Will 2013 be the year of Bitcoin?

The economy has dominated the news in recent years, whether it was the bankruptcy of Iceland, the Greek situation or the massive US fiscal cliff. One trend that has been nipping away at the financial press and demanding a share of the limelight is the rise of Bitcoin

2012 has seen Bitcoin taking leaps and bounds as it approaches mainstream use:

  • Researchers at ETH Zurich, one of Switzerland's tier-1 universities, have studied Bitcoin in depth and come to the conclusion that the mathematical algorithms that underpin the integrity of Bitcoin are largerly secure
  • The European Central Bank has undertaken a detailed study of the potential for digital currencies and Bitcoin is unmistakably the most significant element of their report
  • The North American Clearing House Association invited the CEO of a major Bitcoin services company to be a speaker at their Annual Global Payments Forum
  • And there is even a campaign under way to have an official three-letter symbol for Bitcoin registered in ISO 4217, the standard for currency symbols (you can support the campaign with a click on change.org)

What makes a currency?

Currencies have taken many forms over the years. Sometimes, commodites that are scarce and hard to replicate (such as gold and silver) have dominated, particularly at times when there was little trust in the political system. Other variations have included the use of rice, tulip bulbs and even payments made between prisoners using cigarettes. As long as both parties agree that something is a currency, it can be used as a currency.

A quick search of the web with Google quickly reveals hundreds of thousands of web sites now accepting Bitcoin as a means of payment, whether it is for web hosting services or donations to charity.

This widespread acceptance well and truly establishes Bitcoin as a currency, and it's use can only continue to grow.

How well does Bitcoin perform as a currency?

There are three main purposes for a currency:

  • As a means of payment: Bitcoin's ability to be paid across the internet or between devices such as mobile phones, instantly, makes it the most compelling means of payment in existence today. Credit card fraud is in excess of $US 100 billion per year (enough to repair the national balance sheet of Greece, being lost every year), suggesting the credit cards and other traditional payment methods are simply not up to par for today's world of online business and payment. Bitcoin has strong cryptography at it's foundation, rather than as a gimmick added later to `plug the leak'.
  • As a unit of account: a unit of account is used to measure the size of an investment portfolio and then compare one portfolio to another, or compare the growth of a portfolio over time. Bitcoin's infinitely divisible structure makes it an ideal tool for such comparison, whether it is measuring your personal tax return or measuring the GDP of the European Union.
  • As a store of value: many people put away small or large amounts of money for future expenses, such as saving for Christmas or a holiday. A reliable currency (or investment) should preserve the spending power of the savings portfolio so that it will be sufficient to make the desired purchase at the planned moment in the future. Inflation of currencies, particularly the fiat currencies (like USD, GBP and EUR), undermines the store of value. Bitcoin is designed to be inflation proof, as it can not be `printed' by a desperate government. In fact, the maximum number of Bitcoins that can exist is approximately 21 million, enforced by the algorithm itself: Bitcoins are simply divided into fractions to serve more people, rather than printing more of them. This makes inflation less likely than with a fiat currency.

So it appears Bitcoin ticks all the boxes, using the criteria set by the economists themselves - so what is missing, and what is next?

Missing links in the Bitcoin economy

Converting conventional money back and forth into Bitcoin is not always convenient. Bitcoin exchanges only exist in a few countries (including the US). Many of them charge payment fees and commissions that are currently perceived as a major deterrent for people who want to try a small quantity of Bitcoin to begin with. Further companies are now entering the market and this alone will create more competition to reduce fees.

The hacking of a couple of major Bitcoin exchanges has been perceived badly, and given the relatively small amount of Bitcoin capital in existence at the time, each major hack has temporarily depressed the market price of the currency, usually more than 10% in one go. It has subsequently recovered of course, when people realised that it was just one operator that was hacked, and not a vulnerability in the technology itself. To put it in perspective, can you imagine an armed robber stealing $250,000 from a bank branch in Los Angeles and the currency imediately falling 10% on international markets? Of course, once the market becomes bigger these wild fluctuations will cease to happen, this is one major threshold that may well be crossed in the coming 12 months.

What can or should I do to prepare for the rise of Bitcoin?

Some easy things you can do now:

  • Try the Bitcoin software on your computer or on your mobile phone.
  • Would you go out without any cash or cards in your wallet? Think about how many Bitcoins you need in your digital wallet.
  • Are you involved in any community or charity organisation? Add support for instant Bitcoin donations on the organisation's web site (it is very easy to do)
  • Spare 30 seconds to sign the petition necessary for the Bitcoin currency symbol to be recognised by the ISO. This will enable the use of Bitcoin in more software and traditional currency markets.