From now you may have heard about Bitcoin, but can you introduce it?
Most often it is described as a non-governmental digital currency. Bitcoin is sometimes called an electronic currency or, in reference to its crypto assets, a cryptocurrency. These descriptions are accurate enough, but they miss this point. It's like describing the US dollar as a green piece with pictures on it.
I have my own ways of describing bitcoin. Think of it as store credit without the store. A prepaid phone without the phone. Precious metals without metal. Legal tender for the absence of debts, public or private, unless the party to which it is submitted wishes to accept it. An instrument backed by complete faith and credit only for its anonymous creators, whom I do not believe in, and I give them no credit except for creativity.
I will not touch Bitcoin with a 10-foot USB cable. But too many people already have, and quite a few people may do soon.
This is partly because Cameron and Tyler Winklefoss businessmen, known for their role in Facebook origins, are now seeking to use their tech savvy and money to bring Bitcoin to the mainstream.
Winklevosses hopes to start a currency exchange fund for bitcoins. The European Training Foundation would make Bitcoin widely available to investors who lack the technological knowledge to buy digital currency directly. As of April, Winklevosses are said to have held about 1 percent of all Bitcoins in existence.
Bitcoin was created in 2009 by anonymous encoder, and works on the premise that anything, even intangible parts of the code, can have value as long as enough people decide to treat it as value. Bitcoin currencies exist as digital representation only and are not linked to any conventional currency.
According to Bitcoin, "Bitcoin is designed around the idea of a new form of money that uses cryptography to control its creation and transactions, rather than relying on central authorities." (1) New bitcoin coins are mining by users who solve computer algorithms to discover virtual coins. Bitcoins' alleged creators said that the final offer of Bitcoin will amount to 21 million.
While Bitcoin encourages itself as a "very safe and inexpensive way to handle payments," (2) in fact, some companies have taken this step to accept bitcoins. Among them, a large number operate on the black market.
Bitcoin currencies are traded anonymously online, without any involvement of existing financial institutions. As of 2012, sales of medicines and other black market goods made up an estimated 20 percent of exchanges from bitcoins to the US dollar on the main Bitcoin exchange, which is called Mt. GOX. The DEA recently made the first Bitcoin seizure ever, after a deal was said to have been tied up in the unknown Silk Road market from Bitcoin to sell illegal drugs and prescriptions.
Some Bitcoin users also suggested that currency could be a way to avoid taxes. This may be true, but in the sense that bitcoins help in illegal tax evasion, not in the sense that they actually serve any role in real tax planning. Under federal tax law, no money needs to be changed in order for a taxable transaction to occur. Barter and other non-cash exchanges are still fully taxed. There is no reason to treat transactions involving bitcoins differently.
Outside the criminal component, the main worshipers of Bitcoin are speculators, who have no intention of using bitcoins to buy anything. These investors are convinced that the limited supply of bitcoins will force their value to follow a continuous bullish path.
Bitcoin has already experienced some significant spikes in value. But it also saw significant losses, including an 80 percent 24-hour drop in April. Early this month, Bitcoin fell to around $ 90, from a high of $ 266 before the April crash. They traded near $ 97 earlier this week, according to mtgox.com.
Winklevosses would make investing in Bitcoin currencies easier by letting small investors profit or lose, as they are, without actually getting into trouble for buying and storing electronic currencies. Despite security claims, bitcoin storage has proven to be a problem. In 2011, a mountain attack. Gox Exchange forced her to shut down temporarily and caused bitcoin price to drop for a short while to almost zero. Since all Bitcoin transactions are anonymous, there is little chance of tracking down the culprits if you suddenly find your e-wallet empty. If Winklevosses gets regulatory approval, their ETF will help protect investors from the threat of individual theft. However, the ETF will do nothing to address the problem of volatility caused by widespread theft elsewhere in the bitcoin market.
While Bitcoin comes wrapped in a high-tech shell, the latest coins have an amazing amount shared with one of the oldest currencies: gold. The vocabulary of Bitcoin, especially the term "mining", highlights this connection, as well as on purpose. The mining process is designed to be challenging as a supply control, simulating the extraction of more traditional resources from Earth. However, this speech should serve as a word of caution rather than provide a sense of security.
Gold is a last resort investment. It has little intrinsic value. It does not generate interest. But since the supply is limited, it is considered more stable than the forms of money that can be printed at will.
The problem with gold is that it does not do anything. Since gold coins are not used, most of the gold in the world is now located in the treasuries of central banks and other financial institutions. As a result, gold has little connection to the real economy. This may sound like a good thing when the real economy feels like a scary place. But as soon as other attractive investment options emerge, gold loses its radiance. This is what we saw with the recent declines in gold prices.
In their campaign to bring Bitcoin into mainstream, its promoters agreed, and in some cases sought to increase regulation. Last month Mt. Gox registered itself as a financial services company in the Financial Crime Implementation Network of the Treasury. It also increased customer verification procedures. The changes came in response to a March directive from the Financial Crime Enforcement Network that clarifies the application of its rules to virtual currencies. Winklevosses' The proposed European Training Foundation would achieve a new level of accountability.
In the end, however, I would expect Bitcoin to fade back into the black market shadows. Those who want a safe and organized currency that can be used for legitimate business transactions will choose from one of the many currencies that are actually sponsored by a national government with ample resources, a real economy, transparency and security that much more than the Bitcoin world can offer.
After the Bitcoin bubble bursts, we won't even be able to use the remaining coins in jewelry.
1) Bitcoin, "About Bitcoin"
2) Bitcoin, "Bitcoin for companies"