Bitcoin: A Passing Fad or the Future of Monetary Exchange?

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Bitcoin

If Bitcoin had a physical form, it might look something like this. Image by CASASCIUS

It’s ten years from now, and you’re in the checkout line of future McDonald’s. After ordering a burger and fries and declining the suggestive sell of a semi-hot apple pie, the cashier tallies up the total.

“That will be $14.68, please” she says through her braces. You whip out your cell phone and in a flash, transfer the requisite amount in bitcoins to McDonald’s Corporation, avoiding the banks, the Federal Reserve and the established systems of monetary exchange altogether.

Having been circumvented for the billionth straight time, Bank of America finally gives up and announces plans to become a doggie day care center.

Far-fetched? Bank of America isn’t going anywhere anytime soon. Having said that, Bitcoin does exist and is beginning to gain a level of acceptance as an alternate method of payment for goods and services. How does it work, and what are the pros and cons?

What is Bitcoin?

Allegedly created in 2009 by a 64-year old Japanese-American named Satoshi Nakamoto, the Bitcoin Protocol is a form of online currency. It is not produced, governed or (as of yet) regulated by the U.S. Mint, the Federal Reserve or any governmental entity or agency whatsoever. Instead, Bitcoin is fungible only in the digital realm, residing on hard drives throughout the world.

Users can send the digital currency to anyone around the globe that accepts Bitcoins as payment, and the virtual currency circulates completely outside of standard exchange systems.

“The whole reason geeks get excited about Bitcoin is that it is the most efficient way to do financial transactions,” explained Gavin Andresen, Bitcoin’s chief scientist. “For anyone who’s tried to wire money overseas, you can see how much easier an international Bitcoin transaction is. It’s just as easy as sending an email.”

Given that Bitcoin is not subject to bank or exchange fees, it’s about as cheap a monetary transfer mechanism as there is.

How does the Marketplace Work?

The Bitcoin network is an open source, peer-to-peer system with no central control. Accounts are set up at online, secure third-party servers, with bitcoins residing in online ‘wallets’. The system uses complex cryptography to ‘mine’ new Bitcoins, which are subsequently released into circulation. As of this writing, only about 11 million bitcoins have been mined, with a ceiling of 21 million.

A noteworthy aspect of the system is its anonymity. Not only are users anonymous, but bitcoins themselves are untraceable. The two characteristics have led to the dark side of Bitcoin — its rampant usage by the illegal drug trade industry.

Is Bitcoin Widely Accepted?

Having been invented just five years ago, market acceptance is nowhere near universal. Concerns about security and volatility may keep it from being so in the foreseeable future.

That being said, the number of companies willing to consider transactions in Bitcoin is growing. So far, the list of merchants accepting or considering accepting Bitcoin includes Overstock.com, Virgin Galactic, Word Press, The Pirate Bay, Reddit, Zynga, eBay, Tesla, OkCupid, 4Chan.org, Namescheap, EZTV, Lumfile, Etsy Vendors, Pizza for Coins and Tiger Direct.

Private usage of Bitcoin is more widespread. According to Blockchain.info, the cumulative value of all bitcoins currently in the world exceeds $10 billion. Although a mere pittance as compared to the estimated $10.5 trillion in U.S. currency circulating today, the figure continues to grow.

As stated above, the digital currency’s seamy underbelly is its popularity amongst drug dealers. After the FBI raided and shut down the illegal online drug site Silk Road and confiscated its $3.5 million in illicit bitcoins, the Federal Bureau of Investigation became one of the largest holders of the digital currency in the world.

Bitcoin Advantages and Disadvantages

As stated above and assuming the recipient accepts it, Bitcoin is the cheapest and easiest mechanism for online payment out there. Other perceived advantages are as follows:

  • Anonymity
  • Irreversible transactions
  • No regulation
  • No currency manipulation
  • Low inflation risk
  • A truly global currency

Despite the benefits, the risks are substantial.  Mt. Gox, the one-time largest Bitcoin exchange in the world, was recently attacked by hackers who allegedly made off with $400 million in bitcoins. Flexcoin, which served to store bitcoins online, lost $600,000 recently to a hacker, and a $1.2 million theft also occurred last October.

Other disadvantages include:

  • Not well-accepted amongst merchants
  • Too new to assure long-term viability.
  • Price volatility
  • No government protection

Is Bitcoin Here to Stay?

Given the newness of the digital currency and the long list of benefits and disadvantages, the future of Bitcoin is uncertain at best. Even if doesn’t survive, it may well have opened the door for a next-generation digital currency that combines greater acceptance with fewer problems.

As McAfee, Inc. founder John McAfee once said, “You can’t stop things like Bitcoin. It’s like trying to stop gunpowder.” National Rifle Association CEO Wayne LaPierre would no doubt smile at that analogy.

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