Bitcoin, faddish currency for geeks or the future of money?

Depends who you ask, but you may not want to be asking JP Morgan.

There’s been quite a bit in the press recently about the ‘Cybercurrency’ (also: ‘Cryptocurrency’) known as Bitcoin. It’s made sporadic appearances in the popular press in the UK over the last three years, normally at each spike in the Bitcoin exchange rate, but the particularly high growth recently has spurred a flurry of article-writing, with even ‘respected’ magazine “Moneywise” getting in on the act with an article littered with inaccuracies.

At its most basic Bitcoin is an electronic system that includes both a divisible currency (“the bitcoins”) and a means for transferring them (“the bitcoin network”). The network operates using a peer-to-peer protocol, meaning there is no central computer or authority (and hence, no single point of failure or responsibility) and that transactions are processed and verified using the processing of all the computers connected to the network.

Using these, it is possible for any person to transfer wealth, via Bitcoin, to any other person with a wallet address on the Bitcoin network. Importantly, this can be done near instantaneously, for free (or near as damn it) and in the knowledge that once you have received the payment it is final – and no one can take it away from you. The reason banks hate it – particularly JP Morgan – is that they are for the first time not involved in this. They play no part. They take no cut. They don’t like it.

Bitcoin has no central issuing authority. Unlike ‘Fiat’ currencies, which are issued and to some extent controlled by the central banks of countries or economic areas (the Bank of England can choose to print more money, if it so desires) the number of Bitcoins in circulation is pre-determined and fixed. Bitcoins are released at a steady, pre-determined rate through a process known as ‘mining’. It is possible to discover how many Bitcoins have been released at any given time, and indeed to calculate this for any time in the future. Coins will cease to be issued in around 2140 – so not just yet, then, when 21 million Bitcoins will have been issued. The network automatically rebalances itself according to the number of nodes on it completing mining work, ensuring the level of difficulty matches this rate of release.