What is bitcoin?

13 February 2018

Bitcoin has been labelled a virtual currency. But what actually is it and what does it mean for real currencies?

Essentially, it is a digital token that can be exchanged electronically. It does not exist in physical form. Bitcoins are created and kept track of by a network of computers using complex mathematical formulas, rather than by a single authority or organisation.

So virtual, yes, but currency, no. Why not?

No one is backing it Bitcoin it is not issued by a central public authority. When you hold a €10 note, for example, the ECB guarantees your right to pay with it anywhere in the euro area. No one ensures your right to use bitcoin or works to keep its value stable.

It is not a generally accepted form of payment If bitcoin were a currency, you could expect to be able to use it widely. But, in fact, there are very few places where you can pay with bitcoin. And where you can, transactions are slow and expensive.

Users are not protected It is possible for hackers to steal bitcoin. If this happens, you have no legal protection.

It is too volatile A currency should be a reliable store of value so that you can be sure that the money you have will buy more or less the same amount of things today as it will tomorrow or this time next year. Bitcoin is not stable. Its value has both skyrocketed and tumbled dramatically all within the space of a few days.

If it’s not a currency, what is it?

Bitcoin is a speculative asset. In other words, it is something that you can gamble on to make a profit, but with a risk that you will lose your investment.

Will the ECB ban bitcoin?

It is not the ECB’s responsibility to ban or regulate bitcoin or other cryptocurrencies. But, given the lack of consumer protection, it is important to exercise caution.