With confidence in banks reaching an all time low in the United States and abroad, many are seeking an alternative to the age old banking system. Bitcoin, a peer-to-peer electronic currency, operates outside of control or influence from any single nation’s currency or central banks. Bitcoin is 100% digital, requiring no central system, such as the Federal Reserve, to mint coins or bills.
The origins of Bitcoin are as mysterious as its architect, Satoshi Nakamoto. A pseudonym for either one or multiple developers, Nakamoto is responsible for a published 2008 paper outlining a “peer-to-peer version of electronic cash [that] would allow online payments to be sent directly from one party to another without going through a financial institution.” Think file sharing, but with money instead of music. Bitcoin ensures anonymity and lower transaction fees than traditional credit cards, a consequence of deleting the intermediate financial institution middle men taking their cut.
Simply put, Bitcoin works like this: transactions are secured by servers called “Bitcoin Miners,” which communicate via an internet based network, confirming transactions by adding them to a secured bookkeeping system which periodically updates, creating more bitcoins. The number of bitcoins created is halved every four years until 2140, when the maximum number of will reach 21 million and production will cease. As of May 19, 2013, there were 11 million bitcoins in existence, with the price of 1 coin lingering around $120. The estimated total value of all the bitcoin currency in circulation is over $1.3 billion US dollars.
Over the past year, as more investors worldwide learn about the currency, the value of bitcoins have rapidly inflated and deflated at a volatile rate. Following the April 2013 bank failure in Cyprus, the price of one bitcoin skyrocketed to $266. Even the Winklevoss twins (famous from the Facebook movie/lawsuit and those pistachio commercials) have started investing in bitcoins, buying up large amounts of coins in the hopes that the price will continue to increase. The twins gave the keynote speech in May 2013 at a bitcoin conference in San Jose, California.
Below the surface of the promising and rapidly expanding currency linger serious questions regarding bitcoin’s legitimacy and legality. Due to the volatile nature of bitcoin, investors often hoard the currency instead of spending it on actual goods and services. At its core, the purpose of money is to provide a steady value so it can be exchanged. If one bitcoin is worth the price of an apple tomorrow, but then the price of an Ipod next month (or vice versa) then there is little incentive to spend or accept the currency. Further, in May 2013 the United State’s Department of Homeland Security seized the accounts of the Japanese based Mt. Gox, the world’s largest Bitcoin exchange. The DHS claimed the “unlicensed money service” is in violation of the US law. Essentially, only Congress has the power to “coin money,” and regulate its value within the US. Although operating in a fairly unexplored region of the law, there is a strong possibility that bitcoin will be deemed illegal by the US government. At this point DHS is remaining quiet in regards to the investigation.
Only time will tell if bitcoin will be the next generation of banking or just another internet fad, forgotten as quickly as Pets.com and Gangnam Style.
By Adam McCormick