Every new day seems to bring a new scandal for Bitcoin. To sum up last week: a bug was found and exploited throughout Bitcoin, the largest three exchanges suspended withdrawals, and Silk Road 2.0 was hacked and the equivalent of $2.7 million was stolen.
That’s just last week.
But despite this, Bitcoin continues to gain in perceived legitimacy and grow in popularity. So why aren’t people ditching Bitcoin?
As most probably know, Bitcoin is a form of digital currency that was created by a mysterious group or person under the name of Satoshi Nakamoto. It uses cryptography to create and transfer money via a peer-to-peer payment system on anything from a phone, to wallet software, to a variety of web apps. Bitcoins are created by a process known as mining, which means a computational process of adding transaction records to the block chain, which is essentially a public ledger.
Bitcoin was first mentioned in a paper released in 2008, which detailed, “a system for electronic transactions without relying on trust.” In 2009, the first Bitcoins and open source Bitcoin client were released. By October 2012, Bitpay already had over 1,000 merchants accepting Bitcoin. In early 2013, Coinbase, a payment processor, sold over $1 million worth of Bitcoins in a single month.
The number of exchanges grew, and more online services such as OkCupid and the food delivery service Foodler, started accepting Bitcoin. Then, of course, there was the seizure of the website Silk Road and around 26,000 BTC from William Ulbricht, also known as the Dread Pirate Roberts, who ran the site.
But a few months later, Bitcoin received a big bump when Ben Bernanke told Congress that virtual currencies “may have long-term promise.”
There is a bill right now in the California state senate to make Bitcoin lawful money. The bill passed the California State Assembly last week unanimously.
The news surrounding Bitcoin is never dull. It seems to be moving in two polar opposite directions either towards enormous wealth or catastrophe.
Just picking what happened on February 14th of last week is an illuminating example of the dual movement of this currency. It was reported that the newly created Silk Road 2.0 was attacked by hackers who took advantage of the Bitcoin glitch and raided the funds it held in escrow, ultimately absconding with 4,440 bitcoins, or over $2.7 million. This caused prices to drop sharply. Because of the same bug, three of the largest exchanges stopped allowing customers to withdraw their funds, and it was reported in the Wall Street Journal that the software fixes will take longer than expected.
Meanwhile, Bloomnation, a delivery service for local artisan florists, offered Valentine’s day flowers that could be paid for by Bitcoin. Later that day, Coinbase announced on their twitter that WedBush Securities, one of the nation’s leading financial service providers, announced a partnership to help them become the first U.S. institutional broker to accept Bitcoin.
So despite the volatility, scandals, skeptics, money-laundering, and theft, Bitcoin is still pressing forward and in fact gaining speed.
Bitcoin lowers transaction costs. While other payment services charge between 2-4%, Bitcoin charges only 1%. This will enable a whole new level of exchanges: micro-transactions, which have until now been uneconomical due to higher rates and the flat fee most companies charge. And while Bitcoin is not the first step to enable peer-to-peer transactions, it makes it even easier for individuals and small businesses to transact.
Another potentially radical effect that Bitcoin may have on the economy is in international transactions. Generally, transferring money across borders is still a very challenging and costly endeavor, with fees incurred on both sides. Bitcoin can be a boon here, standardizing value and bypassing unnecessary infrastructure. This is also a reason that Bitcoin can be potentially become less risky than other currencies. The fact that it is decentralized and not pinned to any particular country can insulate it from localized political problems.
Of course, much of this is dependent on Bitcoin becoming more widely adopted, and there is still a danger of certain countries and governments outlawing or not recognizing Bitcoin, as China did briefly last year.
But Bitcoin keeps growing - because there are incentives for people on both ends of the spectrum.
In less transparent countries, Bitcoin counteracts the restrictions a government can exert over a banking system. This is another reason Bitcoin is popular in countries with potentially unstable political and economic situations. But even in developed countries, there is a lot of excitement for a de-centralized, digital currency. In the United States, the Fed can implement programs that print money, causing inflation. Since Bitcoin has a finite number of circulating coins there can be no inflation, and in fact there will actually be deflationary effects.
Bitcoin is not the only payment-type in the news with a scandal recently. Credit card data has been compromised at many of the nation’s largest chain stores, affecting millions of individuals. Another reason Bitcoin will continue to grow is because of its superior security metrics. Bitcoin, unlike credit cards, was designed for the digital age. It has public and private key encryption. The way a Bitcoin transaction works is more like a cash transaction than a credit card transaction. Whoever has the coins, owns them. Nothing is left behind. There is no danger of skimming like there is in credit card fraud because no data is left to skim.
Bitcoin seems the least absurd when you examine it in a historical context. When you think about what currency is, moving to Bitcoin is not a very drastic leap. Throughout history nearly every item has been used as currency: shells, cattle, sweat, gold, printed paper. So the move to a digital currency is actually a logical progression.
The idea that the future could possibly be a decentralized virtual currency is not that radical of a shift, in terms of a historical perspective of money. Even in the United States until 1860, there were 8,000 types of bank notes being issued by a total of 1600 corporations. Surprisingly, the United States government actually only controlled about 4% of the money supply.
The reason this changed was the outbreak of the civil war. So a government regulated and centralized currency is not a fundamental fact of the United States. In fact, it was only taken over as an emergency relief effort. In the long run, this may well have been a short-lived piece of the history of money.
At this point, however, things are uncertain. No one seems to know what will happen to Bitcoin - or everyone seems to have an opinion, but no one agrees. People are comparing the Bitcoin rush to the dot-com bubble. It is being called a ponzi scheme. It is being both denounced and lauded. It seems to breed criminals, but it is also attracting some of Silicon Valley’s top venture capital firms. The currency is extremely volatile and - and yet there is no stopping this wave.
Perhaps it is like the tech bubble of the late 90’s; perhaps it is over-valued and attracting much more attention than it deserves - but even if it pops, it won't necessarily spell doom. Just as the dot-com crash didn’t stop the internet, it looks as though nothing will stop the adoption of digital currency.