The Future of Bitcoins

Will this disruptive new open-source, P2P currency change e-commerce as we know it? Or is this just another bubble that will continue to grow, fuelling expectations, only to ultimately burst in our face?

What is bitcoin?

Bitcoin is a P2P currency, founded by Satoshi Nakamoto (a pseudonym for one or more programmers who never revealed themselves). P2P or Peer to Peer, is the same technology that unfortunately has earned itself a bad name because of Napster (while we are certainly aligned with the legal view on Napster, one cannot deny that it sparked a great technology revolution!). In P2P technology, there is no central repository and no ‘master-server’ that houses data, or in this case bitcoins. It’s spread across servers and individual user computers – making it, just like Napster, an entity controlled by the collective mass of the internet audience.

How bitcoin works

Bitcoin is governed by a set of master algorithms, based on the P2P network, which makes it inaccessible and uncontrollable when compared to how we know currency and have always known currency. Bitcoins are generated by ‘bitcoin miners’, which are in turn algorithms which ‘mine’ bitcoins by solving complex mathematical problems. Just like gold needs to be mined and processed, bitcoins too need to be mined and generated. And like the Gold-Rush of the 19th century, today, we’re seeing several miners and ‘mining pools’ (groups of miners combining their analytical skill and bandwidth) working hard at these algorithms to generate bitcoins.

Apprehensions about bitcoin

This raises eyebrows. And we’re talking some sharp eyebrows – will the rules of Economics have to be rewritten? What about Financial laws and regulations? How does one regulate something which is an automated program made of a set of mathematical problems? Can it go out of control, adopt a mind of its own and result in a Terminator scenario? Is this a plan by Satoshi Nakamoto to get it to become a popular currency and then exploit a pre-installed loop in the system to their advantage to get rich real quick? The Verge already claims to have cracked the case – that Nakamoto is hoarding a great fortune of almost a million bitcoins!

Security and stability

The technological soundness of bitcoins has so far been undisputed. The code is secure, stable and very scalable – accommodating the possible millions who may go at it together. The system also has an in-built regulatory system which means that as more and more bitcoins are generated, the difficulty levels of the mathematical problems increase, requiring more effort and thus, in a sense, stabilising the bitcoin circulation in the economy like a mint does. At first, the client could create 50 bitcoins in an hour on an average laptop. It now takes a day to generate three bitcoins using a powerful machine that does nothing else. Further, the bitcoin protocol creates a public ledger as bitcoins are generated and exchanged, producing a receipt for every transaction and preventing coins from being spent twice. Bitcoin substitutes technology for trust. As Nakamoto himself said – “What is needed is an electronic payment system based on cryptographic proof instead of trust, allowing any two willing parties to transact directly with each other without the need for a trusted third party”.
Finally, In addition to archiving transactions, each new ledger-update creates some newly-minted bitcoins. The number of new bitcoins created in each update is halved every 4 years until the year 2140 when this number will round down to zero. At that time no more bitcoins will be added into circulation and the total number of bitcoins will have reached a maximum of 21 million bitcoins. Thus, like the gold that is used to regulate currency world-wide, bitcoins too are finite, and one day we will have mined them all.

Pros and cons for the user

Bitcoin has seen some great support – from the Winklevoss Twins (of Facebook fame), who invested a whopping USD 1.5 Million in it. Also, WikiLeaks and some popular e-commerce sites (like WordPress) have started accepting donations and transactions in bitcoins. The advantage for the user is very clear – it’s a universal currency with no exchange rates, no transaction fees (no governing bodies or banks) and safe and secure (being P2P and a sound platform). Oh, and look at this – bitcoin has its own ticker on CNBC.

But here’s the catch – bitcoin has had rough and highly volatile swings in value since its introduction (with values jumping from USD 200 to USD 70 to USD 100 to… oh my!). Economists also argue that bitcoins, as they are limited, are inherently deflationary as a currency.

Our take on bitcoin

We’re not buying up bitcoins or wiring together bitcoin miners to join pools and start generating bitcoins (we’re not done with the Agency business yet). But, we will wait and watch – and we recommend that bitcoins be given the trial of time before being written off or written down in the money books.

As a non-investor, one cannot help but applaud at the concept and the platform itself. More than bitcoin itself, we are excited about the future products and platforms that will be inspired by the technology and thought behind bitcoin. And that’s where we’re putting our money!