Do We Trust Bitcoin?
You’ve probably heard of Bitcoin before, but can you define it?
Very often, it is described as a non-governmental digital currency. Bitcoin is also sometimes referred to as a cyber currency or, in a nod to its cryptic origins, a cryptocurrency. These descriptions are precise enough, but they miss the point. It’s like describing the US dollar as a piece of green paper with pictures.
I have my own way of describing Bitcoin. I consider this to be store credit without the store. A prepaid phone without a phone. Precious metals without metal. Legal tender without debt, public or private, unless the tenderer wishes to accept it. An instrument backed by the full faith and credit only of its anonymous creators, in whom, therefore, I do not trust and to whom I do not give credit except for ingenuity.
I wouldn’t touch a bitcoin with a 10ft USB cable. But many people have done it already, and many more soon.
This is in part because entrepreneurs Cameron and Tyler Winklevoss, best known for their role in the origins of Facebook, are now seeking to use their technical knowledge and their money to bring Bitcoin into the mainstream.
The Winklevosses hope to create an exchange-traded fund for bitcoin. An ETF would make Bitcoin more widely available to investors who do not have the technological know-how to directly purchase digital currency. As of April, Winklevosses held around 1% of all existing bitcoin.
By An Anonymous Cryptographer
Bitcoin works on the premise that anything, even intangible snippets, can have value as long as enough people choose to treat it as valuable. Bitcoin only exists as digital representations and is not linked to any traditional currency.
Bitcoin is designed around the idea of a new form of money according to the Bitcoin website, Encryption is used to control its creation and transactions, rather than relying on central authorities.
To discover virtual currencies, new bitcoins are “extracted” by users who solve computer algorithms. The alleged creators of Bitcoin said the final bitcoin supply would be capped at 21 million.
While Bitcoin advertises itself as
“a very secure and inexpensive way to handle payments“,
few companies have actually taken the step to accept bitcoin. Of those who do, a considerable number operate on the black market.
Bitcoins are traded anonymously over the internet, without any involvement from established financial institutions.
In 2012, sales of drugs and other black market products accounted for around 20% of bitcoin trading in US dollars on the main Bitcoin exchange, called Mt. Gox.
Recently, the Drug Enforcement Agency made its first seizure of Bitcoin, after linking a transaction in the anonymous Bitcoin-only marketplace, Silk Road, with the sale of prescription and illegal drugs.
Some Bitcoin users have also suggested that the coin can serve as a way to avoid taxes. This may be true, but only in the sense that bitcoin contributes to illegal tax evasion, not in the sense that it really plays a role in real tax planning. Under federal tax law, cash does not need to change hands for a taxable transaction to occur. Barter and other non-monetary exchanges remain fully taxable. There is no reason why transactions involving bitcoin should be treated any differently.
Apart from the criminal element, the main followers of Bitcoin are speculators, who have no intention of using bitcoins to buy anything. These investors are convinced that the limited supply of bitcoin will force its value to follow a continuous upward trajectory.
In fact, Bitcoin has seen significant spikes in value. But it also suffered significant losses, including an 80% 24-hour drop in April. Earlier this month, bitcoin fell to around $ 90, from a high of $ 266 before the April collapse. They were trading near $ 97 earlier this week, according to mtgox.com.
Winklevosses would facilitate investing in Bitcoin by allowing small-scale investors to profit or lose, as the case may be, without having to buy and store electronic currencies. Despite security claims, Bitcoin storage has proven problematic.
In 2011, an attack on Mt. The Gox exchange forced it to shut down temporarily and briefly brought the bitcoin price down to near zero. Since Bitcoin transactions are all anonymous, there is little chance of finding the culprits if you suddenly find your e-wallet empty. If the Winklevosses get regulatory approval, their ETF would help protect investors from the threat of individual theft. However, the ETF would do nothing to address the volatility problem caused by large-scale thefts in other parts of the Bitcoin market.
While Bitcoin is wrapped in a high-tech lining, this new coin has a surprising amount in common with one of the oldest coins – gold. Bitcoin’s own vocabulary, particularly the term “mining,” highlights this connection, and on purpose. The extraction process is designed to be difficult as control of excess supply, imitating the extraction of more conventional soil resources. However, far from providing a sense of security, this rhetoric should serve as a warning.
Gold is an investment of last resort. It has little intrinsic value. It does not arouse any interest. But because its supply is limited, it is considered to be more stable than forms of currency that can be printed at will.
The problem with gold is that it does nothing. Since gold coins are no longer used, most of the world’s gold is now found in the coffers of central banks and other financial institutions. As a result, gold in the real economy is irrelevant. It can seem like a good thing when the real economy seems like a scary place. But as soon as other attractive investment options appear, gold loses its luster. This is what we have seen with the recent declines in gold prices.
In their effort to bring Bitcoin into the mainstream, its promoters have accepted, and in some cases sought further regulation. Last month, Mt. Gox registered as a money services company in the Treasury Department’s Financial Crime Enforcement Network. It has also increased customer verification metrics. The changes came in response to a March directive from the Financial Crimes Enforcement Network that clarifies the application of its rules to virtual currencies. The Winklevoss proposed ETF would bring a new level of responsibility.
In The End
however, I expect Bitcoin to fall back into the shadow of the black market. Those who want a regulated and secure currency that they can use for legitimate business transactions will choose one of the many currencies already sponsored by a national government with sufficient resources, a real-world economy, and much more transparency and security than Bitcoin. The world can offer.
After the Bitcoin bubble bursts, we won’t even be able to use the remaining coins for jewelry.