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Economy 25 Feb 2015

Years later, where have Bitcoin and the other cryptocurrencies got to?

Cryptocurrencies have become a trend. Everybody talks about Bitcoin and its rising value. Now is the moment to think about it and get to know where we are and which the situation is.

Counting coins bbva

On January the 3rd, 2009, the Genesis Block -the first block in the Bitcoin block chain- was generated. Although others had already tried to launch cryptocurrencies, none of these were particularly important (because, among other things, they were not decentralized like Bitcoin). This date therefore represents the real birthday of cryptocurrencies. 6 years later, now is a good time to ask what has happened to Bitcoin and the rest of these cryptocurrencies.

First, we must remember what we are talking about when we discuss cryptocurrencies: a digital currency we can use to buy goods and services through a decentralized P2P system of electronic transactions.

If we share this definition of cryptocurrencies, we can see how far Bitcoin and these other digital currencies have got, and the obstacles they still face.

Its first success is its survival. Not many people gave Bitcoin much of a chance 6 years ago. But it has survived the hype and is starting to achieve a degree of maturity that financial analysts never expected.

The second is the value that it has acquired. Cryptocurrencies have developed into stores of value, a type of digital gold. As we go to press, Bitcoin was listed at 218 dollars. And this is no mean achievement if you consider that there is nothing behind Bitcoin other than cryptographic systems and the energy needed to unravel these.

The cryptocurrencies have highlighted -for those who were not already aware of it- the fiduciary nature of ordinary, national, currencies. Yes, there is nothing behind them: there is no gold standard. And, compared to the inflationary model of traditional currencies, Bitcoin's model of generating monetary units through deflation is based on conserving the value of money.

Cryptocurrencies are gradually expanding their scope for action, passing from the Deep Web to the ordinary transactions circuit for goods and services, breaking out of the geek ghetto: there are now ad hoc ATMS, major financial entities such as PayPal have incorporated it, cards are being issued in cryptocurrencies, etc.

Another sign of its success is that it is attracting those who love other people's property. If something has no value, no one will steal it, it is of no interest to thieves or fraudsters.

And finally, if cryptocurrencies were just a hobby for a handful of weirdoes they would not have become the focus of special vigilance by governments and security agencies, generating specific regulations or even being banned outright.

But these achievements cannot hide two areas in which all cryptocurrencies still face significant challenges if they are to develop into real alternatives to official currencies.

To be widely used on a mass scale they need to gain legal and fiscal legitimacy. It is unlikely that companies and their customers are going to start using these payment media en masse whilst they are hampered by such uncertainty and face significant regulatory and tax risks.

Furthermore, the volatility of these cryptocurrencies, appreciating and depreciating by a jaw-dropping 80% against the greenback, is a major obstacle to them being used as a payment media. No payment media aspiring to widespread use can be so unstable (irrespective of official currencies being particularly unstable and the debt crisis looming on the horizon).

What does the future hold? Predictions are difficult, but irrespective of whether these or other cryptocurrencies crash, they will leave their mark on our financial systems. And that is not just because some governments, such as Ecuador, are seeking to issue their own cryptocurrencies. It is also because the block chain itself, the very architecture of Bitcoin, is seen by some as being faster and more economic than established global financial alternatives, such as SWIFT.