Can we trust virtual currencies?

Will virtual currencies used on the web ever replace physical currencies such as the euro? This is not certain, especially for the most used of them, the Bitcoin.

Bitcoin exists since 2009. Unlike the current monetary system, Bitcoin is not being created by a trusted central instance such as the European Central Bank (ECB) for the euros but by members of the Bitcoin network, known as miners.

Miners use special software to solve math problems and are issued a certain number of bitcoins in exchange. They help keep the Bitcoin network secure by approving transactions. People are sending bitcoins to each other over the Bitcoin network all the time, but unless someone keeps a record of all these transactions, no one would be able to keep track of who paid what. The Bitcoin networks deals with this by collecting all the transactions made during a set period into a list, called a block. It’s the miners’ job to confirm those transactions, and write them into a general ledger. This general ledger is a long list of blocks, known as the blockchain. When a block of transactions is created, miners put it through a process. They take the information in the process and apply a mathematical formula to it, turning it into a far shorter, seemingly random sequence of letters and numbers known as a hash. This hash is stored along with the block, at the end of the blockchain. Every time a miner successfully creates a hash, he gets a reward of 25 bitcoins (about EUR 9,900, reward divided by two from July 2016).

First of all, you need to have a virtual wallet on your computer or your mobile device, allowing you to store and exchange bitcoins.

Once you have your virtual wallet, you can start getting bitcoins:

·         you can try to solve a math problem such as a minor do (good luck!);

·         you can buy or exchange bitcoins with euros via an online Bitcoin exchange platform;

·         you can exchange services and/or goods for bitcoins.

At first sight, the advantages of Bitcoin are obvious: fast transactions, much lower fees compared to traditional banking and anonymity. But what are the risks?

The first and most important risk is the risk of security. If you have downloaded a wallet program on your computer, you should make sure never forget the password or your funds will be permanently lost. Unlike your bank, there are very limited password recovery options with Bitcoin. You need to backup your wallet on a regular basis and to store it in a safe place. If you don’t do this, you could definitely lose your bitcoins in the event your hard disk fails or your computer is stolen. Using online services is not a good idea because such services generally still do not provide enough insurance and security to be used to store money like a bank.

The high volatility of bitcoins can significantly affect the price. On Tuesday 18 August 2015, bitcoin’s price fell 16% in just one day!

The third problem is the opacity in bitcoin management. In April 2014, MtGox, the world famous Bitcoin exchange platform, has gone bankrupt. Sixteen months later, in August 2015, the former head of MtGox, French-born Mark Karpelès, has been arrested in Japan for embezzlement.

So, can you attempt the Bitcoin adventure? Yes, provided that you keep in mind that it is a speculative currency and you commit only small amounts of money.