Did you hear about the bitcoin millionaire? Back in 2009, a Norwegian man called Kristoffer Koch spent less than $30 to buy 5,000 so-called bitcoins—a new experimental digital currency he discovered while researching his thesis on encryption. It was just for fun, and he promptly forgot about them until earlier this year when the media starting touting bitcoins as the next big thing. Recalling that he bought some years ago, he decided to check on his tiny stash: he discovered they were worth more than $880,000. He promptly cashed in about a fifth of them to help buy a new apartment. His remaining bitcoins are now closing in on a cool million.
Bitcoins are big news. The total value of the currency has hit $1.5 billion worldwide, the world’s first bitcoin ATM just opened in Vancouver, and venture capitalists such as Jim Breyer (an early Facebook investor) and the Winklevoss twins are investing millions in them. The claims are grandiose: that they will become the predominant Internet currency; that bitcoins prove monetary systems don’t need governments. Some are even saying that the almighty U.S. greenback may one day be threatened. So you may be wondering: Are these things for real?
Not entirely. Yes, the technology behind bitcoins is impressive, and will change the way electronic transactions are processed. But is this a new global currency that will one day rub shoulders with the dollar and the euro? Not a chance.
To see why, let’s take a closer look at what bitcoins are: an open-source electronic currency that enables secure transactions without having to go through a centralized clearing house. The idea is that you wire some real money to your electronic wallet, where it is converted into bitcoins that can be spent at any website (or bricks-and-mortar establishment) that accepts them. The big difference is there’s no big payment processor like a Visa or PayPal involved—which almost certainly means lower transaction fees. In essence, bitcoins are electronic cash. You can spend them somewhat anonymously, they’re difficult to counterfeit, and once you’ve handed them over, they’re gone.
But that hardly makes them a potential global currency, any more than Canadian Tire money is. To become a real currency, bitcoins would need to have a predictable value and widespread acceptance, and that’s where the problem lies.
For starters, there’s the matter of trust. Bitcoins have no government or central bank standing behind them. To the community of hackers and coders who developed bitcoin, this is a core strength. They love the fact that no one entity is in charge. But to the wider public, it’s a massive weakness. With no central bank, bitcoin values are already ricocheting all over the place: the value of a coin can double one week, then drop by half the next. As a currency, bitcoins have a host of other issues too, including a built-in limited supply that will almost certainly lead to deflationary behaviour.
Despite this, I think retailers and financial institutions should keep a close eye on bitcoin. The currency itself is flawed and may not survive. But some of the ideas behind it—such as having a decentralized “master ledger” of all previous transactions that can not be tampered with—will live on. Those ideas will be incorporated into payment methods that really could introduce a whole new era of electronic commerce. And as we’ve seen time and time again, when a new disruptive technology emerges, there’s no way to stuff that genie back in the bottle.