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Bitcoin Blunder: New Digital Currency is Still Shaky

By: Anna Junko, Section Editor for Student Literature and Art (ajunko2@uic.edu)

Don’t be embarrassed if you have some questions about Bitcoin. This new currency—introduced in 2009—has many consumers puzzled, and recent negative headlines only make it more confusing.

But seriously – why would anybody use Bitcoin?

Well, some consider currency in its present form problematic. First, it is public. Unless you only use cash and don’t utilize banks, there is a fairly public record of your financial activity.

Second, credit card transactions and processing fees are expensive for merchants. These costs drive up the price of products and services. Some people want a way to avoid the cost and publicity of banks and governments, and this is where Bitcoin comes in.

Bitcoin is a new kind of money that, according to Bitcoin.org, “uses peer-to-peer technology to operate with no central authority or banks.” Although using Bitcoin is similar to Paypal, it differs in two main ways: it is de-centralized and functions as its own currency. Paypal, unlike Bitcoin, must use currency such as the U.S. dollar, and is still dependent on financial institutions. Instead of traditional methods of purchase, users buy Bitcoin through “Bitcoin exchanges,” which allow them to purchase Bitcoin with other currencies. Users then store Bitcoins in a “digital wallet,” which exists in the cloud or on an individual’s computer.

An unknown person with the alias Satoshi Nakomoto introduced Bitcoin in 2009 as open source software. Users send payments through digitally signed messages to the user network. They do not have to reveal their names or locations when using Bitcoin. Many argue that digital currency protects privacy in an age where financial privacy is almost impossible. Each Bitcoin transaction is recorded in a public log, but users are only identified by their wallet IDs.

Critics, however, are skeptical about Bitcoin’s erratic market price and say that it is vulnerable to theft or fraud. Bitcoin.org even warns, “Bitcoin should be seen as a high-risk asset, and you should never store money that you cannot afford to lose with Bitcoin.” Between June and October 2011, Bitcoin lost 90 percent of its value.

The latest calamity was the most devastating of all Bitcoin gaffes. On Feb. 24, the Bitcoin exchange seemed to be on the verge of collapse after a document communicated in the Bitcoin world asserted that 744,000 had gone missing in a theft gone unnoticed for years. Critics lashed out at Mt. Gox, the largest Bitcoin exchange, for its lack of security. Executives at other Bitcoin exchanges asserted that the “tragic violation of the trust of users of Mt. Gox was the result of one company’s abhorrent actions, and does not reflect the resilience or value of Bitcoin and the digital currency industry.”

Bitcoin has been making negative headlines for months. Chief executive Charlie Shrem has been accused of money laundering—authorities arrested Shrem for allegedly selling Bitcoins to people trying to buy and sell on the seedy Silk Road website—and on Feb. 28th, Amber Ratke, a 28-year-old Bitcoin executive, was found dead of apparent suicide in Singapore.

The FDIC does not insure Bitcoin, and because it is mostly unregulated, governments are worried about the effect it will have on their currency control. The future of Bitcoin is uncertain, and even though the famous Winklevoss twins (who asserted that Facebook was actually their idea) purchased their space visits with Bitcoin, nobody recommends that average individuals invest just yet.

Further Reading:

http://www.nytimes.com/2014/02/25/business/apparent-theft-at-mt-gox-shakes-bitcoin-world.html

http://money.cnn.com/infographic/technology/what-is-bitcoin/

http://www.washingtonpost.com/blogs/the-switch/wp/2013/11/19/12-questions-you-were-too-embarrassed-to-ask-about-bitcoin/

https://bitcoin.org/en/you-need-to-know

http://money.cnn.com/2014/02/19/technology/security/bitcoin-black-market/

http://www.foxnews.com/tech/2014/03/05/bitcoin-firm-ceo-found-dead-in-suspected-suicide/

http://articles.latimes.com/2014/jan/27/business/la-fi-bitcoin-arrests-20140128

http://money.cnn.com/2014/03/05/technology/winklevoss-space-flight/

 

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