Thursday 06 June, 2013

Bitcoins – A New Global Currency?

In 2008, an anonymous developer created Bitcoins, a peer-to-peer virtual cash system. What makes Bitcoins unique from other virtual currencies is that there is no central authority. It’s an open source cryptographic protocol with no international exchange rate, no governing body, and no main bank.

Bitcoins isn’t the world’s first virtual currency but at the time of writing, it’s the biggest. Virtual currencies have been used for many years, mostly to purchase online games. They were the domain of geeks and of little value to the world at large. But with Bitcoins, it’s a different story.

The value of Bitcoins has been booming in the last few years. In the year 2012, the currency’s value increased 1,000 percent. It’s hard for anyone today to dismiss this virtual currency as something just for gamers. It has been widely speculated that one reason for the increase in value is the economic crisis in Europe. Many believe that a virtual currency such as Bitcoins could provide something more stable than government-issued fiat money.

How Bitcoins Work

Like other virtual currencies, there are no physical Bitcoins. A Bitcoin is a piece of code that’s stored in a file called a wallet. The wallet includes the address you send and receive Bitcoins from to identify you. Your wallet has a password that allows you to use your Bitcoins.

New Bitcoins are introduced into the market through ‘mining.’ This means mining algorithms and it’s a process so slow that new currency can’t be introduced into the economy quickly. The advantage of this is that unlike fiat money, it can’t be suddenly devalued.

The lack of central authority is its most unique feature. With no central authority, the currency can’t be manipulated. People are wary of government manipulation after the recent levy in Cyprus. There is no way to do this with Bitcoins. No central authority also means there are no chargebacks. Once a Bitcoin is spent, it’s spent.

The Problems with Bitcoins

Of course, this virtual currency isn’t perfect. Although a central authority can’t manipulate Bitcoins, a botnet could. Hackers can and surely will find ways to steal Bitcoins. There have been no successful attacks yet, but if Bitcoins keep gaining value there are sure to be.

Although advocates of Bitcoins tout it as a stable currency, recently they’ve been shown to be not as stable as previously believed. The sudden rise in value is evidence that it’s not totally stable. In April there was a sudden drop in value lasting less than a day and a sudden recovery.

Finally, Bitcoins have gotten a bit of bad press lately. Because they’re anonymous and there’s no way to track transactions, they’re being used to gamble and buy drugs online.

Will Bitcoins create a new economic system or is it just another virtual currency that’s going to be used for video game add-ons? We’ll have to wait and see.

Bob Steele

Bob Steele is an entrepreneur, software developer, marketer, and author living in the Denver metropolitan area. He’s an avid outdoorsman who loves skiing, hiking, fishing, boating, and just plain having fun. His interests include games, space, technology, physics, cooking (well eating actually), economics, business, internationalism, and team sports. With over thirty years of professional consulting experience, Bob has been exposed to many diverse business models and has gained a sensible approach to life. Bob’s company, WaveCentric is focused on commerce, marketing, and entertainment related products.

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