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The future of Bitcoin in a volatile world

The digital currency is attracting legions of investors. Here, the rewards -- and the risks.
Bitcoin illustration

Bitcoin illustration Photo: Flickr user antanacoins

Hardly a day passes when I am not asked what I think about Bitcoin — as a technology, as an investment, as a currency for transactions, perhaps even as the coolest thing to talk about over this year’s turn at holiday cocktail parties.

But, as news comedian Jon Stewart once pointed out to over-the-top TV stock-picker Jim Cramer after listing his failures and statistical losses: “It’s not a game.” At least, not to the newbies now piling into Bitcoins with just as much chance of understanding what they own, or what to expect, as if they were purchasing shares of neutrinos.

As for pseudonymous founder Satoshi Nakamoto (Satoshi is also the name given to 1/100,000th of a Bitcoin), the chance that he is a real Japanese male person is, let’s say it, less than the value of a Satoshi. More likely, his name represents a small collaborative group of programmers, with at least one or two British members. As an entity, he appears to have bowed out in 2010, after writing the first paper on Bitcoin system design in 2008 and launching the first coins in 2009.

You might say Satoshi has just evaporated.

Just before he did, though, he passed along the magic key to the kingdom to Gavin Andresen, now chief scientist at the Seattle-based Bitcoin Foundation. He subsequently told Forbes: “Bitcoin is designed to bring us back to a decentralized currency of the people… this is like better gold than gold.” His dream: creating “cash for the Internet.”

But should you buy into that dream?

Benefits of a Digital Currency

Digital currencies are more common than we realize, and there is nothing to keep you and your mom from inventing the next one tonight. Even the world's fiat currencies, like dollars and pounds, may be considered digital, since virtually none are backed by gold or other physical assets. Their only existence is as bits and bytes in a computer somewhere. (Now that is faith.)

So why bother with the increased risk of a non-country currency like Bitcoin? Well, we could start with politics: People from the libertarian persuasion love the idea of an anonymous digital currency, which they can get and spend without government approval or intervention.

So, of course, do drug dealers and cartels, thieves of all kinds, terrorists and a long list of people who prefer to keep their financial lives outside the law. The recent FBI takedown of the criminal website Silk Road included the seizure of $28M in Bitcoins from its founder. In fact, Silk Road seems to have been the largest Bitcoin transaction site on the planet, until its demise.

If you are looking to avoid government scrutiny, you can consider using this cryptographic messaging system, but you should also be aware that you, too, just like the nice fellow running Silk Road, may be shocked to find out that “they” have found your name and address.

And this brings out the most important aspect of Bitcoins, which we’ll come back to later: As brilliant as this crypto system seems to be, it is run by computers. It’s just cool IT.

Are there other benefits? Sure:

1. They are useful. First and foremost, there are a growing number of uses, places, and vendors where Bitcoins can be used. Every Sunday paper seems to have stories about some poor reporter who was asked to go buy dog food, deep-dish pizza, or a birthday card with Bitcoins.

Sir Richard Branson, never one to shy away from publicity, even accepts Bitcoins for passage on Virgin Airlines. And the first Bitcoin ATM opened in Vancouver, BC, not too long ago.

2. They are cool. All you have to do to be the center of attention is to quietly announce that you just bought another Bitcoin this morning.


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Comments:

Posted Fri, Jan 3, 4:08 p.m. Inappropriate

I'm basically a libertarian (fiscal conservative, social progressive), but no way would I get into Bitcoins. There's nothing of substance to back them up, their worth is based solely on supply-and-demand and the potential for fraud is monumental. People who want to invest are welcome to it, but a Bitcoin is a cipher with artificial value added. Caveat emptor.

Posted Fri, Jan 3, 5:51 p.m. Inappropriate

Guilty - Everything you said about Bitcoin is precisely applicable to fiat currencies. There is nothing of substance to back up any government currency sicne we went off the gold standard. A dollar's purchasing power over time is precisely related to the supply and demand of that dollar. Which is why your dollar buys less and less every year. The amount of fraud that takes place with the world's fiat currencies DWARFS what's happend in Bitcoin -- in number of acts, in value, and by percentage... And if you don't believe that, I have a Bohemian Lottery Award to give you, just send me your bank account number and access code.

BTC is more likely to stabilize as a currency than destablize. I don't mean the price -- nobody knows where that will go just like nobody knows what the price of any particular stock will go. But big players are moving in to manage exchanges, wallets, transactions, and etc. There will be roadbumps, but Bitcoins and at least some of the dozens upon dozens of alternate cryptographic currencies are here to stay.

ddmiller

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