Bitcoin, the Internet-based, borderless digital currency not governed by any state monetary policy, has been around only since 2009, but it’s already begun gaining acceptance among people in distressed European economies, as well as a few jaded Americans who’ve lost faith in the future of traditional currency.
While Bitcoin continues to be lauded for its independence from “artificial” economic controls, allowing both its supply and its value to be dictated by market conditions, it’s not free from all the drawbacks that affect traditional currency. Its unit value has fluctuated wildly — from as little as $13 to $266 and back again — just since January. Some see it as a place to store money; others see it as a true currency, meant to be used to effect transactions.
Anonymity is an attractive feature of Bitcoin. The peer-to-peer network that facilitates encrypted Bitcoin transactions isn’t centralized, and it isn’t owned by any entity. One computer can drop out, or another join into, the network, and the underlying system still won’t change.
And because people can confidently spend Bitcoins without any record that traces the transaction to either the buyer or seller, Bitcoin is a preferred payment method for acquiring illegal items — think military-grade weapons, drugs, crime for-hire or, potentially, stolen art and jewelry — on “Deep Web”-based black markets like the Silk Road.
But law enforcement is starting to figure out ways to break through the wall of anonymity, and the publicity that comes with drug busts and pornography rings could eventually recast popular perception of Bitcoin, rightly or wrongly, as a currency for criminals. Who knows what that would do to its value? Even now, the Silk Road already has an escrow account in place so customers who opt in can hedge their buying power against Bitcoin’s volatile nature.
Perhaps most importantly, though, is that Bitcoin — or any “alternative” currency — can’t replace the trust-based foundation on which any system of currency is based. Harvard Public Policy professor Steven Strauss explains this very well in a recent Huffington Post article.
“Bitcoin requires us to replace trust in legal systems, institutions and procedures, with a system where we must [among other things]… [t]rust that your Bitcoins are stored in a secure location,” Strauss writes. “Precisely because Bitcoin transactions are anonymous and non-reversible, they’re highly vulnerable to theft. If your Bitcoins are stolen, they’re pretty much untraceable.”
Best bet: If you’re interested in alternatives to debased traditional currency and see Bitcoin as nothing more than an interesting experiment in how a borderless, decentralized exchange system could function, there’s probably little to lose in converting a few real dollars into Bitcoin, making a small purchase or two and getting a feel for the way it all works.
But if, like some, you’re converting your dollars to Bitcoins in the hope they’ll retain (or grow in) value over the long haul, you’re probably taking a tremendous risk — at least for now.