Michael Quinlan ’14: Bitcoin, a popular digital currency, has seen massive fluctuations in its USD exchange rate, drawing public scrutiny and leading some to question Bitcoin’s long-term legitimacy.
Quietly introduced in 2009 by an anonymous developer(s) known only as ‘Satoshi Nakamoto’, Bitcoin began generating interest in 2010. The value of one Bitcoin rose to a record high of $266 on April 10, amidst the Cypriot bank crisis. Throughout the last month, the Bitcoin market cap has oscillated between $1 and $2 billion.
As a digital currency, Bitcoin is not backed by any central bank such as the Federal Reserve in the United States. Instead, twenty-five Bitcoins are currently released every fifteen minutes and awarded to Bitcoin “miners.” Anyone interested in accruing Bitcoins can “mine” by running software that attempts to solve complex mathematical problems, processing transactions of Bitcoins along the way.
However, this decentralization has caused a number of problems. A number of large Bitcoin exchanges – the trading houses where people can buy and sell Bitcoin using other currencies – have fallen victim to hacking and other cyber-attacks. In 2011, Mt. Gox, the largest of such exchanges with an estimated 80% current market share, ultimately lost approximately $8.75 million of its customers’ Bitcoins after a security breach. In April, Mt. Gox experienced extensive downtime due to distributed “denial-of-service” attacks, which effectively halted the Bitcoin market for hours at a time.
One problem with the usability of bitcoin is that having the currency “doesn’t help you live day-to-day” said Mr. Ted Mathisen, science teacher at Episcopal. A feature of bitcoin is that all transactions can be conducted pseudo-anonymously online, but this reliance to the internet effectively restricts its offline use. Mathisen believes bitcoins will either “break down [because] the technology is going to exceed the criteria by which bitcoins are released and received” – be it because mining bitcoins becomes too difficult in the future or as more people become interested in the currency – or fall prey to its own features. Mathisen ended with an oft-echoed comparison that bitcoin is, at current time, essentially “speculative gambling.”
Many popular economists have expressed doubt about the economics behind Bitcoin, most commonly that Bitcoin is nothing more than a “bubble.” Paul Krugman, New York Times columnist, has on separate occasions criticized the necessity of using real resources to “mine” Bitcoins. He points out Bitcoin’s dubious actual value and the lack of legal venues in which to spend Bitcoin. (On his last point Krugman is alluding to the Silk Road, an online black market which deals exclusively in Bitcoin and largely consists of illegal drugs and other contraband items for sale.)
Felix Salmon, a financial journalist and blogging editor for Reuters, criticized Bitcoin as an “uncomfortable combination of commodity and currency.” Andrew Hess, history and economics teacher at Episcopal, echoed these concerns of Bitcoin’s model, saying that it is too unlike those of most other currencies, creating “hurdles” for Bitcoin to prove its viability as a currency.
The future of Bitcoin is uncertain. As different computer rigs specifically designed for Bitcoin mining are released, the potential for hobbyists to mine may all but cease. Similarly, if rumors are true, an influx of venture capitalist interest in Bitcoin has the potential to radically alter a currency originally designed for what Washington Post columnist Neil Irwin calls the “techno-utopian futurist crowd.”