to bitcoin as an investment: will it stand the test of time? One benefit — so it is said — is that once 21 million bitcoins have been released, production will stop, meaning that your virtual cash could hold its value, on grounds of scarcity, more than a traditional currency. But some devotees have already raised the question of removing or raising that cap.

Meanwhile, Wall Street has also been showing more interest in the currency, with a bitcoin index introduced on the New York Stock Exchange last year. It also has been gaining traction in countries with unstable currencies or weak banking systems. If the mainstream financiers who brought the world to its knees in 2008 decide to embrace bitcoin, who knows what will happen to it.

So how about bitcoin as a hedge against the Brexit result, or a safe haven in the current round of financial turmoil? Whichever way the EU vote goes, it looks like sterling is in for a torrid time in the short to medium term, and shares have already gone into a bear market. So if you’re looking for somewhere safer to keep your cash, is bitcoin an option?

It’s certainly a volatile proposition: you might make money if your timing is exactly right but if there’s a sudden panic over bitcoin’s future, the bottom could fall out of this market very quickly indeed. There’s always a risk of cyberattack too, especially given that so many bitcoin users tend to be high-level techies.

It’s also worth bearing in mind that this is the first digital currency to go large — and just look at the fate of other web firsts. Few of the earliest social media networks are still going today; everyone in the digital arena is always looking for the new, new thing.

Bitcoin is an intriguing phenomenon, for sure, but its fate hangs in the balance. Would I risk putting my savings into such a mysterious thing? No, probably not. But a small punt? Well, in an uncertain world, it’s got to be worth a try.

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Show comments
  • shaft120

    “and with no central authority in control, its market is vulnerable to manipulation.”

    I stopped reading and had to laugh out loud on a packed train at this point. What utter, ironic, ignorance. The single most important aspect of cryptocurrency is that it is not vulnerable to manipulation BY central banking authorities and national governments. To say it is vulnerable to market manipulation could be said about ANYTHING in the open market, like somebody hording oil to raise prices or dumping cheap iron onto the market. The benefit to Bitcoin is that this can’t be interfered with by producers very much as there is a finite source, like gold, and cannot be taxed and skimmed by 3rd parties if you’re careful, because transactions are peer to peer. The government and central banks can’t rig exchange rates and can’t impact supply without attempting draconian laws about legality of using it. Thus they hate it as it threatens their ability to raise revenue, which is all government cares about since time immemorial. Tax the populace as much as you can get away with.

    • Milly Bitcoin

      The quote is about manipulating the price, not the supply.

  • Milly Bitcoin

    Bitcoin does not use encryption, it uses cryptography.

    • Anon Wibble

      Indeed, elliptic curve cryptography too 🙂

  • Neal Palmquist

    “once 21 million bitcoins have been released, production will stop, meaning that your virtual cash could hold its value, on grounds of scarcity,”

    The very first bitcoin was infinitely divisible. It was never going to run out or ever becomes scarce. So making tens of millions more of them does not give it any properties of being scarce.

    • Kizami

      An brick of gold is infinitely divisible. It doesn’t mean that an atom worth of gold is the equivalent value of an entire brick. Why can’t you understand this?

      • Neal Palmquist

        Who says that I don’t understand an atom is not worth same value as the entire brick of atoms? Wait.What? I’m not even going to bother to figure out how you believe you can put those words in my mouth.

        I am a person who took math courses to study calculus. And I did that without a calculator. So I can see how it is actually you who cannot understand.

        If a thing has the property of infinite divisibility then that thing has a limit in supply of only one. It is not possible to multiply a thing that is infinitely divisible. People who never studied math or did their homework are easily fooled into believing the limit on the supply of Bitcon is 21 million, hence the ponzi scheme and the scam. Never was there an honest reason to create more than one.

        Is infinity divided by infinity equal to one? Then how do you figure 21 million divided by infinity is greater than one? Isn’t 21 million actually less than infinity?

        Consider that bitcoin is nothing and consider the mathematical representation for nothing is zero. The very first infinitely divisible bitcoin was zero divided by infinity. Zero represents the nothingness used to create the bitcoin and “divided by infinity” represents the property of infinite divisibility.

        BTC = 0/∞

        You can’t multiply that equation by 21,000,000 and make it go anywhere.

        I also took chemistry. Gold in any size or quantity is not infinitely divisible. You are wrong. Once you split the atom, it is no longer considered to be gold. Sorry, but that is just a fact.

        • Kizami

          1 dollar is divisible into 100 pennies. Does that make the dollar any less valuable? First of all you are incorrect that bitcoin is infinitely divisible. Check your facts. 1 bitcoin is divisible into a FINITE number of satoshis. With that little tidbit cleared up, how does divisiblity automatically calculate as worthless? Your advanced math skills have been requested.

          I’ll part with this little brain buster (for your brain at least):

          Does an Mp3 song file have value?

          • Neal Palmquist

            Bitcoin is infinitely divisible. Everybody already knows that. I am not sure why you are changing the facts. Verifying that bitcoin is infinitely divisible is probably the easiest fact about bitcoin to be checked. I will not pretend bitcoin is not infinitely divisible to make you happy.

            The dollar is not infinitely divisible. Anything less than a penny is no longer currency. Nobody ever said divisibility calculates as worthless. Nobody ever said mp3 songs don’t have value.

            Let me try again.

            When you have infinite divisibility (bitcoin is infinite divisibility) then the laws of math force the limit of supply to be just one bitcoin. Have you ever tried to take a calculus course? It is not so advanced as you make it seem to be. You could probably handle it once you get started. If not, then you probably have a friend who has taken calculus. Ask them if what I am saying makes sense.

            If there was only ever just one infinitely divisible bitcoin created then it would not be a ponzi scheme, Remember what I was talking about? I was arguing that the creation of tens of millions of bitcoins does not give it the property of scarcity as the author stated.

  • ChrisTavareIsMyIdol

    Bitcoin is NOT a currency as it’s not backed by anything : Not a govt, no tax income, nothing. I wouldn’t invest even a single Euro in it.

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