Bitcoin: currency 2.0

Posted by Deloitte Customer UK on 22/10/2013 at 6:17 PM Permalink Comments (3) TrackBack (0)

As far as money is concerned, much of the headline press over the past five years has focussed on how little of it is floating about these days. But despite the headlines something else has been happening in the world of money, something more fundamental is being engineered and entirely new models for the representation, storage and transfer of currency are being proposed, prototyped and adopted.

A new paradigm is fast emerging with potentially profound implications, offering opportunity and risk in equal measure. Welcome to Bitcoin.

Born in 2008, and representing a new generation of digital currency, Bitcoin enables people anywhere to store and transfer payments though a global decentralised peer-to-peer network. Transactions do not pass through any financial institution and Bitcoin is not owned or controlled by any company or government; it is opensource, borderless, and accessible to any internet user. Transactions are processed near instantly at close to zero cost and cannot be blocked, seized or interfered with. 

Bitcoin 101 – your 30 second introduction!

  • Bitcoin is a decentralised virtual currency; it lives on the internet and can be stored or transferred between users without relying on the processing infrastructure of any third party.
  • User accounts are held as digital wallets on smartphones/computers; each wallet is represented by an address, and holds the key to access funds linked to that address.
  • Bitcoin is a crypto-currency, with simple but extremely secure encryption techniques controlling the ability of users to access and move currency.
  • There are around 12 million Bitcoins in existence today and only 21 million will ever exist, new Bitcoins are released gradually through a process designed to reward network users for validating and  processing transactions, which are then stored within an ever growing public ledger known as the blockchain and which contains every transaction ever processed. 
  • Each Bitcoin is divisible into 100 million units, at all times each unit is allocated to an owner (or wallet address) within the blockchain, and can only be moved when authorised by the owner using a unique private key.
  • Bitcoin is a deflationary currency: this is radically different from most traditional fiat currency models which typically experience consistent inflation as a result of new monetary supply.

Five years on, the fledgling currency is gaining traction. Stats for just one of the many available digital wallet applications show over 3.5 million downloads, the value of a Bitcoin has appreciated over 1000% in the past year, and the platform network boasts more than twice the dedicated processing power than the top 500 supercomputers in the world, combined.

Smart money
People are getting excited, and it’s not just the geeks. Venture capital likes disruptive technology, and Bitcoin is the poster child for disruptive potential. Bitcoin presents an entirely new model for the way in which money is denominated, issued, stored, exchanged, received, monitored and controlled. Widespread adoption would redefine consumer behaviours in traditionally hard-to-penetrate markets and the race to claim what may become a lucrative new landscape is well underway.

Adoption is currently highest in the US, UK, Germany and China. However, emerging regulatory obstacles are likely to produce a short term deceleration in growth amongst western markets. Legislation must adapt to ensure the usage and taxation policy toward Bitcoin denominated trade and earnings is clear and enforceable, as well as to guarantee consumer security within the marketplace as it evolves at tremendous speed. Finally it must keep pace with new forms of criminal activity perhaps best exemplified by the anonymous Silk Road, until recently a thriving anonymous marketplace for prohibited goods, with trade denominated entirely in Bitcoin.

Far more interesting is the emergence of Bitcoin technology amongst less developed communities such as Kenya, where access to traditional bank accounts is limited and the past decade has seen explosive adoption of new mobile phone-based payment services such as M-PESA. Kenya’s population is primed for the type of solution offered by Bitcoin, and the recent launch of a phone-based Bitcoin wallet providing direct integration with M-PESA accounts provides a platform for widespread adoption amongst communities in which there is genuine need for accessible, ultra-low cost capabilities.

What about traditional banks?
If Bitcoin were to achieve the mainstream adoption some believe it is capable of, the implications to retail banking would be seismic, with declining demand for traditional banking services (cash storage, payment, balance checks, international transfers and foreign exchange to name a few) as consumer behaviour shifts toward alternative technology.

To survive such a transition retail banking institutions should embrace new technology and redefine their value proposition for tomorrow’s market, emphasis must shift away from exclusive ownership of customer accounts and associated transactional activity, towards lightweight, collaborative and community-driven operating models supported by new value added products and services. Beyond this organisations must leverage all the power of social community and learn how to harness the big data goldmine that is the blockchain to deliver truly powerful social finance capabilities.

