Will Bitcoins join the ranks of US dollars, Euros and other currencies?
I first heard about Bitcoins seven months ago on the radio. I understood them to be some sort of alternative, online “currency” but it sounded a little too esoteric to me at the time. A few months later I heard about them again in a story covering an underground website called Silk Road that sold drugs, including illicit drugs, and people used Bitcoins to pay for these drugs. Bitcoins were real and being used to buy real products.
In a day and age when people are starting to question the true interests of the government and corporations and banks, especially in light of the Occupy protests, it’s no wonder that Bitcoins were created. To pay for something over the internet usually requires the backing of a bank or some other centralized financial institution. These institutions do not have the best interests of their clients in mind and can be very unstable. The idea of a de-centralized, peer-to-peer currency with no middleman was very appealing.
Bitcoins were first introduced in a paper in late 2008 written by a hacker going under the pseudonym Satoshi Nakamoto. The paper described a whole new currency made up of digital information instead of tangible bills. Basically a person’s computer acts as a digital “wallet” by storing Bitcoins. It is possible to create Bitcoins, a process called mining, but it takes an incredible amount of computing power to create new Bitcoins. Most people simply use online trading sites, such as Mt. Gox or Camp BX, to buy and sell Bitcoins. Then Bitcoins can be used to purchase anything from vendors who accept Bitcoins as currency. The process is quick, easy and instant. Most products being sold that accept Bitcoins as currency are technology-related: web hosting, virtual networks, or other online services.
There are several good reasons for “digital” coins. Since the currency is not centralized and basically exists across the internet from any computer to any computer, it would be hard for the entire system to fail like a bank. It is also a highly secure system. Bitcoins are protected by cryptography technology. According to one website, “[E]ach coin is encrypted with the buyer's digital signature that is extremely difficult to replicate or forge. Your signature is your private access key, so you are essentially signing over your bitcoins to the seller and the seller's wallet address gets newly imprinted on the Bitcoin as the coin's new destination.”
There will never be more than 21 million Bitcoins due to the design of the network and they are almost infinitely divisible although this may not be a plus if the value is too low. Bitcoin transactions are all free, with no charges or hidden fees and they are simply a matter of clicking your mouse. Although there is a public register of all transactions, there is no link to a person’s identity and it is possible to remain truly anonymous. Transactions are only identified by your Bitcoin address, and you can create as many Bitcoin addresses as you want.
Of course, there are just as many cons. The value of Bitcoins fluctuates dramatically due to the nature of the community using them. There is no definite community and it is a constantly open and changing membership. Therefore, there is no stopping point to Bitcoin's price increase or decline. People tend to buy up Bitcoins when the price falls, hoping to cash out when the price goes back up eventually, but impatient people will cash out too soon and affect the value. On January 1, 2011, Bitcoins were worth 30 cents each and shot up to $29.55 in June but as of today, the value is only $2.76. While it seems like the bubble has burst, Bitcoins can suddenly rise in popularity again and interested parties will drive up its value.
People question the security of Bitcoin wallets. They do not realize that wallets are stored with no encryption by default and transfers of stolen material are irreversible unless half of all Bitcoin users agree to it. News broke in June of this year when a hacker transferred 25,000 credits of Bitcoins, worth almost $500,000 dollars at that time, to his own account. While not the norm, it is a vulnerability in the system. There is also the questionable use of Bitcoins for purchasing things such as illicit drugs or pornography. Because anyone anywhere in the world can buy from their computer, and given the relative anonymity of the transaction, it is hard for law enforcement to trace and capture people that are using Bitcoins for criminal activities or money-laundering.
The popularity of Bitcoins has grown to the point that the very first Bitcoin Conference took place this past August in New York. More than 50 people came to discuss the future of Bitcoins as a viable currency and have already planned for future conferences in 2012. The Bitcoin experiment is indeed like a start-up and like any start-up, will have hitches and bumps along the way. More and more people are learning about Bitcoins and the ease of conducting transactions by the click of a mouse is a huge draw for a society so dependent on computers. As people grow frustrated with the current systems in place and look to other alternatives, Bitcoins definitely have a place in the future and may just help create a real change in the world.