Bitcoin first started making headlines in 2009 and has continued to grow into one of the world’s most well-recognized, thorough, and usable cryptocurrencies. But with multiple legal controversies and the general public’s skepticism when it comes to something as new as “cryptocurrency,” it’s difficult to tell whether Bitcoin has much of a future. Read on to learn more about the currency and its future.

What is Bitcoin?

Bitcoins are widely known as a digital or cryptocurrency. Unlike conventional currencies that are regulated by central authorities in their respective regions (such as the Federal Reserve Bank for the United States Dollar), Bitcoin is border-less and managed by a cryptographically-secured peer-to-peer network. The demand for Bitcoins determines their value in the market, and their supply is determined by complex mathematical algorithms developed by the founder–a person who goes by the pseudonym Satoshi Nakamoto. This supply generation process is called Bitcoin mining. So, Bitcoins are usually created by being “mined” by computers solving a complex string of processing problems, although one can now purchase existing Bitcoins.

Only fifty were created at the time of the cryptocurrency’s genesis and the maximum number of coins that can be issued is locked at 21 million. Just like the lowest value that the United States dollar can be divided into is one-cent pennies, a Bitcoin can at most be divided into eight decimal places. It gained prominence in April 2013 when its value spiked to $266 US Dollars compared to only $22 earlier that  same year. More than 10 million coins had been issued at that point at a total market value of $2 billion.

Courtesy of Idology.com.

Who likes Bitcoins?

Proponents of the cryptocurrency appreciate its purity in terms of supply and demand without any governmental interference. Bitcoins mitigate privacy concerns because they eliminate the need to enter information such as name and address for online transactions. For many tech aficionados, the cryptocurrency provides the thrill of following a new trend in the virtual world. Bitcoins are now being accepted by many platforms like WikiLeaks, restaurants, mobile payment applications, and retail apps that have partnered with major consumer brands like GAP and Sephora.

A federal district court recently ruled that Bitcoin is indeed a currency, given that it can be either used to purchase goods and services directly, or to purchase currency that can in turn be used to purchase goods and services. According to a study conducted by the European Central Bank, Bitcoins do not pose a risk to price instability given that their supply is capped at 21 million coins, and will not negatively affect  the economy as long as the government monitors it to ensure that its not being used for fraudulent purposes.

Who doesn’t like Bitcoins?

Opponents worry that the unregulated and anonymous nature of cryptocurrency lends itself to be used for illegal trade, tax evasion, money laundering, and investment frauds like Ponzi schemes. Dread Pirate Roberts, the owner of Silk Road, an online drug market in the deep web that is now shutdown, blatantly admitted that Bitcoin helped him win the war of drugs against the state.

Opponents also criticize Bitcoin’s algorithmic design for specifically inducing rise and fall in its value. But unlike traditional currencies, Bitcoin is not insured by the government in case it gets devalued enough to cause a major financial crisis in its market. Some claim that Bitcoin is being used more like a stock than a currency and that once the initial hype dies down its value will eventually decrease to nothing because it doesn’t have anything to offer except for its cool factor. Since Bitcoin is primarily digital (though coins are now available), it can be lost forever if a user loses his/her computer or account in which it’s stored.

What’s next for Bitcoin?

Bitcoin’s future is somewhat uncertain. While the cryptocurrency is still growing, there are many concerns that it’s not worth it. Detractors point out things like a possible Ponzi-style scheme involving Bitcoin in North Texas as indicative of the worthlessness of the currency. On the other hand, Bitcoin-based ventures have been growing, such as the development of startups like Coinffeine, which aims to create a new way to exchange Bitcoins. These are just a few examples of the ways in which Bitcoin is slowly breaking its way in into the mainstream, albeit with many setbacks.

Conclusion

Bitcoin. and other similar digital currencies, is just one of many interesting developments that has come about because of the internet. In essence, it’s a pretty revolutionary and fascinating idea, but whether or not it is actually good for the global economy remains to be seen. The potential for the use of Bitcoin as part of illegal activity though, should not stop people from using it for legitimate means. It’s only through incorporating online tools into the mainstream that it will become a genuinely useful and productive innovation.

Resources

Primary 

Bitcoin: Official Site

US District Court: Securities & Exchange Commission v. Trendon T. Shavers  and Bitcoin Savings & Trust

Additional

European Central Bank: Virtual Currency Schemes

Techland: Online Cash Bitcoin Could Challenge Government, Banks

Coindesk: Confirmed: Bloomberg Staff Are Testing a Bitcoin Price Ticker

CIO: In Kenya, Bitcoin :Linked to Popular Mobile Payment System

ParityNews: The Internet Archive Starts Accepting Bitcoin Donations

Webcite: In Bitcoin We Trust: The Berlin District Where Virtual Currency is as Easy as Cash

Readwrite: What’s Bitcoin Worth in the Real World?

Wire: Today’s Bitcoin Shows Why It’s Not Really a Currency

Fox Business: The Consumer Risks of Bitcoins

Slate: My Money is Cooler Than Yours

Washington Post: Imagining a World Without the Dollar

Social Science Research Network: Are Cryptocurrencies ‘Super’ Tax Havens?

