Cryptocurrency’s value has inflated, but doubts remain as to its stability
The top half of a building at 1537 Main St in downtown Columbia can now be leased using Bitcoin, a digital cryptocurrency designed to make trading online with complete anonymity a reality. But the digital currency has lost credibility with investors after the crash of its biggest exchange.
Bitcoins are created via a process called mining, which is basically the creation of a ledger of bitcoin transactions. Mining is intentionally designed to require a significant amount of processing power to generate a new Bitcoin. The process protects Bitcoin’s scarcity which protects its value in the market of supply and demand.
Bitcoin’s popularity in the five years since its conception has grown exponentially. In Oct. 2011, the approximate value of one Bitcoin was $2. Today, the value of one Bitcoin is approximately $566. That’s a total increase of 28,300 percent in three years, though the currency remains in a state of limbo with floating exchange rates resembling more of a financial roller coaster rather than a stable currency.
As a result of its viral popularity, trading exchanges began to pop up all over the web. The exchanges serve as a medium to trade fiat currencies such as the U.S. Dollar or Japanese Yen for Bitcoin.
The most notable exchange site being MtGox based in Tokyo, Japan. The exchange site was originally created as a place for fans of the card game Magic: The Gathering to trade cards.
In 2010, the site abandoned its Magic: The Gathering trading venture after being sold to Tibanne Co. and diversified into a Bitcoin exchange, thus enabling buyers to trade fiat currencies such as the US Dollar or Japanese Yen for Bitcoin.
Transaction malleability — a bug in the transaction process that leaves Bitcoin vulnerable to exploitation — is believed to be the downfall of MtGox. Basically, when a fiat currency is traded for Bitcoin there is a ten minute lag between the time you pay and the time the Bitcoin you purchased arrives in your wallet client.
Hackers take advantage of this bug by acquiring the transaction hash, a sort of receipt that can be manipulated to change the address of the Bitcoins, and subsequently stealing them from the customer.
Prior to filing for bankruptcy and terminating service, MtGox could not account for 750,000 of its customers’ Bitcoins — the equivalent to $460 million U.S. Dollars at the time. The exchange filed for bankruptcy protection in Japan and says it is working on a method to pay its customers back.
Currently, the exchange website and Twitter account have been completely erased. Investors now fear that millions of their dollars may be lost in translation, never to be returned.
What sets Bitcoin apart from its competitors is it’s lack of a centralization or government control.
Lack of governmental regulation makes Bitcoin truly useful as an international currency: transaction fees are at a minimum and capital can be processed overseas without being converted into local currency.
Silk Road is an Internet based black market that became hugely popular because it utilized the anonymity of Bitcoin. Silk Road facilitates the trading of commodities and services that are either illegal or un-taxable.
These commodities and services include illicit drugs, weapons, prostitution and murder-for-hire. Buyers and sellers can trade utilizing these online markets and mail potentially dangerous goods to each other.
Ross William Ulbricht stands accused by the FBI of being the founder of Silk Road. He has been indicted for money laundering, conspiracy to traffic narcotics and six counts of attempted murder.
Bitcoin’s use in the realm of anonymous trading of illicit goods and services has caused it to come under government scrutiny.
Its volatile exchange rate and seedy past make it alluring and dangerous — where there is quick money to be made there will certainly be investors to cash in.
Its commercial use has yet to catch on; however, the prospect of low transaction rates may attract a new wave of merchants.
Bitcoin’s future in the world of finance is uncertain. Investors have reason to be cynical of its stability.