From coin to cryptocurrency: The Bitcoin success

The Lydians; a relatively overlooked civilisation which at its most powerful around 600 B.C, enjoyed an empire that straddled most of eastern Europe and Asia. However, its culture of high fashion and an almost indecipherable language saw its heyday disappear almost as quickly as it had risen, being absorbed into the first Persian Empire after the Battle of Halys.

Although various games of dexterity that are still played today, such as Jacks and even early forms of tiddly winks, are attributable to those from ancient West Anatolia (modern day Turkey), it is the other items that were jangling in their pockets that have fascinated economists for millenia. It is true that the first forms of currency, such as the Mesopotamian Shekel, were around a good 2,500 year beforehand, however it was the Lydians that had established the first ever mints, using gold and silver coins, stamped with images of animals, to pay their armies. Lydia's currency helped the country increase both its internal and external trading systems, making it one of the richest empires in Asia at the time.

Over the subsequent years, coinage as a commodity owes its success largely to its portability, durability and inherent value. Additionally, its use is ideal for those who control the money supply and circulation to regulate inflation and exchange rates, keeping economies stable. However, with the advent of cryptocurrencies, especially Bitcoin, a digital currency that uses cryptography to avoid fraud, many now wonder whether the once omnipresent physical coin is well and truly spent.

Dating from around 2008, Bitcoin itself started life as the folly of those in the know about the new possibilities of cryptocurrencies, with one of its first notable utilisations being to purchase a takeaway pizza in 2010. Based on bitcoin's open-source code, other cryptocurrencies soon started to emerge with online currencies rapidly gaining in popularity throughout the 2010s.

Using Blockchain technology, digital currencies are not tied to a central bank or government, allowing its users to spend money anonymously. Another unique feature about the new wave of currencies is that there is no supply/demand dynamic; the coins are created by users who “mine” them by lending computing power to verify other users' transactions.

Whether seeing its price surge or dip, there is no question that Bitcoin in particular remains a hot topic amongst investors, with the currency gaining traction as a viable payment option. With the take up still relatively low, the currency has risen an impressive 300% in a year with companies such as Tesla announcing (before swiftly backtracking) that they will now accept Bitcoin for purchasing their vehicles.

With the new forms of digital currency still being very much in their infancy, huge price swings seem to be an almost daily occurrence as speculators react to the next piece of news to affect the validity of their investment. With Bitcoin having no real intrinsic value, huge fluctuations are to be expected with the latest coming just a few weeks ago. A statement posted on the Chinese Banking Association’s website stated that financial institutions should “resolutely refrain” from providing services using digital currencies because of their volatility and openness to fraud. Unsurprisingly, the price of bitcoin fell over 50%, plummeting from $65,000 per coin to just under $30,000. Whilst it has rebounded from these considerable drops in the past, such movements make high risk digital currencies more of a ‘punt’ than a part of a balanced portfolio of investments.

With investors increasingly examining the carbon footprint of the companies they have in their portfolio; the environmental impact of cryptocurrencies has become a source of concern for many. According to research, a single bitcoin transaction uses the same amount of power that the average household consumes in a month, and is responsible for roughly a million times more carbon emissions than a single debit card transaction

Whilst it is abundantly clear that the potential for digital currencies is near endless, especially as the technology around them becomes more refined, with new ideas, come new challenges. The fact that digital currencies are not regulated by central banks can feel liberating for many speculators, but it also makes the currency popular amongst fraudsters and criminals.

As any numismatist will tell you, it should be no surprise that China is one of the first nations to highlight the potentially fraudulent nature of Bitcoin. It is worth noting that whilst it is the Lydians that can be accredited with the first mass produced coins, it was the Chinese that began using paper money before most others.

By the time Europeans such as Marco Polo had made their way up the Silk Road by the late 1200s, notes were in wide circulation in China and the surrounding areas. However, such was the worry that their currency was becoming easier to forge, in the place where modern pound notes say "I promise to pay the bearer of the sum on demand" the Chinese inscription at that time warned: "Those who are counterfeiting will be decapitated”. With the regulations facing Bitcoin users being nowhere near as harsh these days, it just goes to show, a little change can still be a good thing.