Bitcoin, the privatized digital currency, regained much of its value after plunging 20 percent on Thursday, climbing back to nearly $10,500 by mid-afternoon Friday, and topping $11,000 again on Monday.
The cryptocurrency’s rocketing ride shows no sign of slowing. And opinions about the Bitcoin phenomenon vary as wildly as its price.
Some believe it’s the future of money. One eccentric internet pioneer predicts that 1 Bitcoin will rocket to $1 million by 2020. Intrepid speculators and hedge funds are snapping it up. Both the Chicago Board Options Exchange and Nasdaq plan to introduce Bitcoin futures, giving a trusted exchange’s imprimatur on digital currency prices, which can vary around the world.
Others warned last week that the mania around the cryptocurrency was a disaster waiting to happen: One Fed official suggested Bitcoin and other cryptocurrencies endangered the stability of the market “if they achieve wide-scale usage.”
Here’s a primer.
What is Bitcoin?
Bitcoin is a digital currency. Though some view it as money, unlike U.S. currency, it can’t be touched or held. It’s not guaranteed by any government, the FDIC, or any bank. It is largely unregulated and no single entity controls it. The record of every Bitcoin is kept on a decentralized network of more than 10,000 computers worldwide. Its birth in 2008, two months after the collapse of Lehman Brothers at the nadir of the financial crisis, is shrouded in mystery. No one knows who created it.
How do you get it?
Bitcoin and other cryptocurrencies can be bought on online exchanges such as Coinbase, bitfinex, or Gemini. The exchanges often will store the currency for account holders, though it is commonly held in an electronic “wallet.”
Buyers aren’t required to purchase an entire Bitcoin, but can pick up fractions measured in “Satochis,” named after the currency’s mythical creator Satochi Nakamoto who has never been publicly identified.
Bitcoin can also be bought at Bitcoin ATMs, at machines throughout the region at a slightly higher cost. People also will sell Bitcoin privately after arranging meetings through Craigslist or Reddit.
Why is Bitcoin’s value exploding this year?
Kevin Werbach, an expert in financial tech at the Wharton School, offers two explanations. “One is the networks have reached critical mass and gotten sufficient trust. Second, there’s so much money around the world that is looking to escape from the traditional financial system or looking for new ways to generate returns.
“That, and we’ve entered this cycle of FOMO — fear of missing out.” People hear of others reaping enormous returns and want in, Werbach said.
How much Bitcoin exists?
The total capitalization for all cryptocurrencies is about $300 billion. On Friday, the value of Bitcoin alone totaled $175 billion, making its value greater than General Electric or Comcast. As a financial asset, it’s still relatively tiny. So it doesn’t take much to move the market. The maximum number of Bitcoins is set at 21 million, but they’re being dribbled out slowly and the last won’t be released until the year 2140, its founding document says.
Who owns Bitcoin?
The number of people trading cryptocurrencies on Coinbase has tripled this year to 13 million, according to Bespoke Investment Group. Cryptocurrencies are also widely held in Japan, China and especially South Korea.
Why should potential buyers be wary.
It’s not guaranteed to be liquid.
“It’s critical to understand that just because Bitcoin trades for $11,000 on one exchange doesn’t mean that everyone who holds it can get $11,000 out,” Werbach said. “Even if it’s legitimate, people are buying on the assumption they’ll be able to sell to someone who will pay more. It can’t go up forever.”
There are limited number of places to spend it.
To repeat: Most people are buying Bitcoin not to use but to sell it to someone else.
Bitcoin’s first killer app was as a way of buying illicit drugs and illegal goods on the dark web. It’s also increasingly used to launder money and make ransom payments.
As Bitcoin has come into the light, some restaurants, real estate companies, and car dealers will accept it. Microsoft, Overstock.com, and the musician Bjork now take it for some purchases. Cryptocurrencies have been widely embraced overseas, especially where people lack ready access to credit cards, and for international money transfers.
The potential for great fraud.
Few buyers understand how Bitcoin works, let alone grasp its underlying architecture and that of all the other 1,300 cryptocurrencies. Many financial professionals don’t understand it either.
Werbach warns that the price has been significantly influenced by “shady activities and manipulation,” generally outside the United States. As a decentralized currency, “it hasn’t been subject to the regulatory controls that operate on other assets,” he said.
Coinbase, the U.S. based exchange, has to comply with the rules, Werbach said. But off-shore exchanges do not. There is strong evidence that some exchanges are practicing “wash trading” to create the appearance of more sales volume.
In addition, cybercriminals have reportedly been scouring servers for unsecured bitcoin wallets, where private bitcoin accounts are stored, and cleaning them out.
Lose your account number, lose your money.
There’s no central authority that tracks your account. So there’s no one to appeal to if you misplace your information. If you take the plunge, keep your records secure and in triplicate.
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