In our previous two blogs, we covered the Emergence of Virtual Currency and discussed the successes and failures of this mathematically elegant and highly popular virtual monetary system.

Among all the different digital currencies in this space, Bitcoin is inarguably the most successful currency to hit the market. Many different theories have been offered to explain the Bitcoin phenomenon. They range from “money laundering in Cyprus,” “promise of a digital gold rush,” or a disruptive new economy. Whatever the theory, Bitcoin has forced the world to stand up and take notice.

 Evolution of Bitcoin

Bitcoin was invented by a pseudonymous developer named Satoshi Nakamoto in 2009. It started off as a simple idea to create a digital currency that can be spent as anonymously as the cash in our wallets, rather than as the money in the bank accounts that can be traced. Bitcoins can be used globally in exchange for goods and services, without the involvement of the traditional financial institutions such as bank. All that a purchaser needs is a seller willing to accept them. The security of the Bitcoin system is entrusted to the fellow users of the network, and each transaction is publicly verified by the community of users, keeping the money theoretically safe. Bitcoin is artificially limited to 21 million units or coins, unlike the flat currencies. They are created by a community or collaboration-based process called “mining” which keeps it as an artificially self-limiting system, and ensures a constant flow of the currency into the economy.

 Current concerns

As there is no central system to monitor Bitcoins, the money is stored locally on the user’s computers. There is no independent record to the wealth, so it becomes the user’s responsibility to ensure that it remains secure. In its relatively short lifespan, Bitcoin wallets and processors have been a target for hackers — and old-fashioned fraudsters. In fact, during the last two weeks, one of the most prominent European exchanges was reported to have lost over US$1 million worth of Bitcoins to hackers.

 Increase in value with prospective certainty

On January 3, 2009, Bitcoin’s value relative to the US dollar was less than a penny. Over time, its value has increased to reach a peak of $1163 in the last few weeks. This had also pushed its market capitalization to over $12 billion. While Bitcoin has garnered the attention of regulatory bodies and financial institutions due to its huge potential to become a new prominent financial payment mechanism over the last few weeks, current uses of Bitcoin as a medium exchange is limited. It is simply inconvenient to use because the common payment systems are yet to adopt it. Moreover, many people are still not aware or even interested in Bitcoins.

Bitcoin has survived massive cyber-attacks, scams, technical panics and extreme price fluctuations, so it may have the gusto to overcome the regulations put up by various bodies. This resilience has contributed greatly towards keeping investors, venture capitalists and businesses interested – and will continue to do so.  In conclusion, Bitcoin is reaching a financial maturity phase. It is growing from a merely Internet phenomenon to a recognized carrier of value for the real economy. Due to the nature of Bitcoin’s network, it will be nearly impossible to shut down this payment system into the future.

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