Bitcoin in Cyprus - Is this the future for finance?
Is this the future for finance? November 2013 has been a lively month for the digital currency with its value hitting record highs amidst several key developments around the world. First the US Senate committee hearing on virtual currencies proved generally supportive of the concept. This may have been partly due to developments in China, where bitcoin was given favourable coverage on the state-run CC-TV network and in government-supported newspapers; and China’s most popular search engine, Baidu, announced its intention to accept bitcoin in payment for some of its services. Finally there was the announcement by the University of Nicosia that it would become the world’s first university to accept bitcoin as a currency, and would also offer a Master’s degree in digital currency. With plans for Cyprus to become a centre for trading and banking in bitcoin, can it also encourage increased international investment in the country that can help to stimulate economic recovery?
Dr Christos Vlachos, the University of Nicosia’s chief finance officer, described this as possibly the commencement of a new era, the advent of internet money as a mainstream method of financial transaction. The move to begin using bitcoin has come not as a response to Cyprus’s banking crisis but because of the number of requests by students, many of them from overseas. This showcases bitcoin’s potential as a simple way for people to conduct their day-to-day transactions, rather than an over-hyped niche currency, a last ditch defence of fiat currencies, or as another path to boom and bust similar to the dot.com bubble. Dr Vlachos pointed out that many of those students requesting the use of bitcoin came from countries in southern or West Africa or the Far East where there was less access to traditional banks with low charges. The university undertook a serious study into bitcoin before making its decision and came to the conclusion that the speed of transactions and convenience of the currency would benefit students. All the transactions will be made by a Cypriot company working on behalf of the university, and payments made in bitcoin will be converted into euros at the prevailing rate.
What is bitcoin?
Bitcoin stands apart from other currencies as it is not regulated by any government or central bank. In the traditional central bank, the money supply can be controlled by the printing of banknotes, which can help boost the economy but also cause inflation. With bitcoin, the amount of currency produced is controlled by software in a complicated process known as bitcoin mining. Individual ‘miners’ or dedicated mining facilities produce quantities of bitcoin by solving complex mathematical problems in the form of computer algorithms – to put it simply, by solving a block to the availability of bitcoin, which becomes more difficult as the supply increases, so automatically regulating supply and in theory ensuring that its value is maintained. Investors have often found it difficult to buy substantial amounts of bitcoin, but in September 2013 the US brokers SecondMarket launched the Bitcoin Investment Trust as a vehicle for investment in bitcoin that would be more acceptable to a wider range of investors. For the first six months the Trust will be in the process of asset-gathering, but will then open up secondary markets for trading. The value of Bitcoin is still volatile, but investors have increasing confidence in its staying power, and the new investment trust is set to be a safer and more profitable way of investing in the currency. ‘In essence, putting your money in a large fund enables you to spread your investments across a range of companies and sectors that would simply not be possible if you managed your investments alone.’ This is one of the clear advantages of investment trusts, which applies equally to a conventional or virtual currency. Rising demand and a fixed supply of bitcoin should ensure that it continues to rise in value, and it is winning a strong following among people looking for an investment that will hold its value against currencies threatened by inflation or devaluation.
Growing into maturity
Bitcoin has not been without its growing pains. It has often been targeted by criminals and hackers. Examples: the Polish exchange, Bidextreme, whose servers were hacked and its customers digital bitcoin wallets emptied; or the New York video game company, E-Sports Entertainment, which installed bitcoin mining software on its clients’ computers without their consent. However, traders and investors are beginning to realise that in an increasingly digital financial environment where much business is routinely done in the virtual world, one or several new forms of digital currency are bound to arise and become successful. These won’t replace the existing major currencies such as the dollar or euro, but they will fill a niche as a way of storing currency or making digital payments. The most pressing question is not whether it will survive, but how it can be policed and taxed. This will require careful handling, and as a currency without links to any one nation it must be regulated in a way that avoids fragmentation.
In April 2013 the price of bitcoin shot up to $266 when the Cyprus financial crisis led to fears of a run on the banks that could threaten the stability of the euro, although with the crisis resolved the price dropped back to $50. Recent surges due to China’s endorsement of the currency brought the price up to record levels, exceeding $476 on Japan’s Mt. Gox exchange in November. BTC China, the major bitcoin exchange in China, recently surpassed Mt. Gox in its volume of trading in the currency, which is now reaching prices of over $1000 for a single bitcoin.
One advantage of using bitcoin for transactions is that the fees may be lower than those charged on conventional credit and debit cards, which may be up to 3% per transaction. Bitcoin may challenge the dominance of networks such as Visa and Mastercard. Its use by Baidu and the University of Nicosia and support for these moves by the governments of China and Cyprus respectively goes a long way to establishing bitcoin in the pantheon of world currencies. However, it may be that the future of bitcoin is in its value as a means of storing wealth. Dr Vlachos, speaking about the University of Nicosia’s new Master’s degree in digital currency, called bitcoin ‘the gold of tomorrow.’ Indeed, gold itself benefitted from the development of new investment tools such as exchange-traded funds, which made it easier for it to be held by a greater number of investors. Bitcoin has the potential to completely overturn how we think about money. Many governments now recognise this and are exploring the pros and cons of supporting it as well as how to control its use. With Cyprus already some way ahead of the game, Dr Vlachos has urged the government to set up the regulatory framework that would attract trading companies dealing in bitcoin, which could boost the country’s ailing economy.
Author: Melissa Ravenscroft
Date: 3/12/2013
