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Is Bitcoin an online fad or the future of finance?

BY DI EDITORIAL BOARD | DECEMBER 13, 2013 5:00 AM

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Bitcoin is a decentralized online financial market and form of currency that allows users to make payments with no middlemen. Lately, the value of Bitcoins has been rising, causing some to see a viable new currency and others to see an inflating bubble.

A currency finding its footing

Imagine it: you’re in a hurry, waiting in line for a cup of coffee. The cashier and the customer in front of you are fumbling with dollars and cents. Finally, you get up to the register, but instead of pulling out your wallet, you scan a QR code with your phone. The transaction is verified, and you pay for a tall cup of joe without touching a dime.

This isn’t a pitch for some vague future technology. This is happening now with Bitcoin.

The so-called crypto-currency, generated using complex computer algorithms and traded in markets across the world, is difficult to explain. But it is easy to understand why its meteoric rise in value has financial gurus buzzing.

Even as I write this, a Bitcoin is trading again above $1,000, a milestone it hit in late November before dropping down to around $600 in an apparent correction of the market. Just as quickly as Bitcoin fell, it rose again, prompted in part by endorsements from prominent financial leaders such as David Marcus, the CEO of Paypal, and Bank of America’s David Woo, a top Wall Street currency analyst.

Put simply, Bitcoin is a way to conduct peer-to-peer transactions without the use of a middleman. The facilitator of these trades is the Bitcoin network, a vast collection of computers working to confirm transactions like a bank would confirm a monetary transfer. Bitcoins can be used for everything from political contributions to ordering a pizza, and more and more online and offline retailers are accepting it as a payment method.

The difference between Bitcoin and conventional methods of transferring value is precisely what gives it value. Bitcoins don’t need to be converted like other currency. An electronic transfer of Bitcoin is often completed in an hour or less, with lower fees than you would find at any credit-card company (and many times, no fees at all). There’s no red tape to jump through in setting up a Bitcoin wallet, no credit history to worry about. What you spend is what you get.

No one “controls” Bitcoin, and unlike fiat currency like the U.S. dollar, Bitcoin is scarce. Only 21 million will ever be produced. As demand for the currency increases, the price per Bitcoin will rise accordingly.

My colleague argues that Bitcoin looks like a bubble. And it is true that in the short term, Bitcoin price has fluctuated greatly as traders attempt to make sense of its true value. Even if Bitcoin does crash again, which is entirely possible, the long-term prospects of the currency grow brighter every day. And with a total market capitalization of $15 billion, it’s clear that Bitcoin isn’t going anywhere.

—by Nick Hassett

Bitcoin is a bubble

The Silk Road was an online black market that operated using Bitcoins. Users could browse and make transactions without the risk being tracked by law enforcement. You could buy anything: drugs, weapons, child porn, assassins, books, and so much more. The Silk Road was finally shut, down of course. Hitmen are bad for the economy … or people’s lives or something important like that.

But Bitcoin’s techno-libertarian cheerleaders argue that the virtual currency can be used for much more than that. To Bitcoin’s credit, it’s accepted in exchange for Subway sandwiches, legal services, airline tickets, and more.

Nevertheless, for Bitcoin to succeed, it needs stability, and that’s something it will never have. Bitcoin is largely a speculative bubble, and its value is far too unstable to possibly get ordinary consumers to regularly use it.

At the start of November, it was worth just over $200. Before the end of the month, it was valued at $1,200. Just your run-of-the-mill six-fold price swing.

And if Bitcoin really is free from the influence of governments, it seems a bit perplexing that its value fell by 20 percent after China’s central bank said the currency has no value. Whoever said power has to come from direct control?

On the flipside of the coin, people have to use the currency and believe in it for it to have value. And when nearly two-thirds of Bitcoins are being hoarded, as researchers from the University of California-San Diego and George Mason University found, it’s not so much a currency as, by definition, a speculative bubble.

As if Bitcoin isn’t weak enough in the short-run, its long-run future is nothing short of damned.

Bitcoins come from a “mining” program users run on computers. However, there is a finite number of the currency that’s available. Right now, there are about 12 million Bitcoins, and the supply will peter out at 21 million in 2040.

When demand rises, supply can’t rise to meet it, so the value will shoot up, at which point, users will sell their booty to get rich, and the value of Bitcoins will plummet back down.

Aside from clusters of libertarians trying to screw each other out of money and a few idealistic souls who use Bitcoins in niche markets, this currency does not stand a chance.

— by Jon Overton


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