Have you heard of a currency that has gone up 200,000% within a year? There is but only one currency – Bitcoin (abbreviated as BTC). The Bitcoin concept has become so popular that its features and future are even discussed at investment conferences. This has attracted many well-known investors including the Winklevoss twins of Facebook fame who believe its value can easily touch USD 40,000 from the present roughly USD 900.
Bitcoin is a digital currency and the first crypto-currency (a concept first described by Wei Dai) which is claimed to have been developed by an unknown person or group known as Satoshi Nakamoto in 2009. The market size is estimated to be USD 4 billion with around 12 billion bitcoins in circulation.
Fig: Value trend of Bitcoin on Mt. Gox (in USD)
The cryptographic protocol and software used in Bitcoin are open source. Bitcoins are snippets of code that use encryption to prevent counterfeiting and double-spending. It is pseudo-anonymous in the sense that its ownership is anonymous but the transactions are transparent. Complex algorithms control the supply of Bitcoins which can be generated or “mined” by running a program on a powerful computer. Bitcoins grow at a rate known to all parties in advance (it grew at a rate of 25 coins per 8 minutes on 11th April 2011). The total number of Bitcoins can’t exceed 21 million (which will be reached in around the year 2140) but their value depends purely on market forces. It is a purely virtual currency which is not backed by any security or government obligation. Its value is determined by the demand and supply forces, is traded Bitcoin exchanges like BTC China, Bitcoin 24 and Mt. Gox.
Fig: Life of a Bubble (Expected Life of Bitcoin)
Nowadays, Bitcoin is increasingly being accepted as a mode of payment for products and services by vendors that accept Bitcoin payment such as WordPress, Reddit, OkCupid. There are even mobile apps that allow Bitcoin payment and spot trading facility. Surprisingly, many start-ups have been listed on the Global Bitcoin Stock Exchange where bonds and stocks can be traded. The ‘cryptocurrency’ wave has hit the world of financial markets and there have been a lot of speculations as to what the future unfolds. Understandably, there has been apprehension of wide spread money laundering and criminal fraud due to complete anonymity of Bitcoin transactions. Also, Bitcoins at present is highly volatile and the graph below shows the fluctuation in its value over the past two years.
Alternatives to Bitcoins
Bitcoin is one of the many virtual currencies which presently exist. Some of the other popular virtual currencies include:
- Litecoin: It is a peer-to-peer currency enabling instant payments also based on the bitcoin protocol and its network is scheduled to produce about 84 million currency units.
- Peercoin: It is the first cryptocurrency whose creation was inspired by bitcoin and is based upon a proof-of-work system.
Though being different from Bitcoins, the following virtual currencies were popular in the past:
- WebMoney: It is a virtual payment system which aids internet users for conducting real time transactions using WebMoney unit
- Pecunix: It is a digital currency backed by gold
- World of Warcraft Gold: Designed by Blizzard Entertainment, it is a virtual currency that is used by a popular online role-playing game
- Nintendo Points: It is a virtual currency which has been established by Nintendo and it can be redeemed at Nintendo’s games/shops
- Linden Dollars (L$): It is a virtual currency wherein digital characters can be customised
- There have been instances where some virtual currencies have ceased to operate like:
- Facebook Credits: It was a virtual currency that was introduced by Facebook in 2009 and ceased its operation in 2012. It allowed users to buy virtual goods in the form of applications on the Facebook platform
- Liberty Reserve: It was a centralized currency based on Costa Rica which promoted itself as the oldest, safest and most popular payment processor. It was shut down by none other than the U.S. government due to accusations of money laundering
What is the future of Bitcoins, What is its status of Bitcoins in India? Please read on to Bitcoin: How it works & Why You should/should not choose it.
- Image – http://konradsgraf.com/blog1/2013/4/6/hyper-monetization-questioning-the-bitcoin-bubble-bubble.html