Chomping at the Bitcoin? What You Should Know
By Consumers Union on Thursday, February 27th, 2014
What is bitcoin? It’s money.
Bitcoin is often referred to as a virtual currency. In other words, digital money. At its most basic level, it is money. Which is to say that bitcoin is a medium for the exchange of value. It can be used to buy things. For example, you can buy a Subway sandwich for bitcoins at an Allentown, Pennsylvania shop.
Bitcoins exist entirely online. They are made online or “mined.” Mining involves using the free open-source mining software – and a lot of computer power to run it – to find (“mine”) the digital keys to the 21 million bitcoins that will eventually be available. (The creator limited the total number to a maximum of 21 million bitcoin.)
The transfer of bitcoins is peer-to-peer, like PayPal or Popmoney, but without the bank being the ultimate destination of the funds. Any transfer is done online and is recorded in a master register known as the Blockchain. Each transfer is recorded on the Blockchain and unless you convert the bitcoins to cash via an exchange, the bitcoins reside in a your digital bitcoin wallet. That means that when you get paid in bitcoin, it does not go into your bank account.
Bitcoin is also different from the coins and dollars in your wallet in that it’s not backed by any government. There is no “full faith and credit” behind bitcoin. To some, that’s part of the appeal. No government intervention means no one is controlling the supply of bitcoins. That stands in contrast to the way that government entities, such as the Federal Reserve, regulate the supply of money in circulation. For some, that is at least some of the appeal of bitcoin.
But there are plenty of other reasons why people like bitcoin.
Bitcoin may be more than money.
Bitcoin is not just value. It is also a payment network, much like Visa or MasterCard but without the fees for merchants. (That’s one of the reasons why Overstock.com’s CEO says the site started accepting bitcoin.) Some even see Bitcoin as a way of bringing the world’s poor into the financial mainstream, and ending the need for money transmitters, check cashers, and other expensive alternative financial services. (Does that make Bitcoin an alternative-alternative financial service?) In January, venture capitalist Marc Andreessen used a New York Times essay to rhapsodize about the world-chaining possibilities opened up by Bitcoin.
All of the above has made the value of a bitcoin very volatile.
Bitcoin prices nearly doubled between July and August 2013. And kept going. At one point this fall, a bitcoin was worth more than an ounce of gold. But the downs have been hard. Thirteen seconds after bitcoins reached that high, the value dropped 13%. A February 10, 2014 flash crash led to an 80% drop in bitcoin value in seconds. But the real blow came will the collapse of Mt.Gox, a currency exchange for bitcoin. (Mt.Gox collapsed in part, it appears, due to the theft of bitcoins described in the opening paragraph.) The value of a bitcoin at this writing: $579.00.
And there are other reasons to be concerned.
Bitcoin has been a favorite of drug dealers and worse. (Forbes called it the “preferred payment method for much of the online underground.”) Bitcoin was the medium of exchange for now defunct site Silk Road, which was an online drug bazaar before legal troubles and hacking led to what appears to be its demise. Bitcoins have allegedly also been used to launder money. Recently two Florida bitcoin traders were charged with money laundering after using bitcoin to launder $1 million that crooks made selling credit card numbers that had apparently been stolen as part of the Target breach.
What does the future hold for bitcoin (the currency) or Bitcoin (the payment system technology)? It’s hard to tell. Some want it regulated. (Though today, Federal Reserve Bank Chair Janet Yellen said that the Federal Reserve has no authority to do so.) Some are calling for it to be banned. Some expect the collapse of Mt. Gox to lead to the end of bitcoin. Whatever happens, we’re going to keep watching it.