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What other currency garners as much attention as bitcoin? Chances are you don’t hear that much about the U.S. dollar or China’s renimbi, but bitcoin news seems to have a certain sex appeal. Is the focus on the virtual currency much ado about nothing or something to keep track of?
The answer is … it’s complicated. The infant currency is certainly off to a rousing start, but it has a very uncertain future. (Get more background on bitcoin in An Intro to Bitcoin: Can a Virtual Currency Work?)
Bitcoin’s name is a bit of a misnomer, as it’s a virtual cryptocurrency (bits) with no physical manifestation (coins). But the name sure is catchy. Who coined (ahem) the term bitcoin? Actually, the currency’s origins are somewhat murky. According to bitcoin.org, the currency was created in 2009 by Satoshi Nakamoto, who has since left the project and denies having any ties to bitcoin.
There is no Federal Reserve for bitcoins. Nor are there bitcoin banks or backstops like the Federal Deposit Insurance Corporation (FDIC) when a bitcoin exchange (sort of like a bitcoin bank) goes bust. There isn’t a bitcoin mint, as you can’t print something that’s virtual. That’s just not how the bitcoin world rolls. Instead, bitcoins are created (or mined, to be more precise) using computers that also process transactions and secure the network. Bitcoin miners are rewarded with bitcoins for their efforts.
Unlike U.S. currency, only a certain number of bitcoins will be created .. er … mined. "Bitcoins are created at a decreasing and predictable rate. The number of new bitcoins created each year is automatically halved over time until bitcoin issuance halts completely with a total of 21 million bitcoins in existence," according to the FAQ on bitcoin.org. The magic number is expected to be reached in 2017. (One wonders if there will be a ceremony when the last bitcoin emerges.)
Who uses bitcoins? You’d be surprised. Bitcoins can be used to pay for all kinds of things, including Domino’s pizza. OK, so technically you don’t buy the pie directly from Domino’s. Instead, you buy it indirectly by first placing the order with PizzaForCoins.com, which exchanges your bitcoins for good, old U.S. dollars and buys your pizza. It’s cool … but it’s a bit more complicated than just giving the delivery guy a $20 and calling it good.
Discount retailer Overstock.com has been accepting bitcoins since January 2014, and many other online retailers accept it too.
You buy bitcoins on exchanges. The recently shuttered Mt. Gox, which filed for bankruptcy protection in Japan in February, was the largest such exchange. It’s not clear if people who had bitcoins in Mt. Gox will get their money back. As of mid-March there were more than 12.7 million bitcoins in circulation with a total value of almost $7.7 billion. Once you have some bitcoins, you can pay merchants via smartphone or computer.
Just like a "normal" currency, the value of bitcoins can fluctuate wildly. A bitcoin was valued as high as $1,200 late in 2013; more recently, it’s fallen to about half that. There are numerous sites that track the currency’s value.
Bitcoins have a somewhat shady reputation as many governments haven’t begun to regulate them yet, which means that the currency’s use is hard to track, making it ideal for illicit commerce. The FBI shut down Silk Road, an online market, in October 2013.
"In 2012, an academic from the Carnegie Mellon CyLab and the Information Networking Institute estimated that 4.5 to 9 percent of all bitcoins transacted were for purchases of drugs at a single online market, Silk Road," according to Wikipedia. No wonder that market was shuttered by the Feds.
The U.S. is seen as bitcoin friendly, as the IRS hasn’t decided what it will do about bitcoins. Even so, it seems likely that bitcoins will be taxed. China has already heavily regulated the virtual currency.
So far, the future is unclear for bitcoin. It could be regulated out of existence or remain a currency for illegal activities. All things seem possible for bitcoin, but it’s tough to flip one. At least it won’t get lost in your couch.
