Two Bits on Bitcoins

Production Of Bitcoins By Mike Caldwell of Casascius

The buzz about bitcoins may soon subside, because bubbles are certain to burst. But bitcoins may prove to be more like a balloon than a bubble—with a tougher skin, able to expand and deflate over and over. What’s a bitcoin, you say? A cryptocurrency. What’s a cryptocurrency? Glad you asked.

Bitcoin is a virtual currency that exists only online, is not backed by any government or central banking authority, and serves as a peer-to-peer electronic payment scheme. Essentially a string of encrypted computer code, a bitcoin can be transferred anonymously by a computer or smartphone without the intervention of any financial institution. It is being used in limited Internet commerce much like a standard currency like the dollar or yen. Bitcoin transactions and account balances are verified electronically in real time by a host of interconnected servers.

The value of bitcoins, like that of other currencies, can rise and fall, and it has fluctuated rather wildly in recent months. From its inception in 2009, when a single bitcoin was worth just cents, it rose to a height of $260 apiece, before plummeting. Yet, to work as a currency, rather than an investment, bitcoins need stability and those who hold them need incentives to spend them in trade (e.g., for goods or services) rather than hoard them, which defeats the purpose as a means of exchange.

Unfortunately for the creators and promoters of bitcoins, their chief use at present is for black-market transactions. The eBay-like website called Silk Road relies strictly on bitcoins—albeit for purchases of illegal drugs and the like. But the recent eurozone flare-up in Cyprus may have boosted interest in bitcoins. As investors saw the European Union considering the confiscation of bank deposits, this cryptocurrency that is not operated by or for the benefit of any sovereign entity may have begun to appear more viable. If bitcoins survive to become a “mature” currency, it may be the future of money.

Image credit: © George Frey/Bloomberg via Getty Images

Related Links

  • Bitcoin Goes to the Moon
    Listen to this podcast to get an idea of how bitcoins took off on their meteoric rise; includes a graph showing the dramatic rise in bitcoins’ value from January to April 2013.
    (Source: NPR Planet Money, April 9, 2013)
  • 7 Things You Need to Know about Bitcoin
    Solid, thorough consumer advice on the bitcoin buzz.
    (Source: PC World, April 11, 2013)
  • Bubble or No, This Virtual Currency Is a Lot of Coin in Any Realm
    This article analyzes whether the recent success of bitcoins, driven by speculation, may be proving that the virtual currency has what it takes to be viable.
    (Source: New York Times, April 7, 2013)
  • Cryptocurrency
    Bitcoins aren’t easy to understand, but this article provides as good an explanation of the “cryptocurrency” as you are likely to find.
    (Source: Technology Review, August 23, 2011)
  • Bitcoin
    Wikipedia’s extensive article on the topic is worth exploring (though entries on such evolving topics are subject to change).
    (Source: Wikipedia; accessed April 30, 2013)

One Comment

  1. alan says: