21. July 2017

Bitcoins – the development of digital currencies

Dollar and Euro, Yen and Renminbi are facing competition in the Internet

Coins, banknotes, cheques, the familiar forms of payment have repeatedly been confronted with competition, by cashless payment transactions, credit cards and subsequently online banking. However, many people are still not aware that a completely new financial system is emerging: the cryptocurrencies. Digitization and the Internet make it possible to transmit and deal with money in a manner unknown to date.

Bank notes, coins, bits & bytes

If you are a fan of money, it is possible to experience a lot more than simply euro and cent: regional currencies like the “Chiemgauer” in Upper Bavaria, the “Kannwas” in Schleswig-Holstein or the “Urstromtaler” in Saxony-Anhalt are accepted locally for payment transactions. And there were times when many cities had their own currencies printed on fancifully colourful bank notes. Such token money from inflation and the post-war years is very popular with collectors.

But most of the time it is exactly the other way around: currencies and their tangible manifestation as money in the form of notes and coins are dying. Although the introduction of the euro already led to the disappearance of the German mark, the franc, the drachma, the peseta and the escudo, a still more far-reaching change is in the making, which could turn our thinking in money matters completely upside down. On the Internet – but still largely concealed – a radically different future of the financial system is emerging. Bitcoin, Ethereum and Ripple are sprouting there, completely new systems to abstract and transfer values.

Strong currency fluctuations in cryptocurrencies

Worldwide more than 800 cryptocurrencies have already been spawned, with Bitcoin, Ethereum and Ripple probably the best known. However, these currencies have no tangible manifestation: they only exist as posting transactions in the block chain system. This system is a continuous online ledger listing which participants in the market transfer what amount of currency units to whom. As in the real currency market, currency rates rise and fall and with the more popular cryptocurrencies there is occasionally even higher fluctuation, rates falling by 20 to 30 per cent not being an uncommon occurrence. But strong upward leaps can also be observed.

Cryptocurrencies with their somewhat complicated system might seem to outsiders more like the hobby of Internet nerds. But these currencies are slowly developing into a second monetary system. Bitcoins can be exchanged for real currencies, and there are already service providers that accept Bitcoins as payment.

Cryptocurrencies – money without banks?

Collectors will need to have a lot of patience and are likely to be ultimately disappointed: Bitcoin and Ethereum will probably never exist as notes and coins, but that would be much too conventional, anyway. The most endearing allure of cryptocurrencies is that they have a purely digital existence and don’t have to be backed by real money or gold reserves.  Cryptocurrencies are often tied to the ideal that a currency can exist that transfers value, simplifies exchange and is completely outside of the control of central banks and governments. And the more people who participate in the system and accept bitcoins as having value and being convertible, the more likely these and other cryptocurrencies will become accepted.

And one further aspect is also significant: bitcoins and the other digital currencies have developed largely outside the banking world, which however, does not have to worry about becoming superfluous in the foreseeable future, and cash is still likely to be around for a long time. Despite strong exchange rate fluctuations – possibly the teething troubles of the new system – it is obvious that there is room in the financial world for a totally different money system organized in another way. Cryptocurrencies will not replace or supplant the dollar, the euro and the yen – but they will sooner or later be able to hold their own alongside conventional currencies and the money earned by new players trading currencies and handling payments is another lost business for traditional banks.

Photocredit: fotolia.com,Petr Ciz,155038148

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