The New York Times: Winklevoss Twins Plan First Funds for Bitcoins

Forbes: Goodbye Switzerland, Hello Bitcoins

Treasury Department: Application of FinCEN’s Regulations to Persons Administering, Exchanging, or Using Virtual Currencies

GAO: Virtual Economies and Currencies: Additional IRS Guidance Could Reduce Tax Compliance Risks

Forbes: IRS Takes a Bite Out of Bitcoin

The New York Times: New York and U.S. Open Investigations Into Bitcoins

TechCrunch: New York’s Financial Services Subpoenas Bitcoin Firms To “Root Out Illegal Activity”

Salome Vakharia

Salome Vakharia is a Mumbai native who now calls New York and New Jersey her home. She attended New York School of Law, and she is a founding member of Law Street Media. Contact Salome at staff@LawStreetMedia.com.

The post Bitcoin: What’s Next? appeared first on Law Street.

Bitcoin  — the cryptocurrency in the form of digital coins — allows financial transactions to be completed over the internet without the use of banks or a clearing house.  (Click here to read Bitcoin for Beginners.) There are plenty of positives that come along with this currency: it reduces the cost of transactions, as the fees are significantly lower than those with traditional electronic transactions; there are no  prerequisites or qualifications to gain access to Bitcoin; and  unique to its creation, the coins, which are stored in free, user-created digital wallets, can be used in any country. With that said, there are real concerns surrounding the coins.

Unlike paper currency, Bitcoin is not backed by any government or any other currency standard such as gold. One huge difference between traditional currency and Bitcoin is that there will only ever be 21 million coins available. Unlike traditional currencies, producing more Bitcoins, or taking some out of circulation, is not an option, and many of the people currently holding them are hoarding them. This has increased speculation and contributed to the huge increase in cryptocurrency value over a short time. Once people realize that there are only a small amount of coins available to purchase out of the 21 million total, consumers may be unwilling to purchase them at such high prices. This could have adverse affects on the coins’ value, but on the other hand, the exclusivity of the commodity may cause people to be even more interested in acquiring the currency and cause its value to increase considerably.

What happens if Bitcoins become so valuable that they’re able to back legitimate government currencies?  How could this shift power and wealth to the people who are hoarding Bitcoins?  I’m not saying it will happen, but we must think about the possibilities in this technology-driven society. The major takeaway from the speculation is that this currency is risky and can be exploited easily. Bitcoins are a risky investment and there are no equivalent insurance protections to those at traditional banks. Possibly worse, there are no standard cybersecurity protections from hackers when dealing with Bitcoin. Due to the currency’s anonymity, it is very hard to track where a particular coin has gone once it’s taken from a digital wallet. This anonymity leads us into the darker, seedier side of Bitcoin.

Because of the anonymity and absence of government regulation, Bitcoin is being used as a de facto payment to fund illegal weapons and drug trades on the black market. The most well known underground internet-based drug ring, Silk Road, had more than one million users and was in operation for two and a half years. Silk Road allowed users to buy any kind of illegal drug they desired and have it shipped directly to their home. Think eBay for drug addicts and their suppliers. Silk Road was also good for child pornography and illegal weapons sales.

In September 2013, after years of investigation by the FBI, Silk Road was shut down and its engineer, Ross Ulbrict, was arrested after facilitating 1.2 million transactions. These transactions accounted for 9.5 million Bitcoins — valued at a whopping $1.2 billion — and earned Ulbrict about $80 million. Unfortunately for him, all of his Bitcoins, and a majority of those held by Silk Road users, were seized by the FBI, making the government agency’s digital wallet the largest in the world.

Although the FBI should be excited about a job well done, we must remember that it took them two and half years to shut down Silk Road, and only a month for Silk Road 2.0 to get up and running.  If you go to the site, the operators boast how they’re morally superior to the original Silk Road since they no longer provide child pornography or facilitate the sale of illegal weapons. No… I’m not joking. The site also talks about newly emerging competition with other underground websites that were created to fill the void Silk Road left. The problem is getting worse and the operators have learned from the mistakes of previous site operators. They’re even giving users instructions on how to better protect themselves and keep their identities from being detected.

The only positive in this situation is that these people are so clearly lacking significant moral fiber, that every few weeks the site creators steal  all of their users’ Bitcoins, or they are hacked and the site’s Bitcoins are stolen. Unbelievable. I think it’s kind of funny that these drug dealers are being robbed, but at the same time, we have no idea what kind of criminal mind has the ability to steal from other criminals. That’s when it gets scary. We can only hope that these kinds of underground sites will cause so much uncertainty that they self destruct. Until then, we have an unregulated digital currency that can be exchanged for real money, and is contributing to an increased amount of cyber thievery and crime in America and abroad.

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Teerah Goodrum (@AisleNotes), is a graduate student at Howard University with a concentration in Public Administration and Public Policy. Her time on Capitol Hill as a Science and Technology Legislative Assistant has given her insight into the tech community. In her spare time she enjoys visiting her favorite city, Seattle, and playing fantasy football.

 Featured image courtesy of [Zach Copley via Flickr]

Teerah Goodrum

Teerah Goodrum is a Graduate of Howard University with a Masters degree in Public Administration and Public Policy. Her time on Capitol Hill as a Science and Technology Legislative Assistant has given her insight into the tech community. In her spare time she enjoys visiting her favorite city, Seattle, and playing fantasy football. Contact Teerah at staff@LawStreetMedia.com.

The post The Seedy Side of Bitcoin appeared first on Law Street.