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MoneyTimes - April 3, 2013

Posted by Jill Kerby on April 03 2013 @ 09:00

HOW REAL IS BITCOIN, THE FIRST GLOBAL VIRTUAL CURRENCY?

 

Around 1996-97, a friend of mine who was involved in the satellite imagery business – his companies produced high grade satellite maps and undertook satellite mapping projects for mining companies and government agencies like the EU’s agriculture commission - told me about these amazing new things called DVDs, first invented in 1995.

I hadn’t a clue what he was talking about.  But I do remember thinking that I really had to learn more. It took a few years to abandon video cassettes, but today, DVDs are being overtaken by direct streaming, traditional internet search engines by Twitter and Facebook.

And now there is Bitcoin. (see https://www.weusecoins.com/; www.coinbase.com)

It was inevitable that in a world where physical money is being used less and less – overtaken by credit and debit cards, e-banking and computerised money transfers – that someone (in 2009) would come up with the idea of cyber-based or ‘virtual’ money.

Bitcoin (as in, computer ‘bits’ of information) has now gone mainstream and has been given a global boost by the events in Cyprus, where the sanctity of Eurozone cash deposits has been blown apart and capital controls have created a two-tier euro - the Cyprus euro that can mainly only be used there and the one the rest of use (for now).

The price of bitcoin in just the past fortnight has nearly doubled to $78 a “coin” (as I write). It was worth about 0.25 US cent when first launched and all the Bitcoins in cyber-circulation are reckoned to be worth about nearly $1 billion now, though no one knows for sure.

So what is Bitcoin?

Invented – it is reported – by a Japanese computer hacker, it is a decentralised digital currency that only trades via the internet. There is no central bank that issues, regulates or sets the price of bitcoin. Instead it operates through a peer-to-peer network of users, that is willing buyers and sellers with real goods and services.

Demand for the growing, but ultimately limited number of bitcoin – no more than 21 million bitcoin will ever be issued by the year 2140 – dictates the price at any given time. Bitcoin are issued within its agreed total limit of coins by the user networks, who are known as ‘bitcoin miners’. The miners, says its Wikipedia entry, verify every bitcoin transaction “and add them to a decentralized and archived transaction log every 10 minutes.”

Leaving aside the hugely technical explanation of how bitcoin operates in the virtual world (a great deal of ‘faith’ is required, just like with every other currency) your first purchase of bitcoin is going to be via a conventional currency like euro, pounds, dollars, etc.

Each bitcoin you buy from a supplier for the global price at that moment is then put into the Bitcoin wallet that you set up which in encrypted and encoded with ‘bits’ that represent the number and value of the coins you now own.  You don’t want to lose these codes…your digital signature …or you lose your bitcoins.

Once you have a wallet of bitcoins, you can start using them.  As I write thousands of ordinary retailers and service providers all over the world are being added to the growing network of real people who will sell their goods for a bitcoin.

You can now buy everything from a pizza to a house with bitcoin, somewhere in the world. Governments and central banks, which have no control whatsoever over this entirely private, virtual, encrypted currency say they are hugely worried that bitcoin is being used to buy and sell dangerous contraband like drugs and arms. They also say it is an easy way to undertake money laundering. This is also true – the Iranians buy bitcoin and then convert them into US dollars to get around trade sanctions.

Mostly, governments and central banks are concerned how easily bitcoin circumvents the use of their monopoly to create money out of thin air and then tax it, directly or debasing and devaluing it as the need (like now) arises.

These are all the main reasons why the sale and price of has soared since 2001. It is the only ‘real’ money that can’t be debased by central bankers.

That said, I haven’t bought any bitcoin - yet. I still don’t fully understand it and the risks. How ‘safe’ is it from computer hackers? The price is very unstable, even more than gold, which also rises and falls with demand. What are the tax implications? Can VAT and CGT liabilities be payable to the state in bitcoin?

And I’m old-fashioned: bitcoin is not tangible like gold (which can never disappear) and wouldn’t exist at all without a reliable broadband connection.

Then again, I had my doubts about DVDs and Twitter and…

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