What is Bitcoin?

Most frequently it’s referred to as a non-government digital currency. Bitcoin is also sometimes called a cybercurrency or, in a nod to its encrypted sources, a cryptocurrency. Those descriptions are precise enough, but they miss the point. It’s like describing the U.S. dollar as a green piece of paper with images on it.

I have my own means of describing Bitcoin. I think of it as store credit with no store. A prepaid phone without the phone. Precious metal with no metal. An instrument backed by the full faith and credit merely of its anonymous creators, in whom I so put no faith, and to whom I give no credit except for inventiveness.

I mightn’t touch a bitcoin with a 10-foot USB cable. But a fair amount of people already have, and quite a few more shortly may.

  • This is partly because entrepreneurs Cameron and Tyler Winklevoss, best known for his or her role in the origins of Facebook, are actually seeking to use their technological understanding, and money, to bring Bitcoin into the mainstream.
  • The Winklevosses expect to start an exchange-traded fund for bitcoins. An ETF would make Bitcoin more widely accessible to investors who lack the technological knowhow to purchase the digital money directly.
  • Bitcoins exist only as digital renderings and aren’t pegged to any traditional currency.

According to the Bitcoin web site, “Bitcoin was created around the idea of a brand new type of cash that uses cryptography to control its creation and transactions, rather than relying on central authorities.” (1) New bitcoins are “mined” by users who solve computer algorithms to find virtual coins. Bitcoins’ purported creators have said that the greatest supply of bitcoins will be capped at 21 million.

While Bitcoin promotes itself as “a very safe and cheap way to handle payments,” (2) in reality few companies have made the move to take bitcoins. Of those that have, a substantial number operate in the black market.

Bitcoins are traded anonymously over the Internet, without the involvement on the part of recognized financial institutions. As of 2012, sales of drugs and other black-market goods accounted for an estimated 20 percent of exchanges from bitcoins to U.S. dollars on the primary Bitcoin exchange, called Mt. Gox. The Drug Enforcement Agency recently conducted its first-ever Bitcoin seizure, after reportedly tying a transaction on the unattributable Bitcoin-only marketplace Silk Road to the sale of prescription and illegal substances.

Some Bitcoin users also have implied that the money can function as a way to avoid taxes. That may be accurate, but merely in the sense that bitcoins assist illegal tax evasion, not in the sense they actually function any part in real tax preparation. Under federal tax law, no cash needs to change hands in order for a taxable transaction to occur. Barter and other non-cash exchanges continue to be completely taxable. There is no reason that trades involving bitcoins would be treated differently.

Outside of the criminal element, Bitcoin’s primary devotees are speculators, who don’t have any intent of using bitcoins to purchase anything. These investors are convinced that the limited supply of bitcoins will force their worth to follow a constant upward trajectory.

Bitcoin has really seen some major spikes in value. But it has additionally experienced major declines, including an 80 percent decrease over 24 hours in April. They were trading near $97 earlier this week, according to mtgox.com.

The Winklevosses would make Bitcoin investing simpler by allowing smaller-scale investors to gain, or lose, as the case may be, without the hassle of actually purchasing and keeping the electronic coins. Despite claims of security, Bitcoin storage has proved difficult. In 2011, an assault on the Mt. Gox exchange driven it to temporarily shut down and caused the price of bitcoins to briefly fall to almost zero. Since Bitcoin trades are all anonymous, there is little chance of tracking down the perpetrators if you suddenly discover your electronic wallet empty. If the Winklevosses get regulatory acceptance, their ETF would help shield investors from the menace of individual thieving. The ETF, however, would do nothing to address the problem of unpredictability brought on by large-scale thefts elsewhere in the Bitcoin market.

While Bitcoin comes wrapped in a high-tech veneer, this hottest of currencies has a surprising amount in common with among the oldest currencies: gold. Bitcoin’s own vocabulary, particularly the term “mining,” highlights this link, and deliberately so. The mining procedure is designed to be tough as a control on supply, mimicking the extraction of more traditional resources from the earth. Far from providing an expression of security, nevertheless, this rhetoric ought to function as a word of caution.

It’s little inherent value. It doesn’t generate interest. But because its supply is limited, it truly is seen as being more stable than sorts of cash that can be printed at will.

The trouble with gold is that it doesn’t do anything. As a result, gold has little connection to the real market. That can seem to be a great thing when the real market feels like a scary place to be. But as soon as other attractive investment choices seem, gold loses its radiance. That is what we’ve seen with the recent declines in gold prices.