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Bitcoin seeks to become the de-facto world currency for online purchasing.

Arabian Gazette’s Zain Naeem looks into the Bitcoin phenomenon.

Imagine an electronic currency that can be transferred and used for transactions from one peer to another.

Imagine how this will affect online shopping, making it easier and more effective. The volume of online transactions are increasing dramatically, and soon there will be no need for cash, credit cards or even PayPal accounts. The seamless transition from these old, but robust methods may be taken over by a new one that is safe, secure and can be used worldwide and without geographical or time restraints.

Bitcoin seems to be such a currency, one that has been developed to cover most of these points. One of the best features of Bitcoin is its convenience, ease of use, and rapid processing times as no central authority is involved. Anyone can buy or sell anything and have their Bitcoin account or wallet credited within that day, while a credit card transaction can take time to process before the delivery can proceed.

This is like depositing your cash in an account and then being able to access the wallet safely and securely as you already have the funds in the account. Instead of a central authority, the people involved accept to certain terms and conditions agreeing on what will happen in the market and algorithms are then triggered. It is more democratic in the sense that no one government or authority has control of the currency.

People can do it on their own. Another benefit of Bitcoin, is the currency is to set up in wallets or accounts and it is like a secret post box where anyone can send the money without the disclosure of personal account information by its owner. This does open the opportunity to launder money, as ownership cannot be determined, but this is a bug that can be set right over time.

These two pros can also turn into cons, as there is no one to regulate or monitor what is going on in the market. If someone gets scammed by another, there is no way to get the money back as it has been lost and secondly, people can commit any kind of internet scam and they cannot be caught based on the anonymity in the system.

Another problem that compounds this is that Bitcoin cannot be reversed, people can buy Bitcoin credit using a credit card and once the transaction goes through, they can reverse the transaction completely by calling their credit card company. The cash is returned to the person; however, there is no way to get the Bitcoin back from the buyer.

The most important problem with Bitcoin is the valuation and how the value of Bitcoin is set. As it is made of complex algorithms and traded within groups of people, the value is based on what the people want to pay for it, rather what it is actually worth. This is a huge problem as Bitcoins are worthless by themselves.

Let’s suppose, I see that there is a huge demand for the coins and I get interested in buying at USD 10. As the price is constantly increasing, I am able to secure the purchase at USD 15. Now that I have the currency, it might be USD 20. or USD 1. the next day, as the people who demanded it yesterday do not want to buy it anymore. This leaves me with a loss of potentially USD 14. and forces me to sell it for USD 1. in order to make any recovery whatsoever. Lastly, the fact that new coins are minted on a continuous basis means that the value can be manipulated.

The idea behind this currency is a good one, as it is evolutionary and able to take into account the social and economic needs of the internet. As people want faster and cheaper ways of making their online transactions, they want these tools to get there, however it seems that one more step is required for the process to be complete. There needs to be central authority which can regulate the currency and make clearing of transactions more trustworthy. Till then it seems, this fad of Bitcoin will persist until something new is developed.

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With talks of an ETF being developed by the Vinklewoss twins (yes those Vinklewosses), there seems to be a high demand for this new product. However, just like the latest iPhones, the fashion of this currency will fade when something new comes along. This might see the fate of Bitcoin being relegated to a software currency used by gamers and developers for purchase of game content in the MMORPG games.

© Zain Naeem

INFOGRAPHIC – How a Bitcoin transaction works — Infographic (click on the image to enlarge)