The other side of the bitcoin: Virtual currency’s reach is still very limited

Advocates claim the fast-rising digital currency has the potential to liberate the global economy. In the week it topped $1,000 on one exchange, Ben Chu examines whether the bitcoin really has the clout to shape our financial future

Brick Lane on a Saturday night normally echoes to the shouts of revellers as they stumble in and out of the scores of Bangladeshi curry houses and hipster bars that line the street.

But on Saturday the din on the east London thoroughfare will be punctured by hosannas from believers in a future of digital and financial liberation.

Investors, academics, political radicals and, of course, internet geeks will gather in Shoreditch for a “bitcoin expo”. The audience will hear from a host of speakers how the digital medium of exchange is growing in scale and scope. Some will even present the bitcoin as the future of finance, pointing out that it is quicker and more “independent” than other, conventional, forms of  payment.

The timing is good. On Wednesday the value of a bitcoin breached $1,000 on an exchange in Japan. The cyber money, created five years ago by a mysterious programmer (or programmers) using the pseudonym “Satoshi Nakamoto” has been on quite a run. Earlier this month each “coin” (in reality they are a stream of digital data held on an individual’s computer hard drive) was worth just $215. Bitcoin aficionados have the bit, so to speak, clamped tightly in their teeth and they are driving up the value of their favourite money.

The authorities are beginning to notice. At a Washington Senate Committee hearing earlier this month the FBI conceded that online, stateless currencies such as the bitcoin are a “legitimate financial service”. The outgoing chief American central banker, Ben Bernanke, has said that such forms of cyber payment “may hold long-term promise”.

But can this internet money truly become a new global currency, as some of its more zealous supporters claim? Is the bitcoin really the shape of our financial future?

It helps to go back to the economics textbooks. They describe three traditional defining features of a viable currency. First, it has to be a practical unit of account. Second, it must be a reliable medium of exchange. Finally, it must be able to serve as a store of value. So how does a bitcoin measure up?

Assets and services can certainly be priced in Bitcoins. But it’s not simple since the value of a bitcoin varies from exchange to exchange. This is because it is still difficult to swap the currency for ordinary cash. The process involves using banks in different countries, which charge varying fees.

Is the bitcoin a medium of exchange? Up to a point. They are accepted by a growing number of internet vendors. They are encroaching on the offline world too. One can pay for pizza in the Netherlands with them. In America, hundreds of vendors joined a “ bitcoin Friday” yesterday, selling items from plane tickets to Christmas trees in exchange for the cyber cash. A bitcoin cash machine was installed in Vancouver, Canada, last month. Richard Branson’s Virgin Galactic says it will accept them as payment from people booking its forthcoming space flights.

But, as of yet, one cannot pay for a copy of The Independent in Bitcoins. You can’t pay your taxes in Bitcoins, or use them to buy groceries. For now, at least, the currency’s reach is still very limited.

Finally, is the bitcoin a store of value? This is the biggest, and perhaps insurmountable, barrier. Devotees of the currency, particularly those on the libertarian right, cherish the fact that there is (or rather will be) a fixed stock of Bitcoins in circulation. The total number is set to top out at around 21 million, thanks to the Nakamoto algorithm that created them. This, we are told, means the bitcoin cannot be “debased” by corrupted central banks or greedy governments intent on creating ever more cash to finance their own excessive spending. But the currency has, nevertheless, been subject to large fluctuations. In April the value plummeted from $260 to $130 in a matter of hours. This raises the question of how many people will be happy to store their wealth in a currency that can lose half its worth so rapidly.

The fixed supply of Bitcoins is also likely to make them unattractive to mainstream finance. What most investors crave is liquidity. Governments and central banks provide that liquidity in times of financial-sector stress. The fact that there is no central bank for the Bitcoin, capable of being a “lender of last resort”, is likely to put a ceiling on its growth possibilities.

Another threat is the dubiousness of some bitcoin users. The traceless cyber currency is, understandably, popular with people who want to evade oversight from the authorities. Bitcoins were used on the Silk Road website, which acted as an anonymous clearing house for guns and drugs, until it was shut down by the authorities.

