Bitcoin to become the next currency of choice

By Danielle Middleton topicIcon Internet News

Is Bitcoin the currency of the future?

The virtual currency Bitcoin has begun to be taken seriously after facing five years of scepticism from governments and the public.

In a letter from Ben Bernanke, chairman of the US Federal Reserve to the US Senate, it was indicated that Bitcoin could become a part of US currency regulation, taking Bitcoin closer to becoming a legitimate form of currency.

These latest discussions between government officials are largely thanks to the recent shut down of Silk Road by the FBI. In the aftermath of which Bitcoin has begun to be regarded as a potentially pioneering form of currency as the value continues to rise dramatically; in late October Bitcoin was valued at £124, while on Monday 25 November its value had risen to £559.

How does Bitcoin work?

Bitcoin has no physical properties, but is mined by computers solving difficult mathematical problems; as yet there is no one computer controlling the currency, and no regulatory system in place for Bitcoin. The algorithm used to mine the currency means that the number of Bitcoins in circulation can never exceed 21m, a limit which is expected to be reached by 2140.

A Bitcoin payment address is a short string of characters, which used strategically can make the user anonymous and able to buy illegal products on forums such as the Silk Road and Black Market Reloaded.

A network tracks all transactions made using Bitcoin, however, as the currency exists in a virtual wallet, it is the ID of the wallet that is tracked not the individual transaction made.

So far in the short life of Bitcoin, this ability to purchase relatively under the radar and the need for a regulatory body has led to black market activity and an overall lack of faith in the virtual currency.

Can Bitcoin survive?

Economists continue to debate the validity of Bitcoin in the long term, as a potential replacement currency for the internet generation. Patrick Murck, from the Bitcoin Foundation said to the BBC in response to questions over the transparency of Bitcoin:

"I would challenge that it's for illegitimate use or bad actions. What we're finding is not that it's a haven for illegitimate activities but that there are many legitimate uses."

While Jan Lambregts, head of financial market research at Rabobank, suggested it was the right time for regulators to become involved:

"Looking at it from a distance, it very much looks like it could be a speculative bubble. It's a small market, with a lot of interest in it, which is inflating and distorting the price, but you can see the concerns for governments - this is a currency outside their normal domain and which is not influenced by central banks.

"It may all be relatively small-scale now, but decisions taken now could have wider repercussions were such virtual currency experiments to be expanded in the future."

Daniel Nolan, managing director at theEword said: "The survival of Bitcoin relies on the same trust as every other form of currency, and without the public's perception of its validity and worth it will continue to rise and fall as it has until now.

"Although the closure of the Silk Road is said to have sparked the interest of the Senate and other international financial officials, this rise in interest and consequent value has occurred very suddenly and it is certainly something to be wary of."