What’s the value of money?
Lately we have seen Bitcoin surge and fall in value. At first, it was said to be down to the economic issues in Cyprus turning investors to look at other (safer?) forms of storing their money. And now, since I first started this article, collapse in value in under a less than a month. Is Bitcoin a new haven for investors, or a new way to throw notes on to the fire?
Although even Bitcoin claims not to be an investment haven free of banks and governments, it certainly seems it is being used that way by some. Besides the obvious issue of the financial crisis, how did this new virtual currency suddenly become to be seen as safer than a traditional bank? Admittedly the situation in Cyprus has certainly impacted the view of where your money might be safe, but is Bitcoin any better? At first a surge in value made it look rather attractive at a glance. But that was a week ago.
For a ‘currency’ in its infancy, having started under 5 years ago, it has had its fair share of disaster stories and things going wrong. There are several examples of hackings or failures wiping out vast amounts of money, of theft or bugs resulting in people trying to get rich quick, or little technology flaws resulting in the system failing.
Sure, banks have had their issues – recent problems resulting in no payments being processed for a bank in the UK for up to a week for instance. But they come with assurances, you know (or at least are told) they have backups if disaster struck; they spend lots of money on DR etc. And there is some government backing to a point, varying where you live.
With Bitcoin, your money becomes a little bit of mathematics really. If you keep your own digital wallet, then you become your own custodian of your money (presuming the whole system around it stays running and there’s someone to trade with later). There are comparisons to Bitcoin being a bit like gold – at least with gold though you know it is rare and there will always be a market for it. Bitcoin is creating itself this rarity with controlled release and a cap of how much will ever be in circulation. But that is still several years away and who knows what might change in the middle. Or, again not that dissimilar to gold, you could trust someone else to look after your digital wallet. Someone most likely with no insurance, who if they get hacked or suffer a major failure could end up losing your valuable Bitcoins. Some have just disappeared completely leaving Bitcoin holders wondering if they will see their money back.
With Bitcoin, if there’s a big electromagnetic storm caused by solar events for instance then even if you’ve been extra careful and have paper printouts of your Bitcoins, it is now worth as much as the paper it is printed on without the systems out there to process it and check the authenticity.
However, those flaws exist in almost anything we do and rely on today. Would the loss of your Bitcoins be the worst thing to hit you if all the computers went bang? Indeed, would your money be any safer in your traditional brick and mortar bank – they are reliant on their own computer systems to know how much money you actually have.
So what does all that mean? Have I rushed out and invested in virtual currency (I keep using the term loosely, at Bitcoin isn’t actually recognised as a currency)? No… It is still sitting firmly as 1s and 0s in the computer systems of a traditional bank instead.
So back full circle as to what might be safer! A key premise to Bitcoin’s security is the complexity of the mathematical proofs used to track transactions. As long as the good guys have the larger amount of computer power, then the currency will be fairly safe. However if the bad guys suddenly have more processing power, they could be the ones who can generate the solutions faster than the good guys. I tried to put the mathematics from my degree days back to some good use to understand the algorithms behind it all, but in the end it all seems a bit too hypothetical to me to trust in the long term! And that doesn’t even touch on the vast instability of the currency itself. It hit $142 a Bitcoin at the start of April 2013 (to drop down to under $120), yet traded at $37 on the 12th March at one point – far more volatile than a traditional currency (and was even lower back in February). And after I started writing this, I saw an article over a Denial of Service attack on one of the major Bitcoin exchanges taking place this week causing devaluation. A new view on what a run on a bank means to queue in front of cash machines? And now yet another update as it soared to over $250, only to collapse back down to $52. Yet… it is still higher than it was a month ago. I must say since I started writing this article, it has been somewhat of a headache of having a major new development to try and update before publication!
So back to the original question… what is the value of money? Well today, a few servers, hopefully some offsite backups and a trust that the people running it all have some idea what they are doing! Or perhaps a nice shiny slab of gold to put under your mattress …