The currency is also said to be popular on the so-called “dark net”, which, among other things, facilitates the trade of child-abuse imagery.

Bitcoin users sometimes claim they are self-sufficient and have bypassed the need for governments. But that self-sufficiency is an exaggeration.

The physical computer servers and the telecoms infrastructure that makes the online currency system possible could be relatively easily targeted by states if they were ever to perceive the bitcoin as a facilitator of large-scale money laundering or other crime. That’s another reason to be wary about tying up your wealth in them.

The irreversibility of transactions is another danger. Once a bitcoin is spent it cannot be retrieved, even if it has been stolen. A British man who accidentally sent his hard drive to the landfill site lost £4m worth of Bitcoins. People who fail to back up their computers sometimes discover they have lost their money for good. There’s no way of getting it back, no monetary authority to which to appeal. All of that, arguably, makes the bitcoin a rather precarious store of value.

Throughout history, economists noticed that when new coins were introduced whose face value was higher than the value of the metal from which they were made, the public tended to stash away the older, more valuable money and to use the new coins for exchange. The bad money tended to drive out the good. This became known as Gresham’s Law, after the Tudor financier Sir Thomas Gresham. But in the case of the Bitcoin, Gresham’s axiom could be reversed. The “ bad” elements of this money might end up confining it to the margins. Don’t expect that to dampen the enthusiasm on Brick Lane though.

Video: Man from Wales throws Bitcoin fortune in the bin

Life and Style
“What is it like being a girl?” was the question on the lips of one inquisitive Reddit user this week
News
peopleDave Legeno, the actor who played werewolf Fenrir Greyback in the Harry Potter films, has died
Arts and Entertainment
Armando Iannucci, the creator of 'The Thick of It' says he has
tvArmando Iannucci to concentrate on US show Veep
Life and Style
beauty
PROMOTED VIDEO
Life and Style
ebookA wonderful selection of salads, starters and mains featuring venison, grouse and other game
Sport
Luis Suarez looks towards the crowd during the 2-1 victory over England
transfers
Life and Style
Swimsuit, £245, by Agent Provocateur
fashion

Diving in at the deep end is no excuse for shirking the style stakes

Sport
German supporters (left) and Argentina fans
world cup 2014Final gives England fans a choice between to old enemies
Arts and Entertainment
A still from the worldwide Dawn of the Planet of the Apes trailer debut
film
News
peopleMario Balotelli poses with 'shotgun' in controversial Instagram pic
News
A mugshot of Ian Watkins released by South Wales Police following his guilty pleas
peopleBandmates open up about abuse
Sport
Basketball superstar LeBron James gets into his stride for the Cleveland Cavaliers
sportNBA superstar announces decision to return to Cleveland Cavaliers
Sport
Javier Mascherano of Argentina tackles Arjen Robben of the Netherlands as he attempts a shot
world cup 2014
Arts and Entertainment
The successful ITV drama Broadchurch starring David Tenant and Olivia Coleman came to an end tonight
tv
Sport
Four ski officials in Slovenia have been suspended following allegations of results rigging
sportFour Slovenian officials suspended after allegations they helped violinist get slalom place
News
14 March 2011: George Clooney testifies before the Senate Foreign Relations Committee during a hearing titled 'Sudan and South Sudan: Independence and Insecurity.' Clooney is co-founder of the Satellite Sentinel Project which uses private satellites to collect evidence of crimes against civilian populations in Sudan
people
Arts and Entertainment
Balaban is indirectly responsible for the existence of Downton Abbey, having first discovered Julian Fellowes' talents as a screenwriter
tvCast members told to lose weight after snacking on set
Life and Style
More than half of young adults have engaged in 'unwanted but consensual sexting with a committed partner,' according to research
tech
Life and Style
A binge is classed as four or more alcoholic drinks for women and five or more for men, consumed over a roughly two-hour period
tech
Independent
Travel Shop
the manor
Up to 70% off luxury travel
on city breaks Find out more
santorini
Up to 70% off luxury travel
on chic beach resorts Find out more
sardina foodie
Up to 70% off luxury travel
on country retreats Find out more
Have you tried new the Independent Digital Edition apps?
Independent Dating
and  

By clicking 'Search' you
are agreeing to our
Terms of Use.

