Before Russia quasi-invaded Crimea and before the Malaysian plane disappeared from the Earth, there was a story floating around the news about Bitcoin and something called Mt. Gox. For many people, it was the first time they had ever heard of Bitcoin and while they will probably never look at it again, Bitcoin is a fascinating creation that is growing and shrinking furious fits. Hopefully this post sparks your interest in reading up on Bitcoins.
What is/are Bitcoin(s)?
Well, to put it simply, Bitcoins are a type of digital currency. Often called crypto-currency, Bitcoins are money that can be used to purchase goods and services from places that accept them. Essentially, you can “exchange” real currency (dollars, yuan, euros) for Bitcoins at an online exchange. One Bitcoin can be worth $29 or $1000 depending on the timing of your exchange. The value is determined like any currency. It is based on consumer confidence, exchange trading, and the stability of it. Unlike normal currency, though, you do not hold real Bitcoins. While you can make physical copies, the common holding place for Bitcoins is in a digital wallet. Now of course you have to be asking “Why can’t anyone just make them?” Well when you exchange for a Bitcoin, you receive a code that is unique to that coin. This code ensures that you and you alone may spend the Bitcoin.
Why does it exist in the first place?
Besides the inventiveness of the internet, Bitcoins can be useful in the global economy. As a decentralized currency, it is not tied to any one country and can avoid certain sanctions and problems. It is relatively unregulated, which allows for a wide freedom in its use. But the biggest advantage to Bitcoin is what is known as the “block chain.” The block chain is the public ledger of where Bitcoins are spent or transferred. Every transaction is recorded when the key is entered. This prevents issues like double spending and money laundering because the key can be traced back through the internet.
So why has it been in the news recently?
To put it simply: it imploded. Well not exactly. What happened was one of the largest Bitcoin exchanges (where people can buy Bitcoins and store them until they wish to use or sell them back) collapsed. Mt. Gox (a/k/a Magic the Gathering Online Exchange) was at one time handling 70% of all Bitcoin trades. Then in February of 2014 reports came out that there was a massive security breach. It was unclear the extent of the breach, but Mt. Gox quickly closed ranks and stopped and transactions or withdrawals from happening. It finally came out that the company had lost almost all of their customers Bitcoins totaling around $473,000,000. When the exchange collapsed, about 7% of the total Bitcoins in circulation were lost and the customers seem to have little recourse to recoup their losses.
Why does it matter?
All of this matters to Bitcoin holders because it plays into the volatility of the currency. Unlike most prominent currencies, which remain relatively stable, Bitcoin fluctuates wildly. The volatility prevents companies from wanting to accept them and in turn prevents them from becoming more stable. For those that don’t own Bitcoins, the whole affair is an entertaining view of economics, free markets, and currency on a small scale. It goes to the heart of what makes money valuable. While I am not going to immediately buy into Bitcoin, I will follow them and watch just how far this digital currency will go.