It now stands at a crossroad: will it be a currency or commodity? It is currently used more as a store of value -- something that can be speculated to increase, decrease or at least maintain a value. Rather like London real estate, it is something that money can flee to: the number of people using it sharply spiked after it was announced that accounts in Cyprus were about to receive an infamous haircut.
However beyond either hedge-fund speculation or the Silk Road, it's easy to see the appeal of Bitcoin to normal people like you and me. It is a cheaper way to do business. Buying something using a credit card can cost three or even five percent for the buyer, and sellers stump up merchant fees, usually around 2.75 percent.
For this reason, both small traders and corporates are not necessarily hostile to it (you can buy a Subway with bitcoin in Pennsylvania, honey in Denver). For those living in shaky, uncertain financial systems, the mathematical rigour of cryptographical guarantees can look reassuringly secure. Many see a system that replaces central control with flat, peer-to-peer authentication as inherently safer: impossible to completely control and much harder to manipulate.
But when bitcoin does indeed step over the threshold and into our world as a living currency -- as I think it probably will, starting with online purchasers and then migrating into the offline world -- the possible challenges will make Silk Road trading seem like small fry.
In commerce, the volatility of Bitcoin's actual value remains a huge problem. Over a few hours, the healthy daily profit of a Bitcoin-using pub can turn into a terrible loss as Chinese operators change their mind about its value. Last week Bitcoin lost a third of its worth against the dollar in 48 hours. Consumers will remain worried about how secure it, to hacks, dubious brokers and exchanges, and how to deal with refunds and thefts.
But the most fundamental and existential issues are reserved for nation-states (as the founders would have wanted). Peer-to-peer currencies reduce the ability of central banks to manipulate the money supply; have significant implications for how to track illegal transactions and may erode tax raising powers. Rubbing salt into the wound, it is now bitcoin miners, not Governments that receive 'seigniorage', revenue earned by issuing the currency. Many bitcoiners are avid anarchists, who may wish and actively work to keep bitcoin separate.
In truth, no-one can be sure what will happen. Chinese authorities have in the last few days banned their banks from handling bitcoin and, anyway, it may not be bitcoin that eventually triumphs. Peercoin, Anoncoin, Zerocoin, Litecoin are all bring different strengths and benefits, from privacy and anonymity to the efficiency of the transaction. What bitcoin is however showing us is that Vires in Numeris is not ringing hollow. We will likely wake up to a world that uses currencies secured by cryptographical systems, and it is time that our social and political institutions seriously consider what this will mean for them and the people they protect and represent.
Tomorrow, my think-tank, Demos, is launching a series on cryptocurrencies and their long-term impacts on politics and society. The task now is to ensure that if cryptocurrencies creep into our lives, they make them better; that they encourage innovation, business freedom, consumer choice, without undermining the key functions of the state; to promote basic social goods without washing this promising and fragile new asset away in a sea of regulation. Watch this space.
