There has been a wild fluctuation lately in the value of a Bitcoin, which made me take a second look. What is Bitcoin and what is all the fuss? Why the gyrations now? In short, Bitcoin is a virtual currency that is stored and transferred digitally through an electronic wallet. There is strong encryption surrounding the wallet to ensure that only the owner can transfer or trade Bitcoins for goods, services, or other currencies.
Bitcoin was developed in 2009 and there are two ways that you can secure a Bitcoin (or block of Bitcoins). You can mine Bitcoins by setting your computer to the task of solving increasingly difficult math problems that assist in Bitcoin transactions. You can also buy and sell Bitcoins on currency exchanges such as MTGox. The number of Bitcoins is mathematically capped at 21 million and it is estimated that the last Bitcoin will be issued in 2140.
What fascinates me is the potential of a new currency that is not tied to a country or state and is not regulated by a central bank, yet is tradeable and can be used for commercial transactions. There are several establishments that are beginning to accept Bitcoins for products ranging from a foot-long sandwich to college tuition to attorney services—even a future space journey aboard Richard Branson’s Virgin Galactic! The value of a Bitcoin in the United States has jumped from $13 in January of this year to currently $1,067. Part of the rise in the last two weeks can be attributed to U.S. Senate hearings around virtual currencies, which lent legitimacy to Bitcoin and others.
There are competitors such as Peercoin, Litecoin, and Anoncoin, the latter guaranteeing anonymity by operating in the dark corners of the Internet. All of these competitors hope to cash in on the same speculation that has driven Bitcoin to its current heights. Whether people hoard virtual currencies or spend them for goods and services will be the ultimate test as to how history views them. Will virtual currencies be seen as a speculative bubble, similar to the Dutch “tulipmania,” or, if they become legitimate, a means of trading?
At the end of the day, a currency—virtual or fiat—is really just a medium for exchanging unlike goods and services. The lure of Bitcoin is that it is not yet regulated, it can be traded globally without international constraints, and it does not carry the 2-4 percent transaction fees of credit cards. It relies on the collective power of individual computers on the Internet to process transactions. These are the very same computers hoping to mine new Bitcoins by solving the algorithms necessary to process those transactions. In other words, a very symbiotic relationship as long as there is a lure of potential gain. It is a well thought out system and time will tell whether it becomes a new legitimate currency or succumbs to speculation. Be it Bitcoin or a competitor, I believe that this is the new norm in currency.
Do you own any Bitcoins? Would you invest in Bitcoins or use them as currency? What do you find most attractive about virtual currency? What scares you? Let me know.
Kelly Brown is an IT professional, adjunct faculty for the University of Oregon, and academic director of the UO Applied Information Management Master’s Degree Program. He writes about IT and business topics that keep him up at night.