Monday, January 13, 2014

Is Bitcoin a Bad Penny?

Bitcoin is currently riding the popularity wave, with Overstock and Zynga accepting the virtual currency as legal payment and PayPal announcing that it believes in thecryptocurrency.

Bitcoin was first described by Satoshi Nakamoto in the 2008 white paper “Bitcoin: A Peer-to-Peer Electronic Cash System”. Nakamoto explained in the paper that the virtual currency functions without the rules and restrictions of central banks.

Anyone can mint Bitcoins providing they have an Internet connection. Once users have a certain amount of Bitcoins, they can use them to trade in real currency such as Euros or US dollars. A rising number of users is also buying items with Bitcoins in online shops – hence the interest of Overstock and PayPal in the currency.

Governments are not too happy with the new kid on the block. For one, it is unclear which laws apply. Another problem is to establish what Bitcoin exactly is, since they are created by computer algorithms and traded between online wallets using virtual keys. That would make Bitcoin a piece of software and not so much legal tender.

Banks are keeping an eye on their new competitor. Bank of America became the first major Wall Street bank to release research about Bitcoin stating that Bitcoin could become "a major player in both e-commerce and money transfer".

Chinese banks are forbidden to handle any Bitcoin transactions by the Chinese government. Other governments and central banks do not go that far (yet), but do issue warnings about the potential risks.

Opposition also came from an unexpected side – environmental activists. The mining of Bitcoins is seen as a “disaster” since the processing power of the computers needed to generate Bitcoins requires electricity. According to Bloomberg’s Mark Gimein, the current daily power consumption necessary for creating Bitcoins could easily supply 31,000 US households with electricity.

Once Bitcoin becomes a mass currency, the impact on the environment would be comparable to that of mining silver and gold.

For now, Bitcoin still has a long way to go. The maximum amount of Bitcoins that can be created is 21 million. At this moment, half of that amount is in circulation.

Will Bitcoin make it? Time will tell.

Bitcoin is facing some issues. The mining of Bitcoins is being dominated by pools of people with dedicated hardware (chips). The digital currency is also facing fierce competition and was the victim of computer hacks.

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