Friday, January 18, 2013

What is Bitcoin virtual currency?

Bitcoin is a virtual currency.  It is also a concept and an experiment.  Here's one way to think of it.  If you go into a local store and buy a cool watch, you can pay cash.  But if want to order a watch from a catalog or online, you go through a trusted third party.

Maybe you use your Visa card to buy the watch on Amazon, or you buy it from someone on eBay.  Either way, the buyer (you) and the seller have to trust someone (a bank, a credit card company, an online vendor) to carry out the transaction.

What if there was a way to skip the middleman--skip the trusted third party and deal directly buyer to seller? Bitcoin is an effort to bring this idea about by using cryptography to timestamp each Bitcoin and build a chronological record of its transactions.  To me, Bitcoin is also interesting because it isn't a national currency like the US dollar, the Chinese yuan, and the Indian rupee.

Bitcoin is controversial.  In October 2012, the European Central Bank issued a paper titled "Virtual Currency Schemes," and Bitcoin was one of their case studies.  Because the Bitcoin system allows a person to be anonymous and to set up multiple accounts, there is the risk it can be used for money laundering or drug sales.  And like any other currency or object, Bitcoins can be stolen.

Finally, there is the question of whether Bitcoin really functions as a currency.  Are Bitcoin users saving their money (or hoarding it), and are they able to use Bitcoins in enough places to make them worthwhile? The Central Bank report also asked whether Bitcoin is simply an elaborate pyramid or Ponzi scheme where early adopters see a return but rely on a constant stream of new investors.

I think that as we watch governments around the world make poor financial decisions, and banks fail from reckless greed and ineffective management, we will see more virtual currencies like Bitcoin. 

What do you think? Would you use a virtual currency?

(Here's the Bitcoin site so you can see what they say.  And a link to the TerraNova blog, which has addressed this issue.  And the European Central Bank report in PDF.)

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