What is bitcoin?

Bitcoin has been labelled a virtual currency. But what actually is it and what does it mean for real currencies?

Essentially, it is a digital token that can be exchanged electronically. It does not exist in physical form. Bitcoins are created and kept track of by a network of computers using mathematical formulas, rather than by a single authority or organisation.

So virtual, yes, but currency, no. Why not?

No one is backing it

Bitcoin it is not issued by a central public authority. You cannot have the same level of confidence in it as you can in an official currency like the euro, which is backed by the central banks of the euro area. As guardians of the euro, we work to guarantee your right to pay with the euro and to preserve its value. 

It is not a generally accepted form of payment

If bitcoin were a currency, you could expect to be able to use it widely. But, in fact, there are very few places where you can pay with bitcoin. And even where you can, transactions are slow and expensive.

Users are not protected

It is possible for hackers to steal bitcoin. If this happens, you have no legal protection.

It is too volatile

A currency is a reliable store of value, so that you can be sure that the money you have will buy more or less the same amount of things today as it will tomorrow or this time next year. Bitcoin is not stable. Its value has both skyrocketed and tumbled dramatically within the space of just a few days. 

If it’s not a currency, what is it?

Bitcoin is a speculative asset. In other words, it is something that you can gamble on to make a profit, but with a risk that you will lose your investment.

Are stablecoins the same as bitcoins?

Stablecoins aim to be a more stable form of crypto-asset than bitcoins. Issuers link them to a trusted type of value, such as company assets or gold. However, the value of a stablecoin is only a promise made by a private company. There is no public institution backing it, unlike with official currencies.

Who supervises crypto-assets?

It is not possible to check if international stablecoin issuers can really keep their “stable value” promise or if they issue more stablecoins than they can pay back. To address this problem the European Commission has proposed new legislation to protect users of stablecoins in the EU.

Will the ECB ban bitcoin?

It is not the ECB’s responsibility to ban or regulate bitcoin or any other crypto-assets, as they are not legal tender. But, given the lack of user protection, it is important to exercise caution.

Source: European Central Bank

Published: 13 February 2018

Updated: 14 June 2021

The above presentation was created for educational purposes.

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