A Closer Look at Bitcoin

Hang around the world’s financial markets, and sooner or later you’ll hear the word “bitcoin.” What does it mean?

     Technically speaking, bitcoin was first introduced in 2008 by Satoshi Nakamoto, then released as an open software system in 2009. It’s also known as virtual currency, cryptocurrency or digital currency: it acts as a substitute for a variety of money exchanges, including the U.S. dollar and the Canadian loonie.

     Not only have investors been speculating in this new ‘money,’ but they’ve been using it to pay for their expenses, including plane tickets, hotels, etc. The first ATM for bitcoin recently opened in Los Angeles, CA; others are planned.

     Several questions remain about this new form of trade:

*Who the heck is Satoshi Nakamoto? No one is certain. ‘He’ may be a personor a group. What is certain is that soon after introducing the first bitcoins in 2009, he handed over control of the network to Gavin Andresen, a scientist whose own ‘Clearcoin’ program closed in 2011. Other members of the bitcoin community were given some control, as well.

     Nakamoto was careful, however, to retain a million bitcoin for personal use. Although values fluctuate, in 2013, that was about a billion dollars’ worth of currency.

*So is Andresen really Nakamoto? Who knowsbut Andresen did say in Forbes magazine, ” “Bitcoin is designed to bring us back to a decentralized currency of the people,” and “this is like better gold than gold.”

*How do bitcoins get their value? Several ways. First, they are used to pay for computer processing work “in which users offer their computing power to verify and record payments into the public ledger,” according to Wikipedia. This is called mining.

     Secondly, they can be purchased via the Internet with other currencies (pounds, dollars, marks, etc.), then sent and received for a small additional processing fee. (Think wiring money — because that’s essentially what it is.)

     And thirdly, they can be obtained in exchange for products and services.

*What’s the rate of exchange? It’s been varying all over the place ever since bitcoin was first introduced — but basically the earliest investors have made the most profit, so far. Does this make it a burgeoning pyramid scheme-in-the-makingor were those investors just quick to take advantage of a great new system? (The current value for bitcoin, as of this writing, is $630 and change.)

*Is this real money? Well, sort of. Technically, bitcoin is fiat money — an exchange of value that’s not valuable in itself (i.e., based on gold, silver or precious metals), but currency that is recognized by various individuals, organizations and even countries as legal tender.

      This idea is not that far off for Americans. Our first printed money, “greenbacks” or dollar bills, weren’t printed until the Civil War era. Before that, we relied on bills or coins printed or minted by various banks and organizations. They said the money was good, so people believed it. Sometimes they were right — sometimes not.

The one-dollar ‘greenback,’ issued in 1862 (Wikipedia)

     Sadly, we know the world of fiat currency all too well. In 1971, Richard Nixon took the U.S. off the gold standard in a bold move also known as the “Nixon Shock.” What are our currency values based on today? Like bitcoin — nothing at all.

*Is it safe? Some say yes — some say no. Bitcoin was originally billed as ultrasafe because it existed only in computers — so it couldn’t be stolen. Unfortunately, the Mt. Gox bitcoin exchange proved that wrong when it ‘misplaced’ 850,000 bitcoins, worth up to $400 million at the time — and went bankrupt. (“First of all, I’m very sorry,” said Mark Karpeles, Mt. Gox’s CEO.)

     Within a few weeks of that discovery, the Flexcoin bank in Canada shut down after it somehow lost $600,000 in bitcoin values. (Like Mt. Gox, it blamed computer hackers for the theft.)

      Soon after that, the CEO for First Meta, a bitcoin exchange in America, Autumn Radtke, committed suicide.

     Other reasons were trotted out for Radtke’s death. But like the thefts from ‘safe’ companies, it makes the thinking investor very, very cautious.

*Is it reliable? Another difficult question. Could bitcoin be just another pyramid scheme, like the many that have already been reported — or accused of? (A long and varied list is here…add Zeek Rewards and Herbalife to the batch.) Or is it a new and useful currency that transcends different countries and cultures more easily than the hassle of exchanging X for X?

*How can you find out more? Start at the Bitcoin home site for specifics. More here, including explanations of terms including ‘Multibit’ and ‘Armory.’ (The latter is said to support “multiple encrypted wallets,” as well as “cold storage” for additional safety.) Then take a look at the other links in this article. Like any possible investment, ask as many questions as possible before putting your hard-earned cash into it.

In the old days, a “bit coin” was checked for authenticity by biting it — if it didn’t bend, then it was ok. Is this new bitcoin ‘bent,’ as well? Only time will tell.

2 Responses to A Closer Look at Bitcoin

  1. I am waiting to see how bitcoin does in the world for a while longer before jumping on. Although US currency is also not intrinsically valuable, lots of countries in the world use the currency as their preferred method of payment. As a result, lots are interested in keeping it alive and well. Not so clear yet with bitcoin. I am not adverse to bitcoin, but at this moment, it feels a little too new for me.

  2. A number of people are saying the same thing, WD…but many are not.

    I personally wonder if it’s just another angle on the MLM idea…and again think:
    If it sounds a little too good to be true — it probably is.

    Thanks for writing.

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