Since its inception in 2009, Bitcoin has been one of the internet’s favorite talking points. It has made some millionaires and billionaires, and completely emptied the wallets of others.
But, despite its glorious gains and staggering drops on an almost weekly basis, there are many who still argue that it is the future of money. Some countries have even gone ahead and adopted it as their official currencies.
So Bitcoin and the many other cryptocurrencies that have followed in the future? We spoke with brett scottauthor of Cloudmoney: Cash, Cards, Crypto and the War for Our Wallets discover.
What is Bitcoin?
Bitcoin is in a bit of a strange position. As a fairly new concept in the world of finance, it hasn’t really caught on in the world of currencies, and there’s a good reason for that.
“Bitcoin is traditionally described as a decentralized digital currency, but I don’t find that to be a very informative description. If you look at how it works, it’s 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 by which they will issue tokens and move them between themselves. Historically, that has been a difficult task to do.”
Until Bitcoin, the transfer of digital money from one person to another required a third party in the form of a bank. When you pay for something with a contactless card, you’re asking your bank to send some of your money to another account.
The goal of Bitcoin is to allow these transactions without the use of an intermediary. However, it is not that simple.
“The technological aspect of Bitcoin is ingenious, but the actual monetary aspect is quite crude. Imagine taking a large sheet of glass and then punching out a bunch of disks and then handing them out, claiming that it is a monetary system, which is similar to what Bitcoin is,” says Scott.
It may sound like a strange description, but it is an easy way to understand Bitcoin. At its core, Bitcoin is a pretty drab token. In its beginnings 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 a 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 counterparty trading. This is where nonmonetary objects are exchanged for monetary value,” says Scott.
A simple way to imagine countertrade is to imagine that you buy a jacket from a store for £100. You leave, decide you don’t like the jacket, and return it back. The store tells you that they can offer a refund or exchange it for something of similar value, so you choose a pair of jeans that are of similar value.
If an Alien were to observe this transaction, it might appear that the jackets were a type of currency to spend, but you’re actually doing multiple transactions to get there: you’re buying a jacket, returning it for full value, and then using that money to buy another item. .
“You’re taking two currency transactions and overlaying them to cancel out the money part. This is in theory 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 pay for those jeans, essentially using a standard currency with one extra step,” says Scott.
Will Bitcoin always fluctuate in price?
If you have been following the cryptocurrency market, or even if you have just seen the headlines, you will know that Bitcoin has had a messy price history. But is that something that can be fixed?
“Instability is inherent. In a traditional stock market, there is uncertainty surrounding a stock in early-stage companies as people try to figure out what’s going on. But as more information is obtained, a more realistic price is established. You calculate the future prospects of the company. Financial market bubbles occur when companies are overvalued,” says Scott.
This is a problem for bitcoin because there is no underlying story or clear path. You can never know if it is undervalued or overvalued, and there is no scientific methodology to measure it as seen in the stock market.
“Cryptocurrencies are almost purely self-referential speculative markets, so they can crash out of the blue unexpectedly,” says Scott.
This is an especially noticeable problem now that Bticoin has been adopted as a currency in several countries, all of which will be at the mercy of those price changes.
Is Bitcoin a viable currency?
Bitcoin in its current state is not really a currency like the dollar or the yen, but could Bitcoin and other digital currencies transition to operate like currencies we use on a daily basis?
“Bitcoin has a number of structural issues where it constantly has to try to create this mythology that it is some kind of commodity. On some level, everyone knows there’s something iffy about it,” says Scott.
“That is why it is so subject to these speculative flows, because it has just become a traded item in the normal monetary system. It is this digital currency with no physical value. I don’t see how he will get out of that, especially with the wild price swings.”
About our expert, Brett Scott
Brett is an author specializing in the world of finance, cryptocurrencies, and money. He has spoken at more than 250 events on these topics and has published two books that address the future of the financial system.
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