It used to be that the safest place for your money was under your mattress or in the ice chest in your refrigerator. The problem is, that money didn’t gather any interest, or help you build a relationship for mortgages or loans. As banks became more secure, people turned to them as the safest place to stash their cash. Sure, they weren’t perfect – the public’s confidence was shaken somewhat by bank failures during the Great Depression – but the creation of Federal Deposit Insurance mostly satisfied that concern for some time.
Recently, however, a lack of confidence in the banking system has returned. The first strike against the banks came with their unsavory behavior during the Great Recession, including misleading investment advice, mortgage mishandling and the addition of often undisclosed or hidden fees to credit card, debit card, and checking transactions. For many people, all those things have been major turnoffs. But the final straw, at least for some, may have been the announcement by the government of Cyprus that, as a means of reducing its deficit, it planned to tax customer bank balances, automatically taking the tax directly from depositors’ accounts. Although Cyprus backed down somewhat from its original plan, just the possibility of such action by a government, any government, sent shock waves through bank customers, worldwide. After all, isn’t our money supposed to be safe in the bank? Now, many people aren’t so sure. And it has them speculating about a new kind of currency, one that wouldn’t be controlled with a national government like the ones we rely on today. Bitcoin is one such currency, and certainly the leader in this space right now. But can it work?
Founded in 2009, Bitcoin is an open-source, decentralized digital currency based on a peer-to-peer network. To put it in plain terms, it’s an online currency that’s accepted by individuals and businesses around the world. And, unlike many other forms of payment, it provides anonymous, non-taxable transactions. (Learn more about how Bitcoin works in An Intro to Bitcoin.)
As of March 29, 2013, Bitcoin had a monetary base (a term that refers to the amount of currency being held or circulated) of $1 billion dollars, far more than any other digital currency. Since 2010, the currency has appreciated 10,000 times; if you’d exchanged $100 for Bitcoin currency in 2010, it would now be worth as much as $1 million. Pulitzer Prize winning economist Paul Krugman explained how the value of Bitcoin currency expands in his New York Times blog on September 11, 2011.
"Bitcoin, rather than fixing the value of the virtual currency in terms of those green pieces of paper, fixes the total quantity of cybercurrency instead, and lets its dollar value float. In effect, Bitcoin has created its own private Gold Standard world, in which the money supply is fixed rather than subject to increase via the printing press."
Felix Salmon, a finance blogger at Reuters, attributes what he calls "the Bitcoin Bubble" to, first, an article that appeared on Slashdot in July 2010, which brought Bitcoin to the public’s attention. The more immediate impact, he says, came from the effects of what happened in Cyprus, and the public’s increasing distrust of banks.
But Will It Last?
But while Bitcoin is being held up by many as a possible solution, there are, of course, many concerns about possible risks in using Bitcoin. Because it’s digital, it’s subject to cyberattack and theft by cybercriminals. Because it’s anonymous, it’s a favorite currency for organized crime and other shady business that prefer to remain anonymous. Not least of all, it isn’t exactly simpler than the banking system many people are still hoping to rely on.
Many people are now speculating about whether Bitcoin will be the winner in the race to become the universal digital currency. At this moment, it is way ahead of the pack, and its ascendancy has forced the world to look at its defects and possibilities. And we should. Bitcoin may become a new universal currency. It may not. But chances are, we’re on the way to a world where digital currency will be become an increasingly dominant force.