What Exactly is Bitcoin and Is It Reliable?
The last year has seen bitcoin grow from something that only a few really knew about or understood to a massive worldwide phenomenon. Last year saw the value of 1 bitcoin grow from around $13 to a high of over $1,000. At the same time people began to use it for everyday transactions and bitcoin ATMs started to pop up in major cities.
However, the beginning of this year has brought with it considerable controversy for the virtual currency and people are beginning to question its validity. Leading economists are releasing papers explaining why bitcoins cannot serve as a viable currency.
The main argument used against bitcoins by economists is that due to the extreme fluctuations in its value it is hard for it to serve as either a unit of account or a store of value. Its instability is greater than that of a typical stock and its exchange rate with the dollar is about 10 times more volatile than those of other major currencies. Furthermore, unlike other major currencies, it doesn’t correlate with the value of gold.
Another aspect of the digital currency which limits is potential is the fact that only 21 million units can ever be issued. With a growing economy a fixed money supply can only go so far. If for instance workers were to be paid in a bitcoin dominated economy, they would likely have to accept pay cuts every year.
On a more practical level, as has been demonstrated in just the last few weeks, the fact that bitcoins need to be stored in “digital wallets” makes the currency extremely vulnerable to thieves and hackers.
Just last week the bitcoin exchange Mt.Gox went bust and the website was taken offline which has put at risk millions of dollars invested in the exchange. Furthermore, the exchange deleted all of its tweets and the CEO Mark Karpeles resigned from the Bitcoin Foundation’s board of directors.
After the exchange went bust the value of bitcoin dropped around 3% to $490. While the exact reason for the shutdown is not known, it is thought that hackers caused the site to lose 744,408 of its users’ bitcoins worth approximately $367 million.
Of course, other major bitcoin exchanges immediately leaped to the defense of the virtual currency; however, the incident serves to highlight the risks involved in trading the virtual currency. At the same time, the bitcoin system is still young, and as with any other major enterprise there are going to be problems which only time and diligence will solve.
Unsurprisingly there are companies which have foreseen these problems and are already acting upon them. The bitcoin debit card provider, Coinkite is preparing to launch an API this year which will enable companies to store bitcoins on custom-built hardware security modules (HSMs).