The recent emergence of the "virtual currency" Bitcoin, has raised a lot of speculation and uncertainty, bringing up past issues that ultimately shut down Napster in 2001. Napster was the internet program that allowed people to directly share files that others could then downloaded for personal use. This obviously created problems because it allowed people to avoid paying for CDs and essentially download the same music for free. Bitcoin is very similar to this as it is based off of similar principles. Bitcoin is a "virtual currency" which means that it is not issued or backed by a government, therefor its value is not guaranteed. however, recently, Bitcoin has become one of the top interests for investment around the world. Part of the reason for the large inflation of Bitcoin's currency was due to uncertainty of bank depositors due to the recent Cyprus bailout. Searching for newer and greater returns on capital, Bitcoin was created, but its future existence remains in question.
Since Bitcoin is not administered by a central authority or government, its 'monetary policy' is determined by specific computer algorithms. Essentially, hackers can create virtual money from nothing by using these algorithms to solve complex math problems in competition with other users. as a result of this, the currency has become very volatile because there exists no authority to back it up, so if a transaction made with Bitcoin is not paid, they receiver of the funds has no way to enforce the transaction.
Several new institutions have been jumping on the Bitcoin bandwagon, like Mt. Gox, which specializes in the exchange of Bitcoins for real currencies like the dollar. Since Mt. Gox owns 80% of all Bitcoin trading, if the firm were to suddenly go bankrupt, the Bitcoin currency would then become 'virtually' irrelevant. Although Bitcoin allows for the easiest means for international transactions, its existence still remains a question, much like the eventual end to Napster. In the upcoming months it will be interesting to see where Bitcoin goes. Will it explode and become the "next big thing", or will it tank and see a hoard of unhappy investors, just like those Russians during the Cyprus bailout?
The concept of how bitcoins work-that is, creating virtual money from nothing using algorithms- is a bit hard for me to understand. I think it's a really cool idea but because of the currency's extreme volatility I can't see it sticking around in the long term. Then again, its rapid growth in investment indicates that people are interested and ready to invest.
ReplyDeleteBitcoins is currently creating a lot of buzz because we haven't had virtual money before but in the long run it might not work because customers would definitely want stable currencies. Even today people just want to leave their money into their savings account right now because they are not sure about the return of investment and the risk is very high in putting it into investment portfolio so please especially older people who have money are very rigid about the way they do banking and prefer to have stable currency. They don't want to spend much time in keeping tab of their money and switching game. If Bit coins become successful in the long run our banking institution will suffer because almost everyone in the bank will will be losing their jobs. Today I feel like everything is virtual and online therefore bitcoins will have a huge advantage because they computer might not need as much labor as tellers, bankers, and just the cost of setting up banks.
ReplyDeleteAlso since the money is not tied to the government there is fraud issues as well and how do we deal about that. Banks right now have FDIC to protect certain amount of money but the other one doesn't so people would be less likely to change their attitude towards this bitcoins.
I do not see the use of Bitcoins. When people purchase or obtain Bitcoins, they must exchange their currency into the current exchange rate for bitcoins. Today it is just as easy to conduct transactions using traditional currency and exchange rates rather than taking the extra step to convert currency into bitcoins.
ReplyDeleteA currency that is based on trust is unlikely to work. Though the idea that a currency could be based on math instead of politics would have interesting implications in a globalized economy. Though I fear that the system could eventually be hacked and the prospect of it being on a bubble is going to scare investment. This currency is extremely volatile and encourages hoarding since people could buy a lot currency to use for later if the value is expected to go up, but this would send supply down and increases the exchange rate which will send the currency into another bubble.
ReplyDeletehttp://www.newstatesman.com/economics/2013/04/whats-bitcoins-future
Bitcoin is just like any other type of software, it will never be 100% secure and will ultimately be hacked. That being said, it is also a bad way to save wealth compared to hard currencies of gold and silver (tangible assets) which do not display such wild appreciation and depreciation swings like those of Bitcoin. With national currencies, central bank policies are held accountable by governments, but who holds Bitcoin accountable if they were to print an extra million Bitcoins privately? I personally believe Bitcoin is undergoing a bubble and will ultimately fall back to its previous value after all of the media hype ends.
ReplyDeleteI don't see Bitcoin as a viable investment strategy. It is accountable to no one, it does not require transparency, it seems like an insane investment. I would not be surprised if it were to crash or become a big scandal.
ReplyDeleteNPR's planet money has an interesting take on Bitcoin's though, plus the webpage has a good graph that shows bitcoins volatility this year (it actually hasn't been that volatile, just steadily growing.)
http://www.npr.org/blogs/money/2013/04/09/176688096/episode-450-bitcoin-goes-to-the-moon
You're post inspired me to do a little research on Bitcoins and they seem like a truly interesting investment. While Bitcoins may seem like an unnecessary currency they allow consumers to purchase goods and services from any seller around the world that accepts bit coins. This is truly a system where capital is completely mobile and can allow investors to move their capital to where it receive the highest return because there are no international restrictions on it. While it is true that there are opportunities for hackers to take advantage of people who use the currency, as information on businesses and investment opportunities that involve Bitcoins becomes better the volatility of the market will decrease. This will allow for an increased use of the system and the potential for those who use it will put their capital in the most profitable situation without any transaction costs imposed by government intervention. While, i am unsure how the system can be exploited via theft and hacking i think that as the bitcoin currency grows and appreciates in value its users will have an incentive to create secure networks where their bitcoins wont be stolen by hackers. Additionally while nothing really backs up the currency it is still a fait currency that has nothing backing it up other than people trading it for good and services. While it has no government to intervene and prevent depreciation of the currency it allows for a truly free market where supply and demand are the only forces that effect the value wich is an interesting experiment in liberal economics. It will be interesting to see what the future of bitcoins are and believe that they could be at the very least provide an extremely profitable short term investment especially with the expected increases in internet users/access in the next decade.
ReplyDeleteI think bitcoins are really interesting too, since it has no central monetary authority. My understanding is that the bitcoin exchange is overseen by a sort of anarchist peer-to-peer computer network, which collectively monitors the creation of new bitcoins and the transfer of bitcoins between users. Every new transaction is entered into a log and broadcasted across the whole network, which have to be verified. And there is only a finite number, so there is no way for a central authority to flood the market and devalue those is circulation. The issue has been raised that they could be potentially worthless, since they aren't backed by anything? But technically the dollar isn't backed by anything since we discarded the Gold Standard... right? Isn't all "money" potentially worthless?
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