March 2014 Issue
A BIT ABOUT THE BITCOIN
By Stephanie Nalls
For the last year or so, people have been talking about a new form of international currency called Bitcoin. Some believe it is an answer to the constantly fluctuating, easily manipulated economy. Interestingly, all the things that make Bitcoin great are also its greatest weaknesses.
First, what is it? In spite of the picture above, Bitcoin is not really a coin at all. It is a form of virtual “money” used for internet transactions. One way to think of Bitcoin is like stock in a company. You have a piece of paper that shows what stock you own, but you don’t actually own any thing. What is represented by a stock certificate can be very valuable, though – especially if you could use those stocks as payment for other items.
Bitcoins (BTC) can be purchased by credit card from a Bitcoin exchange company or any other entity that wishes to sell their coins. The “money” is kept in a virtual wallet on your computer or phone app. To make a purchase, you give the seller identifying information that enables them to take BTC from your wallet and put it into theirs, much like a PayPal transaction.
Transaction servers are operated and managed by a handful of developers around the world and are held accountable only to the Bitcoin community as a whole. No individual, government entity, bank, or company owns, regulates, or creates BTC. No government has written regulations for the Bitcoin system except Germany, which accepts it as a legal form of currency, and China, which outlawed it.
The original program created by Satoshi Nakamoto limited the number of Bitcoins that will ever exist to 21 million, so no one can create more to alter their value. All wallet programs must be compatible with the original program, so in the same way that no one can create a bank app and give themselves a million dollars, no one can create a wallet app and give themselves a million Bitcoin, either.
Supporters say the Bitcoin isn’t subject to market fluctuation, but it obviously is. It differs from regular money in that the value is only affected by how much it is traded, based on supply and demand. If everyone wants them or uses them, the value goes up. If people lose interest, the value goes down.
When Bitcoin was introduced in 2009, the value of a single unit was almost zero, where it stayed until spring of 2013. The first spike increased the value to $200 before dropping back to closer to $100, where it stayed for another six months. During the month of November, something crazy happened. Within a couple of weeks, the cost of a single BTC jumped from a couple hundred dollars to almost $1200 on December 1! That was about the time a Lamborghini dealership in California sold a Tesla Model S for $103,000 in Bitcoin, giving it a boost in credibility.
February saw the crash of Tokyo-based Mt. Gox, one of the largest Bitcoin exchange companies in existence. “Leaky” security caused them to lose hundreds of thousands of their stored Bitcoins (about 6% of the total number in circulation, about $27 million USD) before going completely offline. Those coins belonged to individuals, just as cash in a bank belongs to individuals. Since new coins cannot be created, the loss of Bitcoins in this manner is as if there were a fire in the bank vault and no more money could be printed. It’s just gone. By the end of the month, Bitcoin had lost almost half its value, closing at only $560.
People have invested in Bitcoin because if the dollar or even the world economy crashes, BTC can still be traded through its peer-to-peer network. They believe that without government regulation or recognition, and because wealth can be amassed in Bitcoin without being shown anywhere on paper, the accounts cannot be frozen or confiscated by the government, taxed, or traced by third parties. This seems contrary to the FBI’s claim that they seized 26,000 BTC from the founder of the now defunct SilkRoad.com upon his arrest for dealing drugs through that site.
If the economy crashes, Bitcoin could still be recognized as viable currency among those who have them. While admitting that a market currency (money created by the People for a specific market) could be a tiny factor in the eventual crash of the American dollar, Ron Paul states that, “If I can’t put it in my pocket, I have zero.”
The primary drawback is that if the economy crashes, the whole internet will likely crash, too, meaning users would have no way of spending Bitcoins, cashing them in (for dollars that would be worthless anyway), or even having access to them. In spite of cautious optimism from respected fiscal conservatives like Glenn Beck and John Stossel, the only major online retailer to accept the currency is Overstock.com.
For now, Bitcoin is a fiat currency like every other currency in the world. It was created out of thin air by people who had the power to do so, and it is not backed up by anything. Bitcoin value is subject to severe fluctuation based on buyers’ faith and trade volume, just like the stock market.
It has proven to be a great investment in the short term and may even be a great investment in the long term, but at least one entire company has already disappeared overnight, leaving BTC owners with no way to recover their losses. The undeterred say that weeding out sub-standard participants is simply part of the process and that Bitcoin will continue its path to become a viable worldwide currency.
Maybe. But it is the opinion of this writer is that only persons who do not mind losing “real” money should purchase Bitcoin at this time. Those concerned about the fall of the US economy would be wise to remember that precious metals like gold and silver have always been a wise and profitable investment, and probably always will be.
The best advice I ever got was in a game of cards, and I think it applies here. Go with what you know.