Why You Should Still Pay Attention to Bitcoin

by Ryan Lynch on 23 May 2014 1 comment

It might sound like something the Super Mario Brothers obsessively hoard, but bitcoin is a form of electronic currency that's worth real money. Little known and even less understood, bitcoin has been gaining steam on a global scale as digital commerce continues to dominate consumer practices. However, due to its early adoption on the black market and price volatility, bitcoin is seen as something of a financial urban legend. While bitcoin has a checkered past and uncertain future, it is being exchanged right now for real money. So the question remains, should you invest in this cryptocurrency? (See also: Here's What You Should Know About Bitcoin)

Introduced in 2009, bitcoin emerged as a peer-to-peer payment method; digital cash that users could trade for goods and services. Because bitcoins can be exchanged without an intermediary (such as a bank) it has its share of supporters and naysayers, each citing advantages and flaws in the system.

Fixed Supply

Traditional currencies like the US dollar are subject to inflation and price manipulation; however, the value of bitcoin lies solely with those willing to use and accept it as payment. Simply put, bitcoin's worth is derived from the basic concept of supply and demand.

The total number of bitcoins is fixed at 21 million; once all 21 million bitcoins have been "mined," that's it. It is estimated that there are 12.3 million bitcoins in circulation and it will take until 2140 for all available bitcoins to be mined. Bitcoins are introduced into circulation via a complex mathematical algorithm designed such that it mirrors the behavior of commodities like gold (hence why folks who discover bitcoins are called miners).

As more bitcoins are added into circulation, "mining" them becomes increasingly difficult. This self-propagating scarcity drives the value of each bitcoin up, provided the demand continues.

Small Transaction Fees

When bitcoin was introduced, virtually no reputable businesses had heard of it, much less accepted it as a form of payment. The anonymity and untraceable characteristics of the digital currency was seen as an advantage in some of the Internet's seedier recesses, and bitcoin found early adopters within questionable circles.

However, as bitcoin becomes mainstream, traditional businesses are opening up to the unconventional tender. While bitcoin hasn't asserted itself as the currency of choice with merchants, it can be spent on everything from pizza to online dating, and the list is only getting longer.

Bitcoin's surge in popularity amongst traditional retailers can be attributed to the low cost of transaction fees. Credit card companies charge merchants fees to use their services, something that retailers have derided for years. Because bitcoin is traded like cash, the processing fees are small when compared to more traditionally accepted methods of payment.

The intrinsic value of any currency is judged primarily on the ability to spend it. As the number of businesses willing to accept bitcoin grows, so does its value.

Potential Adoption in Emerging Markets

With basic financial services difficult to access in the developing world, bitcoin offers a method of transaction unrestricted by geographically isolated financial institutions like banks.

With Internet usage growing in these emerging markets and bitcoin payment systems accessible via phone or PC, bitcoin may very well become the method of choice by which these regions conduct business. Not only is this beneficial in terms of economic development in these areas, but it also increases bitcoin demand, resulting in good things for those holding on to these digital dollars.

Lack of Security

Bitcoin (as well as other forms of digital currency) is decentralized, meaning that there is no figure of authority that controls it (like a central bank). Consequently, end users are responsible for looking after their own bitcoins and, since they are intangible, you can't exactly make a withdrawal and stash them under your mattress.

Bitcoins are stored in a digital "wallet" that allows the user to access his or her bitcoins and spend them. Just as people fall victim to pickpockets and purse-snatchers, your digital wallet is not safe from cyber thievery. The wallet that manages bitcoins is safeguarded by nothing more than a password.

There are multiple methods to secure your hard earned digi-cash, however nothing is foolproof, as illustrated by multiple, near-catastrophic heists. One of the largest bitcoin thefts occurred when the exchange known as Mt. Gox fell victim to hackers. Using stolen passwords, the hackers made fraudulent trades on the Mt. Gox exchange and accumulated nearly $500,000,000 worth of bitcoin. That's half a billion…with a 'b'. The true owners of these bitcoins were left with empty pockets and, because bitcoins are notoriously hard to trace, there is little hope that they will ever see reimbursement.

As the value of bitcoin increases, so does the attention of criminals. Because bitcoin isn't backed by any bank or government, once your bitcoin is gone, it's not coming back. This makes bitcoin thieves a lot like Keyser Soze, a tap of the keys and a click of the mouse and just like that… poof. They're gone.

Status as Legal Tender

Bitcoin's impact on the global economy is subject to speculation and, as a result, most of the world's governments are keeping mum on how they plan to treat it. As a currency still very much in its infancy, the status of bitcoin as legal tender is questionable.

The IRS recently proclaimed that bitcoin is property and consequently must be declared come tax time. This adds a level of complexity that may impede bitcoin adoption, however many see this recognition as a step towards legitimizing bitcoin as a true method of payment.

Many of bitcoin's most vocal critics claim that the digital currency is inherently worthless due to its decentralized nature. When the FBI shut down the online narcotic marketplace Silk Road, the feds seized approximately $25 million worth of bitcoins, which they are now gearing up to sell.

With the federal government preparing to get their piece of the bitcoin pie, it is becoming harder to refute the validity of bitcoin's worth. Bitcoin may not be backed by financial institutions or governments, but the basic principles of supply and demand have solidified its place as a legitimate commodity. After all, gold is just a rock in the ground, and money isn't worth the paper it's printed on.

Do you own bitcoin? Have you considered it?

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Shila

This is a very informative article. Bitcoin, the digital currency, has appreciated very fast. Though growing in popularity and value, it is opaque. As the digital currency is not backed by any country's central bank or government, people are still very apprehensive about its future. I read another article http://www.banks.com/articles/what-bitcoin-anyway-0 that helped me understand basics of Bitcoin. Creating awareness about Bitcoin is desirable.