Bitcoin, a type of digital currency, is gaining popularity, but has also brought new problems with its vulnerability to illegal uses, such as drug and black market purchases. Katie Simmons, associate dean of the Mike Cottrell College of Business at the University of North Georgia, discusses the rise of Bitcoin and how it may impact the future.
When and how did Bitcoin begin?
The idea of a virtual currency not controlled by a central banking authority has existed as long as the Internet. At first, digital currencies failed because no one could solve the problem of double spending, which is similar to the problems with Internet coupons. Virtual cash can be duplicated, which undermined the early attempts of developing digital money.
In 2008, Satoshi Nakamoto published a paper detailing a new type of virtual currency that could solve the problem of double spending by using a system of decentralized computers to verify each transaction. The domain bitcoin.org was registered in 2008. The first bitcoins were issued in 2009, and were first publicly traded in 2010, with 1,000 bitcoins going for $0.0003 USD. The first real transaction also occurred in 2010 when Laszlo Hanyecz, a computer programmer in Florida, spent 10,000 bitcoins to get two pizzas delivered. The first and largest exchange, Mt. Gox, was founded in 2010, with the virtual currency ending the year trading at one bitcoin for $0.30 USD.
What are the advantages and disadvantages of using it?
The problem with conventional currency is that a central banking authority controls the money. It can devalue cash by inflating the currency. The seizure of bank accounts by the government of Cyprus and similar threats in Argentina have made the public concerned about the security of their financial assets when in an institution controlled by a central authority.
Bitcoin transactions are largely undetectable by government. No government can confiscate your bitcoins or prevent their transportation. They can't be artificially inflated by a central banking authority. In this regard, owning bitcoins is similar to owning gold. Bitcoins appeal to investors who want to protect their wealth from the central government. The Bitcoin concept has become extremely active in eastern European countries because of the threat of hyperinflation and monetary collapse.
The main disadvantage to Bitcoin is the currency's price isn't tied to a central authority or to a commodity like gold or silver, so the value can fluctuate widely. The source code is open and free so your "wallet" of bitcoins is subject to hacker attacks without the same protection you'd have with an official currency. It is also very sensitive to media coverage, so every positive or negative article sends it soaring or falling. For example, the value of bitcoins has fallen 40 percent since its ban by the Chinese government in December 2013. They are also not widely accepted as a medium of exchange.
How do you think Bitcoin will evolve in the next few years?
The release of new bitcoins is scheduled to slow annually until it reaches the maximum of 21 million bitcoins in 2140. This limited supply should keep the price higher, and bitcoins are now accepted on enough online services that it can be considered a legitimate currency. The first bitcoin ATM machines have been installed in Australia, and there has been some speculation that New York City could soon have one.
There are some potential problems with the evolution of Bitcoin. The volatile price fluctuations mean businesses have to be able to adjust prices quickly based on the exchange rate, which could limit use in actual brick-and-mortar establishments. The popularity of Bitcoin as a means to avoid taxes and government control also presents a threat. In addition to China, Iceland and Thailand have already banned bitcoins, and numerous other countries are trying to regulate and tax it. The European Banking Authority has released warnings against use of digital currency, in contrast to the U.S. Justice Department, which has named bitcoins a legal means of exchange. Most economists have adopted a "wait and see" attitude toward Bitcoin; it could be a revolutionary new idea that redefines our monetary system, or it could become the next Segway.