Tags: Bitcoin | currency | anonymous | hack

What Could Go Wrong with Bitcoins? A Lot.

By    |   Thursday, 11 April 2013 07:52 AM

Bitcoin is officially the hottest new currency. The electronic currency has quadrupled in value in the past four weeks.

On Wednesday, Bitcoin traded as high as $266 before tanking to $105. It then recovered at $185. It depends on the hour measured, but in four years, Bitcoin has matched the return of the Standard & Poor’s 500 over several decades.

But the day-to-day volatility is not the story.

Bitcoin is one of the most controversial new investments. Some on the right wing of the political spectrum have embraced the currency, which is decentralized and cannot be issued further. However, many libertarian economists have warned that the currency is nothing more than a bubble.

Without wading into this debate, I see many things that can go wrong with Bitcoin, including:

• Bitcoin wallet service Coinbase was the third Bitcoin platform to suffer a hack in the last week, which caused a sharp temporary drop in the value of Bitcoins.

• Given its all-electronic nature, Bitcoin and other virtual currencies could be seen as the “perfect” currency for the digital world. However, Bitcoin has also seen its share of “real world” issues, such as crashes in conversion rates, and I would not be surprised to see increased regulation.

• Furthermore, proponents claim that it is impossible to hack the system and create more of the currency. But the technology for Bitcoin was invented several years ago and no one controls it. In contrast, hacking technology gets better every year. It is highly unlikely to believe it will not be easy to hack the system eventually.

• Since Bitcoin is anonymous, it likely will become a source for terrorists and other criminals to exchange money. This greatly increases the chance of it being regulated.

• Bitcoin is more difficult to buy than other currencies because it is anonymous. You cannot go to a local bank to buy Bitcoins. Since it is difficult to obtain it is likely to make fewer people want to use it.

• You can lose a $20 bill, and if you lose a check you can cancel it with your bank. If you lose Bitcoins, they are gone forever.

• Interest rates are low now, and banks pay close to zero interest. If we get back to 1982’s 18 percent interest rates, who would want to hold a currency that pays nothing?

There are many other things not listed here, but a vital one that must be addressed is the potential for competition. If Bitcoin actually does become the next big thing and we live in a capitalist society, expect others to create currencies.

If all it takes is one hacker to create Bitcoins, then another hacker can create a similar technology with a far wider currency base. Even if, Bitcoins can only grow at a finite rate, the amount of competition is infinite and likely.

In conclusion, Bitcoin might not be the best thing since sliced bread.

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Bitcoin is officially the hottest new currency. The electronic currency has quadrupled in value in the past four weeks. But the day-to-day volatility is not the story.
Thursday, 11 April 2013 07:52 AM
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