The Bitcoin bubble has burst, so what are the alternatives?

The crypto currency Bitcoin has been in the news lately with a sudden surge in value followed by a spectacular crash – not to mention the unfortunate tale of US$4 million in Bitcoin on a hard drive that was accidentally dumped in a rubbish tip.


Bitcoin was the first widely used crypto currency, but few people know it is not the only one. So how do the top five crypto currencies by capitalization compare?

Bitcoin

 

The core of Bitcoin is a loose alliance of people (“miners”) who process and add transactions to the Bitcoin public record and get rewarded with Bitcoins for their efforts. This process (predictably enough) is called mining. Changes to the mining process are negotiated and when 80% of miners agree, the change becomes mandatory.

This process has worked well because the miners have an interest in keeping a stable reliable system that does not drop in price or go into a bubble then crash. The value of a Bitcoin is set by the market, which is the shared delusion of market players as there is no backing to the currency.


In terms of risk it sits some where between the share market, which can drop significantly but seldom to zero, and the derivatives market where you can lose more than you invested.


While Bitcoin transactions are public the true identities can be hidden so it’s an easy way to purchase illegal goods or shift money around the world from one Bitcoin wallet to another and then to a normal currency. The low transaction fees and inability to track and tax money also appeals to some.

When you begin to delve into the question of what money really is, you must be prepared for some metaphysics. Money, currencies and other such media of exchange differ markedly in their backgrounds and means of operation, and have changed quite recently into forms that are barely understandable.

For centuries, minted coins not only represented the value and trust of banks, their depositors and eventually nation-states, but also were deemed valuable because they were made from precious metals like gold and silver. These metals are difficult to move around in large quantities, and so banknotes were invented as early as the seventh century in China and brought to Europe in the 13th century. Unlike coins, banknotes were not treated as valuable in themselves since they were simply printed on otherwise worthless paper. Rather, they served as a form of promissory note or IOU that could be presented to the banks that issued them in exchange for their face value in precious metal, coins or bullion.

In the 20th century, most central banks and governments stopped backing up their currencies with precious metals, and yet banknotes maintain fluctuating values, with some in high demand as media for exchange both domestically and internationally. Dollars and euros are highly regarded and preferred currencies for international commerce, as well as for stocking private bank accounts.

Now we have bitcoins and other digital currencies that exist entirely in blocks of zeros and ones and are even “mined” by machines running algorithms. And earlier this month, bitcoins and their ilk were officially deemed commodities by the Commodity Futures Trading Commission, which will now regulate them.

So as the greenbacks and quarters in our pockets slowly disappear, replaced by strings of digits stored on our smartphones, and money takes another step away from being tied to anything of value, a philosophical question comes to mind: does money still exist? And if so, what gives it its value?