By now you have probably heard of Bitcoin, but are you able to define it?
Most often it is described as a non-government digital currency. Bitcoin is also sometimes called a cybercurrency or, in a nod to its encrypted origins, a cryptocurrency. Those people descriptions are accurate enough, but they miss the point. It’s like explaining the U. S. dollar as a green piece of paper with images on it.
I have my own ways of describing Bitcoin. I think of it as shop credit without the store. A prepaid phone without the phone. Precious metal without the metal. Legal tender for no debts, public or private, unless the party to whom it is tendered wishes to accept it. An instrument supported by the full faith and credit score only of its anonymous creators, within whom I therefore place no faith, and to whom I give no credit except for ingenuity.
I actually wouldn’t touch a bitcoin using a 10-foot USB cable. But a fair number of people already have, and quite a few more soon may.
This is partly because entrepreneurs Cameron and Tyler Winklevoss, best known for their role in the roots of Facebook, are now seeking to make use of their technological savvy, and money, to bring Bitcoin into the mainstream.
The Winklevosses hope to start an exchange-traded fund for bitcoins. An ETF would make Bitcoin more widely offered to investors who lack the technological know-how to purchase the digital foreign currency directly. As of April, the Winklevosses are said to have held about 1 percent of all existent bitcoins.
Developed in 2009 by an anonymous cryptographer, Bitcoin operates on the premise that will anything, even intangible bits of code, can have value so long as enough people decide to treat it as valuable. Bitcoins exist only as digital representations and are not pegged to any conventional currency.
According to the Bitcoin website, “Bitcoin is designed around the idea of a new form of money that uses cryptography to control its creation and transactions, instead of relying on central authorities. ” (1) New bitcoins are “mined” simply by users who solve computer methods to discover virtual coins. Bitcoins’ purported creators have said that the ultimate supply of bitcoins will be capped at 21 million.
While Bitcoin promotes by itself as “a very secure and inexpensive way to handle payments, ” (2) in reality few businesses make the move to accept bitcoins. Of these that have, a sizable number operate in the black market.
Bitcoins are exchanged anonymously over the Internet, without any participation for established financial institutions. As of 2012, product sales of drugs and other black-market items accounted for an estimated 20 percent associated with exchanges from bitcoins to U. S. dollars on the main Bitcoin exchange, called Mt. Gox. The particular Drug Enforcement Agency recently conducted its first-ever Bitcoin seizure, right after reportedly tying a transaction in the anonymous Bitcoin-only marketplace Silk Road to the sale of prescription and illegal drugs.
Some Bitcoin users also have suggested that the currency can serve as a quick way to avoid taxes. That may be true, but only in the sense that bitcoins aid illegal tax evasion, not or in other words that they actually serve any role in genuine tax planning. Below federal tax law, no money needs to change hands in order for the taxable transaction to occur. Barter along with other non-cash exchanges are still fully taxable. There is no reason that transactions including bitcoins would be treated differently.
Outside of the criminal element, Bitcoin’s main devotees are speculators, who have no purpose of using bitcoins to buy everything. These investors are convinced that the restricted supply of bitcoins will force their value to follow a continual upward trajectory.
Bitcoin has indeed noticed some significant spikes in worth. But it has also experienced major losses, including an 80 percent drop over 24 hours in April. At the start of this month, bitcoins were down to around $90, from a high of $266 before the April crash. They were investing near $97 earlier this week, based on mtgox. com.
The Winklevosses might make Bitcoin investing easier simply by allowing smaller-scale investors to revenue, or lose, as the case may be, without the hassle of actually purchasing and storing the electronic cash. Despite claims of security, Bitcoin storage has proved problematic. In 2011, an attack on the Mt. Gox swap forced it to temporarily power down and caused the price of bitcoins to briefly fall to nearly zero. Since Bitcoin transactions are all unknown, there is little chance of tracking down the particular culprits if you suddenly find your electronic wallet empty. If the Winklevosses get regulatory approval, their ETF would help shield investors in the threat of individual theft. The ETF, however , would do nothing to address the problem of volatility caused by large-scale thefts elsewhere in the Bitcoin marketplace.
While Bitcoin comes wrapped in the high-tech veneer, this newest of currencies has a surprising amount in common with one of the oldest currencies: gold. Bitcoin’s own vocabulary, particularly the term “mining, ” highlights this connection, and intentionally so. The exploration process is designed to be difficult being a control on supply, mimicking the particular extraction of more conventional sources from the ground. Far from providing a sense of security, however , this unsupported claims ought to serve as a word of caution.
Gold is an investment associated with last resort. It has little inbuilt value. It does not generate interest. But because its supply is finite, it is seen as being more stable than forms of money that can be published at will.
The problem with gold is that it doesn’t do anything. Since gold coins have fallen out of use, most of the world’s gold now sits in the vaults of central banks as well as other financial institutions. As a result, gold has small connection to the real economy.
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That can seem like a good thing when the real economy feels like a scary place to be. But as soon as other attractive investment choices appear, gold loses its glow. That is what we have seen with the recent declines in gold prices.