Virtual Bitcoins are appealing but probably doomed

May 27, 2011

By Robert Cyran
The author is a Reuters Breakingviews columnist. The opinions expressed are his own.

In the currency wars, the nerds are winning. The value of a Bitcoin — a digital currency trading over peer-to-peer networks — has rocketed more than nine-fold in two months to $8.74. The preordained supply and decentralization of Bitcoins have intrigued geeks and paranoid inflationistas alike. But this abstract gold may not survive what looks like a bubble.

Bitcoins are actually strings of unique digits, tracked and traded via an online network. People earn new coins by solving network security problems. These coins can then be traded for real currencies on exchanges, or for goods from certain businesses that accept them.

The Bitcoins in a user’s virtual wallet are tracked by the secure system and can only be transferred by that user. Unless the system is hacked, this kind of money can’t be forged. Moreover — and here’s the hook for the inflation worriers — it can’t be printed willy-nilly. The supply of Bitcoins is on a predefined path and will be capped at 21 million. And because there’s no central point in the system, there’s no equivalent of the Federal Reserve or another central bank to rewrite that policy.

The concept of the Bitcoin is no less real than regular paper money or coins. All such currencies only have the value their users accept that they have. Bitcoins do, though, have a couple of disadvantages — they don’t generate income, and since they exist in the digital cloud they’d be less use than paper money in any scenario involving power cuts or lost connectivity.

Still, it’s easy, quick and essentially free to transfer Bitcoins. Moreover, transactions are anonymous and the system knows no national borders. That’s helpful for some legitimate users but also makes them perfect for stuffing virtual brown envelopes and other nefarious activities — a potential worry for law enforcers.

The finite supply means the value of Bitcoins should rise as demand increases. But the latest run-up looks decidedly frothy. One concern is they aren’t easy to spend. A flush user can buy Web design help or alpaca socks. But there aren’t many businesses that accept them. So it seems likely enthusiasts and speculators are hoarding them without regard to the value they really represent. A bubble that bursts when the abstract intellectual appeal fades would probably doom the otherwise creative idea.

Comments

” . . . there aren’t many businesses that accept them.”

There are services that let you buy anything on Amazon.com with bitcoins. You can also buy gift cards to many other places, and also pre-paid credit cards spendable pretty much anywhere.

Posted by dacoinminster | Report as abusive
 

A bubble might indeed burst (not that you can tell before it actually happens, bubbles are always identified in retrospect after all), but does it really destroy Bitcoin? Let’s say a catastrophe strikes and Bitcoin falls from current ~8USD/BTC to 0.08USD/BTC, does it destroy Bitcoin? Sure people who are holding Bitcoins and can’t cash out in time will lose big time but the Bitcoins still remain in circulation. Right now they are mostly used as proxy between fiat currencies, vendors don’t care what the exchange rate is as long as they cash in just as they receive their coins. The price gets set according to up to date exchange rates anyway. As long as merchants accept Bitcoin payments and more start accepting every day Bitcoin will continue to be viable currency no matter the exchange rate

Posted by r2kordmaa | Report as abusive
 

They are very easy to spend on dollars, in other words to sell them.

Many virtual currencies can’t be exchanged back for dollars: Facebook credits, iTunes points, etc. Bitcoins can always be traded back for dollars. The dollars for which they are sold is a number on the real value they represent.

It also represents the number of participants helping secure the peer-to-peer network, which is multiplying on a weekly basis. This measure of the p2p network is called the difficulty factor. And its appeal is concrete, not abstract.

Posted by KyleSmith | Report as abusive
 

“[T]hey’d be less use than paper money in any scenario involving power cuts or lost connectivity.”

This is a misconception. A Bitcoin is secured by a cryptographic key pair, which can be printed out and exchanged, as long as the recipient trusts the payer not to have made a copy. To satisfy this requirement, one can embed the key pair in a tamper-resistant card or bill with anti-counterfeiting features. This is being done by the folks at Bitbills.com.

Posted by JohnTobey | Report as abusive
 

They aren’t any more difficult to spend than any other currency. You have to trade them if you want to spend them at most stores, sure, but a) this is a new concept, and as people get used to it more stores will support it, and b) eventually we may see the ability to pay for credit card bills, etc. with Bitcoin.

