Understanding Bitcoin and cryptocurrencies

Ideal for small transactions?

Bitcoin was once regarded as an ideal system for small electronic payments – so-called micropayments – as it is difficult to transmit small amounts of currency efficiently with existing systems. Credit card fees, also known as swipe fees, can often exceed the value of the purchase, making this costly for retailers. However, Bitcoins increased transaction fees have proved to be a barrier preventing it making inroads into the world of micropayments.

Another problem with Bitcoin is the volatility of its value which exceeds the volatility of other currencies and gold, resulting in huge fluctuations in comparison to the US dollar. In 2013, the value of Bitcoin went from $10 to over $1,000! Because its supply is ultimately limited, prices will need to vary to accommodate shifts in demand, not the other way round. Unlike gold, Bitcoin has no intrinsic value from alternative uses that could anchor its price.

Not fit for business?

As a currency, Bitcoin is not stable enough for most businesses. The value of a Bitcoin fluctuates dramatically and because there are no controls there is nothing to stop money vanishing if the price tanks.

Bitcoin payment processors offer a way of getting around this problem, as they convert the transaction to hard currency almost instantaneously. Many companies want regulation to provide them with some security and protect them from potential big losses on the cryptocurrency.

Bitcoin's future

There are some signs that governments are starting to look at regulations and this is clearly proving difficult.

All these factors are significant barriers which are diminishing Bitcoin’s chances of becoming a more widespread and popular currency. Bitcoin's market capitalization currently stands at about $74.5 billion (around £55 billion).

Previously, Goldman Sachs has said that it was more plausible that Bitcoin could have a significant impact in terms of its innovation on payments technology, "by forcing existing players to adapt to it or co-opt it."

However, the Goldman Sachs report also said that Bitcoin's ‘biggest hurdle’ will be maintaining its cost advantage in the face of greater regulation, higher operating costs, and competition from entrenched players.

Fitch Ratings came to a similar conclusion and found that Bitcoin stands to lose much of its appeal if Bitcoin companies are forced to deal with the added cost of regulation, rendering the near frictionless Bitcoin network much less cost-effective than it is today.

In 2017, Bitcoin has been on the rise again, with prices per coin hitting $4,500 (£3,300). This has been fuelled by Chinese buying of the cryptocurrency.

It seems that the sheer success of Bitcoin which has seen it leap from being a shadowy entity to an all-star affair overnight has also hurt its long-term viability. It remains to be seen if Bitcoin can move beyond its niche to gain wider acceptance, and for the time being the cryptocurrency remains quite volatile, and a gamble to investors that has been likened to the tech bubble of the 1990s.