Bitcoin: The Future of Money?

If you've been paying attention to the stock market lately, you've likely heard mention of Bitcoin, a new digital currency (also known as crypto-currency).  Bitcoin was Internet-born, has no centralized government backing, and has no people claiming ownership behind its creation.  In the last month it has seen huge gains and losses, with the value of one Bitcoin (BTC) rising as high as $266 (USD) and falling as low as $105.

The number of Bitcoins in existence is somewhere around 10.5 million, with 25 new Bitcoins being introduced every 10 minutes.  According to the business plan written by pseudonym Satoshi Nakamoto, that number will grow until it reaches 21 million Bitcoins in the year 2140 and then no new currency will be made.

 

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So What's the Appeal?
The main appeal of Bitcoin is that it allows you to quickly and directly transfer money among peers, with a minimal transaction fee and without the need for a middle-man bank.  It is also pseudo-anonymous, which makes it popular among less-than-legal Internet activities (it is an accepted form of currency for the black market drugdealing site, Silk Road).  It allows the Internet to have one global form of currency regardless of location, and is popular among freedom enthusiasts who advocate against the banking industry.


And What's the Downfall?
The biggest concern with Bitcoin is its volatility and market instability.  Since its inception in 2009, the perceived value of 1 Bitcoin has fluctuated between $0 and $266 USD.  Bitcoin is highly referred to as a pyramid or Ponzi scheme, because of its risky and uncertain status.  Like any currency it only works if people have faith in it, but because it's so new and unpredictable, its stakeholders are less likely to trust it entirely.

"The only thing that gives Bitcoins their value is people believing they have value."
-Jason Bellini, Wall Street Journal (@jasonbellini)

Another concern is the moral and ethical dilemma of anonymous currency.  Like Pirate Bay, it sits outside of any government regulation and is mostly untraceable, which makes it ideal for illegal transactions and money laundering.


How do you earn Bitcoins?

To natively earn Bitcoins, you would need a sophisticated computer that can scan the Internet all day searching for Bitcoins.  As they are released, your computer "mines" for them using complex algorithms within dedicated software.  In reality, Bitcoin could have picked any way to distribute new Bitcoins so they chose to make it a mathematical puzzle for elite computer programmers to solve.

Because not everyone has the resources to mine for Bitcoins, you can use real cash to purchase them from miners.  There are Bitcoin exchange sites that handle these transactions, the most popular of which is Mt. Gox. 



Where are Bitcoins Accepted?
So far the early adopters for Bitcoin are online sites, startups and small businesses.  There are an estimated 180,000 users, so businesses accepting the currency are likely to see a rise in customers who are looking to spend their Bitcoins, like this New York bar hoping to capitalize on the trend.

There are also a few well-known companies that have started accepting Bitcoin:

The Crash
On April 10th, 2013 Bitcoin had its biggest surge to date, going as high as $266 per Bitcoin (a 300% increase).  Within hours, it crashed down to $105.  The crash started on Reddit when someone known as bitcoinbillionaire started giving away money to users, totaling over $13,000.  It was a throwaway account and there are theories that this user knew it was going to cause mayhem and was trying to crash Bitcoin intentionally.  Luckily though, it bounced back fairly quickly and closed the day around $160.

Fluctuation chart from Coinbase (wallet site)

In conclusion, Bitcoin presents a unique opportunity and challenge to the future of currency.  As the Internet continues to push the boundaries of social behavior, it will be interesting to see if Bitcoin becomes a widely adopted currency.  With the right companies backing it, it could become more stable and relevant in the real world.  And if that is the direction it's heading, some of us might kick ourselves for not buying in sooner.

Additional Resources
If you're interested in learning more about Bitcoin, here are some resources:

• Bitcoin.org
• Mt. Gox - the largest Bitcoin exchange site
• Coinbase - an online wallet site that helps you track and store your Bitcoins 
• Blockchain - a searchable database of all Bitcoin transaction 
• Bitcoin's Wikipedia page
• Mashable's 2012 write-up on Bitcoin