Economy Hub: Is Bitcoin a real threat to the traditional currencies?

Bitcoin has surged in global value this week to more than US$7800 ($11,382).

It leapt to more than US$13,000 per bitcoin in Zimbabwe. The political turmoil there has made it a safe currency.

That, more so than the fact that it's a crazy speculative investment, is what is forcing governments and banks to pay attention to the technology-driven barter system.

The complex technology and rules around bitcoin and other so-called cryptocurrencies can make it a difficult topic for many of us.

Bitcoin is a blockchain technology - another confusing word. A good start is to think of blockchain as a giant digital ledger that records every transaction ever made in bitcoin.
This week on The Economy Hub I talk to Herald technology writer Juha Saarinen about how it works and how world-changing it is really likely to be.

Is the bitcoin market just a speculative bubble? Probably.

Could it bubble crash? Yes of course, says Saarinen, who has tracked bitcoins progress for several years.

Could it bring down the global economy? No, not even close - at least not yet.

There's about US$150 billion worth of cryptocurrencies in the system.

That's enough to make a splash if it was to collapse in value. But to put it in perspective Apple has a market value of US$880 billion.

It is estimated that in 2009 the global financial crisis destroyed about US$14 trillion of wealth in America alone.

Bitcoin allows people to make financial transactions with anonymity outside of any government control.

That's making it popular for those who don't want government's watching them - arms dealers, drug dealers and people in totalitarian regimes.

Increasingly it can be used for legitimate purposes but in the short term it is not about to replace dollars, yuan or euros as widely used currencies.

The volatility of its value and the time involved in verifying transactions makes it a pretty impractical way to buy something.

You could have $1000 worth of bitcoin in your online wallet. You could go to buy something worth $900 dollars and by the time the transaction has been verified the value in your wallet could have plunged to $800.

Transactions have to be verified by active users (called miners) who use their computing power to check the numbers in return for payment of new bitcoin.

But the process gets ever more complex and time consuming as the number of transactions on the blockchain ledger grows.

Imagine scaling it up to the number of transactions done in US dollars every year - every cup of coffee, every bus fare, every loaf of bread.

It is debatable whether we have the computing power in the world or even enough electricity to make verifying all those transactions possible. For now at least.

Bitcoin and currencies like it aren't going to go away and could eventually present a more realistic problem for banks and governments.

Advances in computing or new improved versions may solve some of the current problems.

Imagine if a major online retailer decided to set up its own systems - Amazon dollars! That could be more practical stuff.

Cryptocurrencies could change the world over the coming decades. But for now they remain something of a curiosity for those of us who aren't speculators.