ES Rentals

    iJobs Job Widget
    iJobs Gadgets & Tech

    JavaScript Developer (Angular, Web Forms, HTML5, Ext JS,CSS3)

    £40000 - £45000 per annum + Benefits + Bonus: Harrington Starr: JavaScript Dev...

    SAP Data Migration Consultant

    competitive: Progressive Recruitment: My client, a FTSE 100 organisation are u...

    (Junior) IT Systems Administrator / Infrastructure Analyst

    £28000 - £32000 per annum + pension, 25 days holiday: Ashdown Group: A highly ...

    Software Developer with SQL and .Net skills

    £27000 - £40000 per annum: Ashdown Group: A highly reputable and dynamic softw...

    Day In a Page

    A History of the First World War in 100 Moments: Peace without magnanimity - the summit in a railway siding that ended the fighting

    A History of the First World War in 100 Moments

    Peace without magnanimity - the summit in a railway siding that ended the fighting
    Scottish independence: How the Commonwealth Games could swing the vote

    Scottish independence: How the Commonwealth Games could swing the vote

    In the final part of our series, Chris Green arrives in Glasgow - a host city struggling to keep the politics out of its celebration of sport
    Out in the cold: A writer spends a night on the streets and hears the stories of the homeless

    A writer spends a night on the streets

    Rough sleepers - the homeless, the destitute and the drunk - exist in every city. Will Nicoll meets those whose luck has run out
    Striking new stations, high-speed links and (whisper it) better services - the UK's railways are entering a new golden age

    UK's railways are entering a new golden age

    New stations are opening across the country and our railways appear to be entering an era not seen in Britain since the early 1950s
    Conchita Wurst becomes a 'bride' on the Paris catwalk - and proves there is life after Eurovision

    Conchita becomes a 'bride' on Paris catwalk

    Alexander Fury salutes the Eurovision Song Contest winner's latest triumph
    Pétanque World Championship in Marseilles hit by

    Pétanque 'world cup' hit by death threats

    This year's most acrimonious sporting event took place in France, not Brazil. How did pétanque get so passionate?
    Whelks are healthy, versatile and sustainable - so why did we stop eating them in the UK?

    Why did we stop eating whelks?

    Whelks were the Victorian equivalent of the donor kebab and our stocks are abundant. So why do we now export them all to the Far East?
    10 best women's sunglasses

    In the shade: 10 best women's sunglasses

    From luxury bespoke eyewear to fun festival sunnies, we round up the shades to be seen in this summer
    Germany vs Argentina World Cup 2014: Lionel Messi? Javier Mascherano is key for Argentina...

    World Cup final: Messi? Mascherano is key for Argentina...

    No 10 is always centre of attention but Barça team-mate is just as crucial to finalists’ hopes
    Siobhan-Marie O’Connor: Swimmer knows she needs Glasgow joy on road to Rio

    Siobhan-Marie O’Connor: Swimmer needs Glasgow joy on road to Rio

    18-year-old says this month’s Commonwealth Games are a key staging post in her career before time slips away
    The true Gaza back-story that the Israelis aren’t telling this week

    The true Gaza back-story that the Israelis aren’t telling this week

    A future Palestine state will have no borders and be an enclave within Israel, surrounded on all sides by Israeli-held territory, says Robert Fisk
    A History of the First World War in 100 Moments: The German people demand an end to the fighting

    A History of the First World War in 100 Moments

    The German people demand an end to the fighting
    New play by Oscar Wilde's grandson reveals what the Irish wit said at his trials

    New play reveals what Oscar Wilde said at trials

    For a century, what Wilde actually said at his trials was a mystery. But the recent discovery of shorthand notes changed that. Now his grandson Merlin Holland has turned them into a play
    Can scientists save the world's sea life from

    Can scientists save our sea life?

    By the end of the century, the only living things left in our oceans could be plankton and jellyfish. Alex Renton meets the scientists who are trying to turn the tide
    Richard III, Trafalgar Studios, review: Martin Freeman gives highly intelligent performance

    Richard III review

    Martin Freeman’s psychotic monarch is big on mockery but wanting in malice