Should you believe in bitcoin?

Like it or not, the bitcoin cryptocurrency is going mainstream.

I’ve already shown you how PayPal could soon make bitcoin available to the masses, and how, with wider adoption and greater understanding, the public may come to love it. As I said, such a change could spell danger not only for the banking system, but for the regulatory authorities and the taxman too. 

But there’s one point I didn’t really cover, and it’s a big one. Should you actually put your faith in such a thing as bitcoin?

There’s an ever-growing band of followers that not only has faith – they also reckon that bitcoin is a vast improvement on the current financial system.

What exactly is so good about it?

It’s bigger than the top 500 supercomputers combined

As I’m sure you know, cryptocurrencies essentially replace notes and coins with code.

The code is called the block chain. Essentially, it’s an encrypted message that includes a register of not only all of today’s current owners, but of all past owners too. As you can imagine, such a registration list quickly becomes very large, and once you add in the fact that all the information is encrypted, it becomes a seriously complex thing.

So complex, in fact, that creating a new bitcoin takes a considerable amount of computer processing time – and that means energy too.

My brother is a bit of a computer geek, with access to a load of computer capacity, and he’s been ‘mining’ these things for years. I wouldn’t know where to start, myself. I take the stance that, as with gold, I don’t have to get involved in the mining of the thing, I can just buy it.

It’s difficult enough to mine new bitcoins, but trying to fake them is impossible (or at least, it has been to date). A bitcoin is inherently registered to the owner, that is fundamentally what it is – a registration document that not only registers your own ownership, but everyone else’s too. It’s as if your car tax disc not only held a record of your own registration, but that of everyone else in the country too!

And this registration system, effectively a network of computers, is now the largest supercomputer network in the world – by far. In fact, it’s eight times more powerful than the top 500 supercomputers, combined! 

The whole idea is quite brilliant. The more of the currency is created, the more difficult it is to create more.

And you know what this all means?  

We’re back to simple barter, and that’s a good thing

Technology has re-created an ancient barter system, allowing people to deal directly with one another without the need for a bank.

There are loads of benefits to this. Let’s focus on just two for now.

First, believe it or not, is security. Why did people start using banks in the first place? Well, for somewhere to safely store their gold, silver, cash – or whatever. Today most of us feel confident enough to leave our hard-earned savings within a bank. I think many have become blasé, but that’s just me. Remember Northern Rock? Or the chaos in Cyprus when the banks were stress tested in real life?

Not only were cash withdrawals limited, but anyone with over €100,000 on account was dealt a hammer blow – 60% of holdings to be raked straight off the top. Imagine a small business owner – or even the workers, for that matter. Certainly sleepless nights for the payroll officer.

Anyway, the point is that there’s now a safe alternative to the banks. Sure, you’ve got to have faith in bitcoin, but that’s the same for any currency. A currency lives and breathes on faith and loyalty. Suffice to say that the value of bitcoin surged as the world cast its gaze on Cyprus.

The second great thing about this ancient form of barter is that it takes leverage out of the whole system. As you know, banks are highly motivated by profit. During the good times, they leverage the balance sheet, do more deals and make ‘loads-a-money’. By dishing out loans and through careful financial engineering, banks effectively create money.

Not so with bitcoin. The maximum number of bitcoins that can ever be produced is 21 million. That’s written into code.  Right now there are 13 million in existence. Estimates suggest that it’ll take around 20 years to mine the remainder. So unlike today’s paper currencies, there’s no way for central bank manipulators, or banks to print and debase the currency – and, might I add, enrich themselves en-route.

With a stable monetary base, you end up with an appreciating currency. The inverse of inflation – which robs savers. It’s certainly an allure that’s attracting bitcoin users. What you’ve got is a currency that promises no banker’s interest – but instead, growth in its real value over time.

Bigger than the internet?

Whether you love it, loathe it, or still don’t really understand it, bitcoin is gradually stepping into the limelight.

This could be the currency of the 21st century, and there are many hugely appealing reasons to back it. That appeal doesn’t exactly extend to the authorities or the banks, of course, but hey – this is the people’s century!

Next week we’ll take a look at the wider social ramifications of the block chain. Many cite it as the biggest invention of our time.

Its effects could stretch way into everything from politics and even the rule of law.

More exciting things to come before then, though. Stay tuned.