Sunday, July 28, 2013

The Pros and Cons of the Bitcoin

bitcoin photo:  bitcoin_euro_zpsfd54babd.png

By Cina Coren


With technology leaping ahead at a rapid pace, I’m sure you have been wondering when and how we would be able to buy something over the internet and pay for it with coins. Enter bitcoins.

Bitcoins are the first decentralized currency. They are digital coins that can be sent through the internet. Sounds strange, right? Well it is a concept that not everyone has grasped yet but it is on its way. Here’s how it works:

Bitcoins are generated all over the internet by anyone who wishes to set up a free application called a ‘bitcoin miner.’ Bitcoins are always generated at a predictable and limited rate and are stored in a digital ‘wallet.’ Transferring bitcoins requires an electronic signature. It takes only a few minutes for the transaction to be completed, confirmed and stored anonymously in the network. Small businesses find using bitcoins quite advantageous.

The main idea behind bitcoins is to facilitate cheap, anonymous transactions policed by its community of users. Bitcoins are very much like gold. There are a finite number of Bitcoins - 21 million exist and they are predicted to last until 2140. (What happens after that to holders of bitcoins is anyone’s guess.)

Also like gold, Bitcoins are mined. But instead of digging in the ground, Bitcoins are extracted online via complex algorithms. The value of Bitcoins fluctuates like gold, too. There are currently several online currency exchanges available where one can exchange dollars, euros and other currencies for bitcoins. The bitcoin is now selling at approximately $93.00

The main advantage of using bitcoins is that one doesn’t have to go through a bank. As we all know, banks can be expensive. They charge for every transaction and then some. Bitcoins can be transferred directly from person to person via the internet, eliminating the use of banks, clearing houses or transfer agents and saving us mucho money.

Bitcoins can be used worldwide and accounts can never be frozen. In addition, there are no stipulated limits or pre-requisites. Bitcoin proponents claim that the crypto currency is flexible, durable, secure and transportable.

Bitcoins are still experimental, however and using them does have certain drawbacks. The currency has seen wild gyrations, with new investors rushing in, then rapidly finding out that prices can go down as well up. Regulators are all over this virtual currency and are looking to keep it clean and away from criminals and money launderers.

Bitcoins must be backed up properly or they can get lost floating somewhere in an internet cloud. It is easy to lose large quantities of money. Often, getting the money is not a problem; spending it is as not all that simple since there aren’t many manufacturers or service providers using the system. So you can end purchasing bitcoins and not be able to buy what you want with them.

The major controversy about bitcoins stems from its use in drug trafficking. The U.S. Drug Enforcement Administration recently arrested the 31-year-old man who was transferring bitcoins to a shady online drug clearinghouse site that only accepted bitcoins as currency. His bitcoins became the first ever seized by the U.S. government, to the tune of 11.02 bitcoins worth $814. Confiscating the coins can be problematic and the police will either have to use the same computer the dealer used to make the transaction when buying the currency or undertake an online sting operation.

So are bitcoins the wave of the future? That’s anyone’s guess.

Cina Coren is a contributing editor at Daily Forex and a freelance financial writer.

3 comments:

  1. I have never even heard of a bitcoin? Iff it is digital and there is nothing to back it whats the point?

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  2. @tannawings. Being backed by nothing is essential to have no point of failure. No institution can be shut down, no web site, nobody can be arrested to stop the currency. Also if there is no gold to back then nothing can be seized.

    Why trust it them? The math/cryptography behind it. It's simple cryptography, You have the "key" (long sequence of characters) that let you spend the money. Since the number of Bitcoin is not unlimited it's value will be probably keep over time if not increasing.

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  3. Regarding Bitcoins and gold, it's important to keep in mind that neither has "intrinsic" value.
    Rather, both are valued by men for their unique properties.

    Gold is:
    Divisible.
    Fungible.
    Value dense.
    Recognizable.
    Durable.
    Zero counter-party risk.
    Stable in supply, yet minable.
    Liquid.
    International.
    Non-manipulatable. (Non-centralized.)

    By comparison:
    Diamonds, while valuable, are NOT divisible, nor are they fungible.
    Water, while valuable and divisible, is not value-dense enough to compete with gold as a form of money, on the free market.
    Food, while valuable, is not durable.
    Dollars, while liquid, do not represent zero-counter-party-risk (rather, they are debt-based.)
    Dollars, while recognizable, are not stable in supply (inflation is a worry).
    Dollars are also not minable. (Production is available only to a monopoly cartel, versus gold, which anyone can produce.)
    Food, which anyone can produce, is not liquid, especially in comparison to dollars or gold.
    Dollars, while you can hold them in your pocket, a board of bankers still has the power to reach into your pocket and manipulate its value. (This is not the case with gold.)

    Soon it becomes very clear that gold was never "declared" to be a form of money by any "authorities" but rather, became money due to natural market forces.

    If gold became money strictly due to natural market forces (as a result of its unique properties) then clearly the only reason it has been supplanted by dollars is due to artificial restraints imposed on the market by government force. (Such as legal tender "laws", tax "laws", money laundering "laws", etc.)

    Such forces must be constantly active, otherwise, natural market forces would immediately resolve back to gold again as they have for thousands of years.

    Now let's consider Bitcoin's unique properties:
    Divisible.
    Fungible.
    Value dense.
    Recognizable.
    Durable.
    Zero counter-party risk.
    Stable in supply, yet minable.
    Liquid.
    International.
    Non-manipulatable. (Non-centralized.)
    AS WELL AS:
    Non-confiscatable.
    Accounts cannot be frozen.
    Anonymity is possible.
    Electronically transferrable.

    As you can see, Bitcoin's unique properties are similar to those of gold, although it adds new properties due to its ethereal nature.

    Those new properties (non-confiscatable, non-freezable, pseudonymous, transferrable electronically) all serve to route-around the artificial forces that are currently being used to supplant gold with the dollar. After all, the various immoral, legal-tender legislation in place today uses the force of a gun to impose fiat money onto an economy that would otherwise resolve to gold by natural forces. That artificial force depends on the government's collusion with banks and their collective monopoly on the ability to issue, store, freeze, confiscate, track, and transfer dollars.

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