Bitcoin – here to stay?

Bitcoin is usually described as the first functioning virtual currency. However, does it have what it takes to become a future world currency and universal payment system – or is it just an unusually clever digital speculation bubble that could burst at any moment?

Since its launch in 2009, bitcoin has shaken up the established view of what a currency is, while demonstrating the need for quicker, cheaper and more secure transactions for everything from micro-payments to major business deals.

According to the official version of the story, the idea for bitcoin was presented by the pseudonym Satoshi Nagamoto on a distribution list for encryption specialists in 2008.

The idea was to challenge the banks’ expensive, complicated and slow systems for international transactions. In bitcoin, a virtual currency was created that could be sent quickly around the world with no middlemen and at a minimal cost.

Unlike traditional currencies, bitcoin has no central issuer. Instead, the currency is created, stored and moved in peer-to-peer (P2P) networks, according to the same decentralised principle as file-sharing. All transactions with bitcoins are stored in a public, distributed database (the block chain) and are protected by advanced encryption.

The release of new bitcoins takes place according to a pre-decided protocol using computer power in a process known as mining. The number of bitcoins that can be mined can never exceed 21 million. This means that as time passes, fewer and fewer new bitcoins are created and trade instead uses existing bitcoins, which are divisible to eight decimal places.

The value of a bitcoin is entirely determined by supply and demand. This has been extremely clear over the past year, when the bitcoin exchange rate has fluctuated from a few dollars to over USD 1 200.

Bitcoin users build up a digital wallet on their computer or in an account. Transactions are then carried out directly between the sender and receiver using asymmetric encryption, where the two users have encryption keys that must match in order for the transaction to be completed.

The encryption technology provides secure transactions, as well as minimal insight and traceability in the transaction system. This has also attracted users who have good reason to want to hide their transactions.

It remains to be seen how things will go for bitcoin. There is a huge need for alternative global transaction options – yet there is also massive resistance to bitcoin and other cryptocurrencies both from banks and from individual nations.

The lasting value of bitcoin may not be the currency itself, but rather the proof that it is possible to establish a worldwide system of rapid and secure transactions without intermediaries.

Text: Sven-E Lindberg

Illustration: Catrin Jacobsson

Published: 2014

Facts

Pros for Bitcoin

• Makes it possible to transfer money quickly, cheaply and securely.

• Can be used for transactions anywhere, from any computer.

• Works independently of the influence of central banks or political pressure.

• Equally suitable for micropayments or large business transactions.

• Secure transactions thanks to advanced asymmetric encryption.

Cons for Bitcoin

• The value of the currency is difficult to judge and fluctuates strongly.

• The currency and the encrypted transaction system can be used for illegal business and money laundering.

• Difficult to monitor the real value of one’s own bitcoin capital.

• Uncertainty and lack of traceability – what happens, for example, if errors occur in the software?

• Technical or practical errors or account hacking could erase one’s entire bitcoin stock in a moment.