Chances are 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 the encrypted origins, a cryptocurrency.
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Those descriptions are accurate enough, however they miss the point. It’s like describing the U. S. dollar as being a green piece of paper with pictures on it.
I have my own ways of describing Bitcoin. I think of it as shop credit without the store. A pre-paid phone without the phone. Precious metal with no metal. Legal tender for no debts, public or private, unless the party to whom it is tendered wishes to accept it. An instrument backed by the full faith and credit only of its anonymous creators, within whom I therefore place no faith, and to whom I provide no credit except for ingenuity.
I wouldn’t touch a bitcoin with a 10-foot USB cable. But a good number of people already have, and quite a few a lot more soon may.
This is partly since entrepreneurs Cameron and Tyler Winklevoss, best known for their role in the roots of Facebook, are now seeking to use 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 currency directly. As of April, the Winklevosses are said to have held close to 1 percent of all existent bitcoins.
Produced in 2009 by an anonymous cryptographer, Bitcoin operates on the premise that 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 traditional 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, rather than relying on central authorities. ” (1) New bitcoins are “mined” simply by users who solve computer algorithms to discover virtual coins. Bitcoins’ purported creators have said that the ultimate supply of bitcoins will be capped at 21 million.
While Bitcoin promotes alone as “a very secure and inexpensive way to handle payments, ” (2) in reality few businesses make the move to accept bitcoins. Of those 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, sales of drugs and other black-market products accounted for an estimated 20 percent associated with exchanges from bitcoins to U. S. dollars on the main Bitcoin exchange, called Mt. Gox. The Drug Enforcement Agency recently carried out its first-ever Bitcoin seizure, after reportedly tying a transaction in the anonymous Bitcoin-only marketplace Silk Street to the sale of prescription and unlawful drugs.
Some Bitcoin users have also suggested that the currency can serve as a means to avoid taxes. That may be true, but only in the sense that bitcoins help 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 a taxable transaction to occur. Barter along with other non-cash exchanges are still fully taxable. There is no reason that transactions involving bitcoins would be treated differently.
Outside the criminal element, Bitcoin’s main devotees are speculators, who have no purpose of using bitcoins to buy anything. These investors are convinced that the limited supply of bitcoins will force their particular value to follow a continual upward trajectory.
Bitcoin has indeed observed some significant spikes in worth. But it has also experienced major loss, including an 80 percent decrease 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 trading near $97 earlier this week, according to mtgox. com.
The Winklevosses would certainly make Bitcoin investing easier simply by allowing smaller-scale investors to income, or lose, as the case might be, without the hassle of actually buying and storing the electronic cash. Despite claims of security, Bitcoin storage has proved problematic. In 2011, an attack on the Mt. Gox trade forced it to temporarily shut down and caused the price of bitcoins to briefly fall to nearly zero. Since Bitcoin transactions are all private, there is little chance of tracking down the culprits if you suddenly find your electronic wallet empty. If the Winklevosses get regulatory approval, their ETF would help shield investors from 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 market.
While Bitcoin comes wrapped within a high-tech veneer, this newest associated with currencies has a surprising amount in keeping with one of the oldest currencies: gold. Bitcoin’s own vocabulary, particularly the term “mining, ” highlights this connection, and intentionally so. The mining process is designed to be difficult as being a control on supply, mimicking the extraction of more conventional sources from the ground. Far from providing a feeling of security, however , this unsupported claims ought to serve as a word associated with caution.
Gold is an investment associated with last resort. It has little intrinsic value. It does not generate interest. But because its supply is finite, it is seen as being more steady than forms of money that can be published at will.
The problem with gold is it doesn’t do anything. Since coins have fallen out of use, the majority of the world’s gold now sits within the vaults of central banks and other financial institutions. As a result, gold has small connection to the real economy. 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 shine. That is what we have seen with the recent declines in gold prices.