Bitcoin has recently grabbed a lot of attention, particularly in the last few months with the digital currency going mainstream and attaining mind-boggling exchange rates.
Most of the media articles try to explain what Bitcoin really is, in terms a 5-year old would understand, in Layman’s terms or, if you want to dig deeper, you can even find the original paper explaining the electronic cash network written by the mysterious Satoshi Nakamoto.
A lot of this attention is on the back of a recent wave of speculators investing in bitcoin on the hope of making a quick profit, but let’s take a step back for a moment and try to imagine what problems should the next generation of currency ideally solve.
One of the good-to-have characteristics would be the possibility of making a payment to a friend or a merchant on the other side of the world, in a currency that would be globally accepted and preferably this payment would be available in only a few minutes. In an even more perfect world, the transfer would happen without either of the parties having to incur the payment of significant fees. We could even take this further and adopt a classical liberal view and wish that the method of payment could also be independent from any central institution.
The good news is that Bitcoin has the potential to allow for all of this to become a reality, and it has already started doing so – bitcoin as a currency has been replaced by Bitcoin as a protocol for global exchange of value and goods.
It might be confusing to many as we have been used to tangible goods and physical currencies for a long time – money 1.0 (gold and silver) and 2.0 (fiat currencies) were both physical – but the main principle underlying all trading is that the value of an accepted currency is the agreed value between two people exchanging goods, either that be grains, spices or gold.
There is still an immense set of challenges that the Bitcoin protocol needs to solve – security, regulatory, taxation, stability – but if we managed to do that in the past for all the traditional currencies and currency-associated services like trading, transfer and storage, we will be able to do the same with bitcoin. Even the protocol itself, given its algorithmic and open source nature, can be improved to fix any potential flaws we might discover in the future.
Governments and financial institutions are taking steps to counteract some of these challenges and regulate what is still mostly an unregulated environment. Bitcoin detractors sometimes point out that it should be banned as a currency given the illegal trading that it facilitates but that misses the point as it wouldn’t be solving the problem at its source. It would be similar to suggesting banning the internet because of its illegal uses. Traditional currencies have always been used for illegal purposes and additionally are prone to counterfeiting which bitcoin isn’t.
It is not the first time a digital currency has been tried out (some people may remember a failed experiment called Digicash in the 1990’s) but at the same time it is still very early days in the history of digital currencies.
We don’t know if bitcoin will become an adopted digital currency out of more than 100 that have been developed, mostly as legitimate evolutions based on the initial Bitcoin concept.
Will it be Litecoin, bitcoin’s closest competitor, or Catcoin the underdog (no pun intended), or Dogecoin which just recently helped sending the Jamaican bobsled team to the Sochi Olympics? (I hesitated to mention Coinye as Kanye West has apparently not given his sign of approval for the development of this currency).
The fact is that Bitcoin as a protocol is far from being just a currency with a political or economic agenda. The creator of the protocol is still disputed but what’s known is that it is currently being developed in a collaborative, non-centralized way. The only condition to becoming a global protocol for money transfers is that overtime its users agree on the value added that it brings to the current monetary system.
When and if it does it may well become a globally accepted alternative to making payments and in this case we may be experiencing a disruption in trade similar to when gold was first accepted as a currency.
Note: bitcoin in small caps used as the currency, capitalized Bitcoin as the protocol/concept following the unofficial rules.