Watch this space
The future of Bitcoin is far from certain. Its risk profile is still enormous and the currency is simply not ready for widespread adoption today. For now though it’s not the price of Bitcoin we should be watching but the real case studies of economic value emerging from those who choose to try it. It’s a money game after all and, regulatory hurdles aside, the survival of Bitcoin will ultimately be determined the true economic value it offers.

Tyler welmans1Tyler Welmans
Tyler is an emerging technology evangelist with a background in business analysis and customer experience transformation across the public sector, private sector and FSI industries.

Connect with Tyler on Twitter and Linked In


  • Thanks for the superb analytics and well rounded story Tyler; this is one of the most concise and accurate responses I have read of late. It is reassuring to see such in practical and balanced thought go into an article of such important relevance in the fast changing financial landscape. I trust many people gain an understanding from your well considered words. And well done Deloitte for providing such an unbiased forum for expression.
    I firmly believe that BTC will trounce the USD as preferred choice of transaction method in the years to come.

    Posted by: Jonathan on 18/11/2013 at 03:43 AM

  • Value stability (or in the case of Bitcoin, volatility) is caused predominantly by two factors.

    Firstly, the relatively small market cap (or M1 currency supply) worth a little under $3Bn means the proportional effect of capital inflow/outflow is magnified in comparison to say the US Dollar with an M1 supply more than 2000 times larger. An injection of $1m represents a drop in the ocean for USD, but a volatility inducing boulder to Bitcoin today. Note that this point relates to the total value of all Bitcoins and not the total number in existence.

    Secondly, Bitcoin has seen very high levels of speculative investment; a large proportion of holders are specifically interested in owning Bitcoin as an investment based on the expectation of future value. Bitcoins held are unlikely to be needed for next weeks rent and holders and are more likely to buy/sell it in response to market events (often accentuating their impact). Added to this, acquiring Bitcoin typically requires access to a trading exchange, meaning a large proportion of holders are capable of jumping online and immediately influencing the market in response to the latest sentiment inducing news story.

    One of the ways retailers typically reduce exposure to this volatility is through third Merchant Service payment solution providers who allow retailers to price in Bitcoin (with frequent or real-time price re-calculation in times of volatility) and offer instant settlement in traditional currency such as USD immediately after a sale is processed.

    It is true that many early investors are probably considering early retirement, if Bitcoin succeeds in achieving mainstream adoption it's value will rise significantly creating wealth for holders, if it fails the opposite will happen, the people investing time and money into it are simply acting on an assessment of this risk.

    Posted by: Tyler on 06/11/2013 at 12:11 AM

  • There is a surprising amount of mystification even obfuscation in articles on Bitcoin. But isnt the essence that it is simultaneously a currency and a speculative vehicle? The final limited quantity (21 million?) is not a guarantee of stable value, rather the opposite, the guarantee that it will take comparatively little buying to push the price up - for a while at least. Using it as a currency is like foreign exchange dealing with the world's most volatile currency. Whoever accepts payment in bitcoins either does so when the value is going up - or at some discounted rate if the Bitcoin is going down. It is surprising for it to be discussed as an alternative method of making payments when the exchange rate is utterly uncertain. Making secret payments is another matter - presumably margins have traditionally been large for this purpose so Bitcoin is a contender.

    There is another point. If, for example, the founders (and earliest investors) had bought then held a large quantity of Bitcoins and saw them rise from almost nothing to $200 and managed to sell them all at this peak which caused the value of Bitcoins to plunge to near zero again then these founders and early investors would have walked away with an immense capital gain which would have been paid for by the new owners of Bitcoins. In other words it is a zero sum game. Setting up a currency of this kind just transfers money from late to early investors - perhaps largely the original founder(s).

    Comment frequently contrasts it with fiat currency as if Bitcoin was some kind of honest currency of unvarying value and fiat currency automatically devaluing the value. The point about fiat currency is that with a growing economy, the money supply must also be expanded - and this is not automatically inflationary.

    If Bitcoins are so good then those who understand money should agree to be paid in Bitcoins set at today's rate for the indefinite future.

    Posted by: Bob T on 29/10/2013 at 09:28 PM

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