Either way – people who understand the technology understand that Bitcoin is more secure than many of the current methods of transferring money online. Credit cards are far less secure than people think.

And, we’re already seeing various organizations accept donations in Bitcoin. Not to mention – the value of the Bitcoin is high enough that it’ll pique people’s interest and get them to consider trying it out.

Also, contrary to popular belief Bitcoins aren’t much easier for bad guys to sneak around. All transactions are published to all nodes – yes, the data is anonymized, but that’s no different than real life. The police don’t know where any particular dollar bill came from unless it is “marked”. I’m sure there would be a way that they could do something similar with Bitcoin (maybe keeping a list of keys used for the Bitcoins they’ve transferred). Either way, IMO the benefits far outweigh the risks.

Let’s not forget – Bitcoin is a system run by USERS – not by a business or bank. Whether it ever sees widespread acceptance or not, it will never go away until people decide to stop using it. Because it’s not run by a bank or business, it will keep running so long as the users have the will and the ability to keep it going. For physical money, keeping the economy alive and well is relatively expensive – we need armored trucks, vaults, etc. to keep our physical dollars safe, and we need computer networks for quick access to bank and credit card accounts.

Bitcoin needs only a computer and a computer network, and you have both physical access (you can put them on a Flash drive and hand them to someone if you want) and access via the Internet.

Posted by scottk | Report as abusive
 

I agree with @KyleSmith, the appeal is definitely concrete. It’s been vetted by security specialist Steve Gibson on the SecurityNow podcast, and we accept it as a form of payment at our company for products and services as of May 2011.

The world’s biggest financial sins occur on Wall Street. Bitcoin can change that. Bitcoin is so fully transparent with absolutely no unknowns and it has solved all traditional currency problems from fraud to international trade to supply, but most importantly there is no middleman. While it is appealing to libertarian ideals and criminals alike, there are legislative ways to adopt it and benefit all of society. The timing is great! Look at all the shakeup happening with Square (SquareUp) and Google Wallet and PayPal.

Posted by davidredekop | Report as abusive
 

“But this abstract gold may not survive what looks like a bubble.”
Why?
The run up in the exchange rate does indeed look frothy- but nothing in your article supports claiming bitcoin to be doomed. Just because the .com bubble popped didn’t spell the end for .coms.
Also, Bitcoin, the concept and implementation, isn’t a company or an industry. The technology itself is not patented and worth nothing. If you want to say that there is a bitcoin valuation bubble then say it; you would probably be correct. But prices falling for bitcoins, just like for gold, does not mean doom for either.

Posted by JonathanW | Report as abusive
 

For a different point of view about potential demand for Bitcoin, you may want to read this:

http://cs702.wordpress.com/2011/05/29/on -the-potential-adoption-and-price-apprec iation-of-bitcoin-in-the-long-run/

Posted by callesantiago | Report as abusive
 

The entire article can be debunked here:

https://en.bitcoin.it/wiki/Myths

I realize this is the internet, and perhaps you had a pressing deadline before hammering out this story with little to no research, but trust me – the resources exist, even if you fail to use them.

Please do your homework before writing about BitCoin, Mr. Cyran – it would do your readers justice.

Cheers,

TraderTimm

Posted by TraderTimm | Report as abusive
 

Does anybody in this room remember tulip seeds or beany babies? And how we were all going to get rich in trading in these types of gambles?

It turns out that, tulip seeds reproduce in huge quantities. Who’ld-of-thought? And when the market prices of beany babies went up, so did manufacturing of them.

The internet is full of people claiming to be Martians. Just making a statement & broadcasting it online, and having gullible people repeat it does not make that statement factual or truthful or accurate or correct.

Posted by rwills | Report as abusive
 

From the content of previous comments, it sure seems like the tea-partiers, the wiki-leakers, and the tech-geekers all banded together and bought bitcoins.

I have some respect for you all, but you need to get out more. Listen to someone with a different idea once in a while.

I would venture a guess that this may be driven by fears of the “NEW WORLD ORDER”. Be careful to not create your own worst fear.

There is Someone Good watching over us.

Posted by UnderdogSlap | Report as abusive
 

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