The Trouble With Bitcoin
Bitcoin is the world’s first “cryptocurrency” or digital currency that uses cryptographic methods for transaction handling. It is a distributed, peer-to-peer money model that is purely virtual in nature and is controlled by the online community rather than a government. Despite its growing popularity and acceptance as a real currency, Bitcoin does have some significant problems.
Probably the most important issue that Bitcoin faces is also one of the reasons it is so important: it is purely virtual. Conceptually speaking, this is a giant leap for a currency system, but it is also a potentially dangerous one. Since the value of bitcoins is not based upon a real-world commodity, it has a tendency to fluctuate wildly and could even reach a zero value. This cannot happen with a “normal” currency, as the commodity on which its value is based – usually gold – will always be worth something.
Another difficulty the currency faces is once again a reason it is so important: it is not controlled by any government. While this is obviously a popular feature of Bitcoin, especially in more anarchic user groups, the fact that there is no governing body means that there are fewer controls. No one sets interest rates, no one determines precisely how much more money to print, there is no national debt associated with Bitcoin and the entire system is consequently more volatile and unpredictable.
Bitcoin’s unpredictability showed itself in February 2014 when a “transaction malleability” – a known bug which allows hackers to create fake transaction data – was used to attack all five of the major Bitcoin exchanges. The Japan-based MtGox was quick to shut off withdrawals of bitcoins and very slow to implement a fix, resulting in panic that cash would be lost. This caused the price of bitcoins on MtGox to fall to less than half the price on the other exchanges in a matter of hours, as investors showed their loss of confidence.
In legal terms, cryptocurrencies face challenges in acceptance and status. Some countries, such as Australia and Canada, accept that they are currencies and state that Bitcoin income must be treated in the same way as any other for tax purposes. Other countries, such as Norway, do not recognise it as a legitimate currency, but happily collect taxes on any transactions. Yet others refuse to accept it at all, such as in China where bitcoins cannot be legally exchanged for normal money and transactions could even be considered criminal activity.
In the consumer market, Bitcoin also faces acceptance issues. While it is possible to purchase goods online using bitcoins, the currency is not widely accepted – especially when compared to traditional payment methods. There is also the problem of transaction delays, as the Bitcoin infrastructure is still in its infancy relative to real-world currencies. It can take hours or even days to complete a Bitcoin transaction, which poses significant problems for merchants and consumers in today’s fast-moving marketplace.
Finally, the currency struggles with social acceptance troubles. Some economists label Bitcoin a waste of time, some herald it as a worldwide innovation worthy of support and some believe it undermines the very nature of money.
Overall, Bitcoin’s impact is far-reaching, despite cryptocurrencies still being very young. As the technology and services behind the theory develop, many of the problems will fall away. Whether what remains will be a legitimate global currency beyond governmental control or just a failed innovation remains to be seen.