In the past year, investors have become increasingly interested in bitcoin, the decentralized digital currency. Many are excited but most are still cynical perhaps because previous attempts at digital currencies have resulted in venture capital backed services like Floorz.com and InternetCash.com failing in dramatic fashion.
But unlike these failed digital currencies, bitcoin has grown exponentially since 2009 even though it’s not backed by any central banking authority.
The identity of the currency’s original creator, Satoshi Nakamoto, still remains a mystery to this day. For these reasons, the future of bitcoin is hotly debated and has yet to be decided.
What is Bitcoin?
Bitcoin has been around since it was originally developed by Satoshi Nakamoto in 2008 and 2009. The original idea of bitcoin was for a decentralized and encrypted digital currency that posts all transactions to a public ledger.
Every ten minutes, a new block of 25 bitcoins is created and given to a randomly selected individual who is running the bitcoin network, which provides a financial incentive to keep the network running.
Since its introduction, the currency has been nurtured among the developer community who have continued to improve the software, fix bugs, and make it more user-friendly.
Most importantly, many reputable companies such as Overstock.com, Dell, and Virgin Galactic are seeing the potential and allowing their customers to pay with bitcoin.
Potential Problems
Unfortunately, bitcoin’s anonymity also has some potential downsides. Last November, a notorious website called Silk Road was taken down by the FBI. The website allowed users to purchase drugs and other illicit items and have them mailed to their house.
Although the price of bitcoin quickly grew from around $100 to $1,100 in the next four weeks following this incident, it also tarnished bitcoin with a bad reputation. In February 2014, the largest bitcoin exchange, MtGox, filed for bankruptcy after it was found to be insolvent. At least $500 million in customer deposits were lost as a result of this mismanagement.
There have also been cases of bitcoin mining hardware manufacturers failing to deliver products on time, such as Butterfly Labs, which has two class-action lawsuits pending.
Growth Potential
Today, the bitcoin currency has been adopted mostly by a small niche of tech-savvy, libertarian entrepreneurs that associate bitcoin’s current status with the early days of the internet.
Despite having already attained a market cap of about $6 billion, the growth potential is still far greater. Since bitcoin transaction fees are almost non-existent and transactions are nearly instantaneous worldwide, the currency is in a strong position to disrupt the remittances industry.
Traditional high-cost services like Western Union, international transfers, and wire transfers are examples of services that bitcoin, arguably, does better and less expensively. There is also the potential for bitcoin to serve those consumers who don’t have a bank account, since users do not need to pay any fees to permanently open a bitcoin wallet.
Bitcoin Myths
The rapid emergence of the bitcoin currency has created many myths and misconceptions about the technology. While bitcoin’s price is volatile, this does not make it unviable as a currency in the long-run. Indeed,IG’s forex trading platformindicates that the currency markets are some of the most volatile in the world.
There is also a myth that the bitcoin currency is entirely anonymous, which is untrue. With statistical analysis, data in the public transaction ledger can be used to detect the identities of many users with enough resources, motivation, and time. However, if the money is never spent, this can be impossible.
Kidal Delonix is a contributor to Mr. Hoffman's blog. The views and opinions are entirely his/her own and may not reflect Mr Hoffman's views.
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