It's been called "gold for geeks," the future of payments or a bubble soon to
burst.
But any way you slice it, the gyrations and rapid adoption of the digital
currency Bitcoin have grabbed the attention of the financial world of late.
Bitcoins have been around since 2009, but have gained widespread attention only
in the past few weeks. Worth only a couple dollars a pop a year ago, the Bitcoin
exchange rate has seen some dramatic ups and downs since the end of March.
Here's how it works: Anybody can get into the game by downloading a program onto
their computer and using a number of online exchanges to convert their dollars
into bitcoins. After that, the currency can be transferred anonymously and
directly between two users anywhere in the world.
Some observers say a payment network like Bitcoin could one day rival a company
like PayPal or Western Union. Even the Winklevoss twins, of "The Social Network"
fame, have a multimillion-dollar investment in it.
But bitcoins aren't likely to be a good investment for the average person for
the foreseeable future.
"I see this as the first generation of something that may proliferate," said
Judson Gee, managing partner of JHG Financial Advisors in Charlotte, N.C. "Right
now it's mostly just a speculative investment."
University of Chicago law professor Eric Posner, writing in Slate this week, was
more blunt, calling it a "fantasy" that "resembles a Ponzi scheme."
The currency traded as high as $266 on Wednesday before crashing. The most
popular exchange put a halt on trading for hours, and prices fell below $55. On
Friday morning, bitcoins were trading for about $78.
Here are five things you should know about Bitcoin.
WHAT'S SPECIAL ABOUT BITCOIN? Bitcoins are gaining a lot of traction among the
technology-savvy because of their privacy, speed and freedom from government
regulation.
The only information attached to a Bitcoin account is a long list of letters and
numbers. The payments aren't processed through a bank or clearinghouse; instead,
the computational power of its users pushes transactions through a system to
make sure they're not fraudulent.
Payments can cross national borders in minutes as easily as they can cross the
street. The system has also proven _ so far _ to be sophisticated enough to keep
people from hacking it.
WHAT CAN YOU DO WITH IT? A small number of merchants are beginning to accept
bitcoins as payment, but none of them mainstream.
You'll now find online stores hawking everything from gun parts to flowers that
are willing to take them. Physical stores accepting them are few and far
between. CNN found a bar in New York City that takes them.
SO WHAT'S BACKING THE CURRENCY? Nothing, really, except the principle of
scarcity and the usefulness people find in it.
Only 21 million bitcoins will ever be in circulation, released slowly over time.
That creates a market price driven by supply and demand. As news spread about
bitcoins, more and more people decided to try them out or to speculate in them _
driving up the price.
But an investment could be worth nothing by next month, meaning prices will
continue to fluctuate.
WHY SHOULD I CARE? Bitcoins are probably more interesting for the way the system
works than for their future as a viable currency.
Some people, like Chris Dixon, a partner in prominent venture capital firm
Andreessen Horowitz, have written that Bitcoin could be part of a new era of
money, based on math instead of politics and fit for a globalized world.
There's some evidence that the theme could catch on. Andreessen Horowitz is now
a backer of OpenCoin, a San Francisco startup creating a "math-based" currency
and payment system similar to Bitcoin. It's one of a number of new companies
starting to enter the space.
"The big money has their eye on it," Gee said. "This could be very relevant."
SHOULD I INVEST IN SOME BITCOINS? Not unless you're ready for a wild ride.
Even before the "crash" this week, bitcoins had been prone to swift movements.
That's going to make it harder for big-time companies to embrace them. And a
currency still trying to find its place in the world is going to continue to be
volatile.
"It seems like it would be hard for the average individual to go into it and
feel comfortable with it," said Don Olmstead, managing director of
Charlotte-based Novare Capital Management.
"If somebody came to us and said, 'What do you think about it? Should I
invest?', we would dissuade them."
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(c)2013 The Charlotte Observer (Charlotte, N.C.)
Distributed by MCT Information Services
