What is Bitcoin and can it be a viable currency?

Since its inception in 2009, Bitcoin has been one of the Internet’s favorites. It has made millionaires and billionaires of some, and completely emptied the wallet of others.

But despite their glorious gains and conspicuous decline on an almost weekly basis, many still claim that it is the future of money. Some countries have even gone so far as to use it as their official currency.

So is Bitcoin and the many other cryptocurrencies it has been pursued by the future? We spoke with Brett Scott, author of Cloudmoney: cash, cards, cypto and the war for our wallet to find out.

What is Bitcoin?

Bitcoin is in a somewhat strange position. As a fairly new concept in the financial world, it has not really been classified in the currency world, and for good reason.

“Bitcoin is traditionally described as a decentralized digital currency, but I do not think it is a very informative description. If you look at how it works, it is essentially a system for issuing tokens,” says Scott.

“It’s a way for a network of strangers to come together and follow a set of rules where they will issue tokens and move them around between them. Historically, it has been a difficult task to do.”

Until Bitcoin, the transfer of digital money from one person to another required a third person in the form of a bank. When you pay for something with a contactless card, you ask the bank to transfer some of your money to another account.

The goal of Bitcoin is to enable these transactions without the use of an intermediary. However, it is not quite that simple.

“The technological aspect of Bitcoin is ingenious, but the actual monetary side is pretty rough. Imagine taking a large glass and then stopping a bunch of disks out of it and then handing them out, claiming it’s a monetary system, which similar to what Bitcoin is, says Scott.

It may sound like a strange description, but it’s an easy way to understand Bitcoin. At its core, Bitcoin is a fairly dysfunctional token. In its early days it did not have much use and could only be assigned from one person to another, it was not until later that it was assigned monetary value.

“When you hear a news story about someone buying a pizza with Bitcoin, they are not actually exchanging Bitcoin for pizza. They are using a system called counter-trading. This is where non-monetary objects are exchanged for a monetary value,” says Scott.

An easy way to imagine counter-trading is to imagine you are buying a jacket from a store for £ 100. You leave, decide you do not like the jacket and return to return it. The store tells you that they can offer a refund or exchange it for something of equivalent value, so you pick up a pair of jeans that have equivalent value.

If an alien were to see this transaction, it might seem like jackets were a type of currency to use, but you actually make several transactions to get there: you buy a jacket, return it for full value and then use the money to buy another item.

“You take two money transactions and put them on top of each other to cancel the money part. In theory, this is how Bitcoin transactions work. When someone says they bought jeans for Bitcoin, they first had to calculate how much Bitcoin they needed to buy to afford these jeans, mainly by using a standard currency with an extra step, says Scott.

Will Bitcoin always fluctuate in price?

If you have been following the cryptocurrency market, or even just seen the headlines, you will know that Bitcoin has had a messy price history. But is there anything that can be sorted?

“The instability is inherent. In a traditional stock market, there is uncertainty about a stock in the early stages of companies when people try to find out what is happening. But as you get more information, a more realistic price is set. You calculate the future prospects of the company. Financial market bubbles occur when companies are severely overvalued, says Scott.

This is a problem for bitcoin because there is no underlying history or clear path. You can never tell if it is below or overvalued, and there is no scientific methodology for measuring it as you see it in the stock market.

“Cryptocurrencies are almost purely self-referential speculative markets, so they can just crash from nowhere unexpectedly,” says Scott.

This is a particularly noticeable problem now that Bticoin has been used as a currency in several countries, all of which will be at the mercy of these price fluctuations.

Is Bitcoin a viable currency?

Bitcoin in its current state is not really a currency like the dollar or yen is, but can Bitcoin and other digital currencies go over to function as currencies we use on a daily basis?

“Bitcoin has a number of structural problems where it constantly has to try to create this mythology that it is a kind of commodity. At some level, everyone knows that there is something questionable about it,” says Scott.

“That’s why it’s so strongly subject to these speculative currents, because it’s just become an object traded in the normal monetary system. It’s this digital currency with no physical value. I do not see how it should come out of it, especially with the wanted price changes. “