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.

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The Internet black market is a fascinating place. It relies on security, word of mouth, and above all, anonymity. It has a unique language and its own currency. Bitcoin, allows users to directly transfer a high encrypted “currency” without an intermediary financial institution. It has evolved into an ideal tool for illegal transactions. For more on Bitcoin see: Bitcoin Pro-Con.

Many illegal transactions made through Bitcoin technology were through a site called “Silk Road.”  Silk Road presented itself as an anonymous marketplace and sold mainly illegal drugs, particularly MDMA, ecstasy, LSD, marijuana, prescription drugs, and heroin. On October 2, 2013 Silk Road’s founder and operator Ross Ulbricht, known on the site as “Dread Pirate Roberts,” was arrested. The site was seized and rendered unusable by the FBI.

The importance of Silk Road to the online black marketplace truly cannot be understated. According to Quartz, at some point, 82% of Bitcoin in existence traveled through Silk Road. NPR called it “the Amazon.com of illegal drugs.” Carnegie Mellon student Nicolas Christin wrote a paper in November of 2012 that estimated Silk Road’s revenue at $92,000 per month.

The general public’s reaction to the news that Silk Road had been shutdown last week centered on a question: How in the world did such a site even exist?

It does seem fairly unbelievable. We are reminded every day that what we do online is almost never anonymous. From bad Facebook photos taken at a club on Friday night, to politicians accidentally tweeting inappropriate pictures, our online selves are constantly on display.

Silk Road and other sites on the so-called Deep Web, the websites that not everyone can access, make their livings off the ability to provide anonymity. Silk Road was not accessible through a regular browser, like Chrome, Internet Explorer, or Firefox. Special software called Tor exists, which does its best to hide web browsing and traffic. Every facet of the software minimizes the traces of its users and Silk Road was only available through it. Furthermore, Silk Road itself contained heavy security features, such as password protection and the exclusive use of Bitcoin.

Another question on many average American’s minds must have been: Why should we care if some online drug marketplace gets shut down?

There are a few reasons to care. First, certain drugs have recently become increasingly mainstream. For example, MDMA, sometimes called Molly, has dominated headlines lately. According to the Global Drug Survey, conducted by an independent institute of the same name, in 2012 26.5% of US respondents had tried MDMA in the last 12 months, but in 2013, 60.9% reported having tried the popular club drug. While these surveys are obviously not representative of the United States as a whole, this demonstrates the growing share that MDMA represents in US drug use.

A site like Silk Road has played an important role in this spike. Before the ability to buy online, really the only way to get drugs was to go through an in-person dealer. It’s easy to imagine purchasing drugs online is simpler and safer. It’s also important to note that the drugs purchased through Silk Road are in some ways more verifiable than street drugs. Silk Road allows reviews of sellers, creating a way to warn other users if drugs are anything but pure. In order to be a seller, you must go through an extensive vetting process. Immediately after Silk Road’s closure, a Reddit user tested Silk Road MDMA versus two samples bought on the street. The Silk Road sample was significantly purer than the unverified street-bought samples. I am not, of course, advocating that anyone try MDMA. However, the argument that testable, verifiable MDMA bought online is safer than street MDMA from a dealer is absolutely valid.

Silk Road’s fall will slow the online drug market, but it won’t topple the industry. A similar website called Sheep Marketplace is already taking over some of Silk Road’s market share. Providers will get trickier, sites will get more encrypted, and Deep Web will simply get deeper.

[Quartz]

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Featured image courtesy of [Drug Enforcement Agency via Wikipedia]

Anneliese Mahoney

Anneliese Mahoney is Managing Editor at Law Street and a Connecticut transplant to Washington D.C. She has a Bachelor’s degree in International Affairs from the George Washington University, and a passion for law, politics, and social issues. Contact Anneliese at amahoney@LawStreetMedia.com.

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