Back in 2009, a mysterious developer known by the pseudonym of Satoshi Nakamoto introduced a new decentralized digital currency called Bitcoin. Sound familiar? I first heard about Bitcoin last year during an episode of NPR’s Planet Money, quite a while after Bitcoin actually went live, but recently this buzzword has been flying around the Internet and news more than ever.
Bitcoin is open-source, meaning that anyone with development knowledge (and hopefully financial knowledge) can access and modify the end product. Interestingly, a twenty-five coin reward is given to the first individual to create mathematical algorithms solving difficult problems as the system grows. The winner’s solution is then implemented and distributed and another problem and reward is broadcasted. This is how the Bitcoin program continues running despite exponentially increasing complexities as the user base grows. Due to the substantial computing power and knowledge needed to mine Bitcoins, the quantities of available Bitcoins grow slowly. Because Bitcoin is run through a peer-to-peer network, there is no governing or central banking authority to regulate it. Instead, users interact only with other users to transfer this digital “crypto-currency.” The open-source, peer-to-peer nature of Bitcoin has prompted many skeptics to refer to it as a “highly-volatile commodity” rather than a currency at all.
Initially, Bitcoins were used largely for online gambling, making it easy to place bets and exchange winnings over the Internet without the need to provide a credit card or personal information. Eventually certain restaurants and online stores started accepting Bitcoins as payment through mobile payment applications. Think of it as PayPal with the benefit of user anonymity and without additional processing fees. Unfortunately, an unregulated, anonymous online banking system is a perfect space for criminal activity, and it didn’t take long for the hacking, stealing and black market exchanges to begin and flourish.
This black-hat activity came to a peak in late 2011 which is probably why you haven’t heard much about Bitcoin in the last year. Most were speculative about the possible success of a peer-to-peer currency system, and even more swore that it would be shut down with a year.
So why is Bitcoin back in the news? Well, after recent scandals with the European Central Bank and impending financial doom in Cyprus, many Spaniards and other frightened Europeans are purchasing Bitcoins to keep their assets out of the government eye. As a result, the price of Bitcoins rose from forty-five to sixty-five dollars in only three days (one Bitcoin was only worth about seven dollars back in 2011).
The New Yorker’s Maria Bustillos points out:
“That a number of panicked Europeans appear to have reckoned the wildly volatile, vulnerable, and tiny Bitcoin market a preferable alternative to their own banking system, even temporarily, signals a serious widening of the cracks between the northern and southern E.U. countries in the wake of the euro-zone debt crisis. It also illustrates the broader collapse of trust that is threatening the world of global banking and fiat money.”
The problem with investing in Bitcoin is that since it is highly volatile, it undergoes intense amounts of inflation and deflation in very short periods of time. Unfortunately for many
Europeans right now, an unstable commodity seems like a much better option than having their hard-earned savings heavily taxed by the government without their consent.
So what is the future for Bitcoin? We can’t really be sure. The unregulated nature of Bitcoin is likely coming to an end, especially if the market continues to grow and more businesses begin accepting and exchanging Bitcoins as a part of their business plan. As I mentioned before, anonymity lends itself to sketchy activity. In the words of Bustillos, “fear-mongering is a red herring, and has so far prevented the rational evaluation of the potential benefits and shortcomings of crypto-currency.” Anonymous crypto-currency is, by definition, exactly like cash. Transactions are basically untraceable and somewhat easily stolen. Is the fear of Bitcoins more about fear of a fully digital financial market? If, as predicted, we completely migrate away from cash within the next 10 years, perhaps Bitcoin will become the new cash?
Ultimately, Bitcoin is an experiment. What is your hypothesis about the future of Bitcoin? Do you use Bitcoin? Get in on the conversation in the comments.