Posted September 24, 2013 at 10:00 am
By Brad Wajnman
Bitcoin is a digital crypto-currency whose presence has undeniably become much more noticeable in recent months.
We’ve been keeping a silent eye on Bitcoin’s evolution since its inception in 2009. However, up until this point, we didn’t know (and still don’t know) how things would play out in the long run.
It all started in 2008 when an anonymous person (or persons) going by the name “Satoshi Nakamoto” laid out plans for the world’s first “decentralized” digital currency.
Simply put, Bitcoin is to banks what email is to post offices. Instead of going to a bank, respecting their schedule, paying their fees, you can instantly transfer money to anyone 24/7 from your computer without anyone else knowing who’s behind the address.
Unlike traditional currencies, which are issued and backed by central banks and governments, there’s no central monetary authority that monitors, verifies, approves transactions or manages Bitcoin’s money supply.
Instead, it operates as a secure digital medium of exchange that relies strictly on a peer-to-peer network made up of up fellow users’ machines.
The basic idea is that a series of servers, called “miners”, create units of digital currency and add them to a ledger that’s shared with all other Bitcoin users from around the world.
The system was set up in such a way so that the total number of Bitcoins that can ever be mined and put into “circulation” is limited to 21 million.
By limiting the supply, the schedule of when and how many of these digital units get developed prevents a flood of new Bitcoins from entering the market, and thus, devaluing those already in circulation.
There are currently around 11 million Bitcoins in circulation, with 25 new Bitcoins being produced every 10 minutes. Bitcoins (or fractions of Bitcoins known as satoshis) can be exchanged with any other person or merchant that’ll accept them for goods and services or traditional currency via an online exchange, such as Mt.Gox.
Mt. Gox is like the NYSE of Bitcoin trading, with about 60% of all Bitcoins changing hands through it on a daily basis.
I’ve seen some claims that Bitcoin transactions are completely “anonymous”, but it’s not entirely true since a log of all transactions is collectively and publicly maintained, and new transactions are verified to prevent counterfeiting.
Of course, Bitcoin hasn’t been without its challenges. As you can see in the price chart below, it’s already gone through its fair share of boom and bust cycles.
For example, in August 2011, it hit a low of $7 just after hitting a high of $32 a couple months earlier. Then, on April 10th of this year it had another wild ride when it spiked to $266 before plunging to $105 the next day.
Because of its volatility, many financial experts have issued warnings against Bitcoin. Art Cashin, a veteran stockbroker at UBS, compares the interest in Bitcoin to the tulip mania of the 17th century, which is considered the first “recorded speculative bubble”.
He also says that since the currency isn’t backed by any government or bank, there’s no protection for it as an investment.
Cyber-attacks and computer hacking is another concern with the currency, which has scared a lot of folks away from the idea of considering it.
In fact, Mt. Gox, one of the largest Bitcoin exchanges, has already battled with denial-of-service (DDOS) attacks. According to an article on PCWorld.com, “When Mt. Gox’s website slows or goes offline, trading becomes more uncertain. Traders may also suddenly sell large volumes of Bitcoins, causing a panic and driving the price down.”
Whether Bitcoin, or any other electronic currency for that matter, can be considered “legal tender” is another challenge. In the U.S. (as in most countries), only the federal government can issue legally recognized tender.
The first knock against Bitcoin came from the mainstream media. They argued that it would be used to buy illegal items (such as drugs, firearms, you name it). And sure, Bitcoin can and probably has been used for nefarious reasons. No doubt about that.
However, it seems like the most serious threat to its success as an alternative currency is the fact that governments can’t control it or tax it.
This scares them to death, and rightfully so. Bitcoins are completely private with no records showing who owns them. There’s no central banker and no paper trail to show what you use them for.
By being completely under the radar and essentially invisible as far as transactions are concerned, Bitcoins take the power of a central banking authority out of the hands of the few (who don’t deserve it) and puts it into the hands of the many.
Bitcoin is removed from government oversight and lives outside of any financial organization’s control, which is why we think it’s a great idea… in principle.
Andrew Leonard, a writer for Salon, said, “Bitcoin is a currency with an ideology. By its very nature, Bitcoin is made for people who don’t want other people to know what they are doing.”
We love that “the people” finally have an alternative choice other than the corrupt global monetary system that’s been firmly in place for decades. We admire that. And while there are definitely drawbacks, Bitcoin does seem like a better alternative than the depreciating junk we carry around in our wallets.
But, is it a good time to jump on the Bitcoin wagon and “invest” in them right now?
The answer to that question may surprise you…