In 2008, a developer named Satoshi Nakamoto developed an electronic cash system called Bitcoin. The creation and transfer of the digital currency is based on open-source cryptography and is not managed by a central authority.
The Currency Skyrockets, Then Plummets
According to an article on SmartMoney, Bitcoins can be transferred via Smartphones or computers, and don’t require a person to have a bank account. The venture got a lot of attention, and was even backed by Tyler and Cameron Winklevoss, most widely known for their legal battle concerning the origins of Facebook. An article in The Independent, a British newspaper, said the brothers invested $11 million into Bitcoin, and perhaps triggered a boost in value. However, the quick rise seemed destined to shine bright and burn out quickly. According to the Independent article, there was one time when a single Bitcoin was valued at almost $270, but by the middle of this past April, the currency’s value fell to slightly more than $73.
A Limited Supply
One possible reason for Bitcoins’ sudden loss of value is there currently about 11 million in circulation, and to get more, users have to either buy them from someone else, or engage in the practice of “mining,” where a user would crack a code, and once successful, get a predetermined amount of Bitcoins dispensed into a virtual wallet. In fact, people can’t get started using the currency until they’ve installed one of those virtual wallets on their phone or computer. Also, there’s an air of mystery surrounding how Bitcoins can actually be used. The system is set up to ensure anonymity — people only publicly discuss their support for the currency if they so choose.
A Recent Lawsuit
During the beginning of May, Bitcoin was in the news because of a failed partnership which would’ve made it easier for North American residents to use the currency. CoinLab, a Bitcoin startup, and Mt. Gox, a major bitcoin exchange in Tokyo are now wrapped up in a $75-million lawsuit, according to an article in PC World. In the suit, CoinLab says that Mt. Gox did not transfer account information of North American users to BitCoin as per their original agreement.
Can Any Regulation Occur?
The newsworthy events of recent weeks have caused some to wonder if the Securities and Exchanges Commission (SEC) will step in to regulate the system. For now, the SEC is declining to comment, perhaps because as mentioned earlier, Bitcoin does not have a governing body. An article from Gigaom mentions that the SEC is able to regulate financial trades of items like stocks and bonds, but in most cases, cannot oversee currencies. The only possibility is that the SEC may be able to impose indirect control through trading houses that hold Bitcoin currencies, but even that may be difficult because of the characteristic of anonymity.
In closing, Litecoin and PPCoin are two of several other virtual currencies looking to gain prominence in the marketplace, but an article in the New York Times cautions that if those hopefuls want to distinguish themselves from Bitcoin, the road ahead won’t be easy. Bitcoin both gained momentum and caused concern after some people believed the currency was used for illicit activities … a perfect match since Bitcoins cannot be tracked, and everything that people buy with them is veiled in secrecy. Although anonymity is certainly a perk for many, it may not be a feature of viable virtual currencies moving forward, simply because it’s too hard to prove instances of wrongdoing and feel assured that transactions will be completed as promised.
Author Jena Daniels is a guest blogger for business sites. Interested in getting involved in the latest business technologies? You may be interested in the mba program offered through Pepperdine Online.
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Bitcoin: Its Rise, Its Fall, and the Future of Virtual Currencies
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