You’ve probably already heard of Bitcoin, but can you define it?

Most of the time it is described as a non-governmental digital currency. Bitcoin is also sometimes called a cyber currency or, in a nod to its encrypted origins, a cryptocurrency. Those descriptions are accurate enough, but they miss the point. It’s like describing the US dollar as a sheet of green, patterned paper.

I have my own ways of describing Bitcoin. I think of it as store credit without the store. A prepaid phone without the phone. Precious metal without the metal. Of legal tender without debts, public or private, unless the contractor to whom it is tendered wishes to accept it. An instrument backed by the full faith and credit only of its anonymous creators, in whom, therefore, I have no faith, and to whom I do not give credit except for their ingenuity.

I wouldn’t touch a bitcoin with a 10 foot USB cable. But quite a few people have already done so, and some may sooner.

This is in part because entrepreneurs Cameron and Tyler Winklevoss, best known for their role in Facebook’s origins, are now looking to use their tech savvy and money to bring Bitcoin to the mainstream.

The Winklevoss hope to start an exchange-traded fund for bitcoins. An ETF would make Bitcoin more available to investors who lack the technological know-how to buy the digital currency outright. In April, the Winklevosses were said to have around 1 percent of all existing bitcoins.

Created in 2009 by an anonymous cryptographer, Bitcoin operates on the premise that anything, even intangible pieces of code, can have value as long as enough people decide to treat it as valuable. Bitcoins exist only as digital representations and are not tied to any traditional currency.

According to the Bitcoin website, “Bitcoin is designed around the idea of ​​a new form of money that uses cryptography to control its creation and transactions, rather than relying on central authorities.” (1) New bitcoins are “mined” by users solving computer algorithms to discover virtual currencies. The alleged creators of Bitcoins have said that the final supply of Bitcoins will be capped at 21 million.

While Bitcoin touts itself as “a very safe and inexpensive way to handle payments,” (2) few companies have actually made the decision to accept bitcoins. Of those that have, a considerable number operate on the black market.

Bitcoins are traded anonymously over the Internet, without the involvement of established financial institutions. As of 2012, sales of drugs and other black market goods accounted for roughly 20 percent of bitcoin-to-US dollar exchanges on the major Bitcoin exchange, called Mt. Gox. The Drug Enforcement Agency recently carried out its first Bitcoin seizure, after reportedly linking a transaction on the anonymous Bitcoin-exclusive Silk Road marketplace to the sale of prescription and illegal drugs.

Some users of Bitcoin have also suggested that the currency can serve as a means of avoiding taxes. That may be true, but only in the sense that bitcoins help illegal tax evasion, not in the sense that they actually serve a role in genuine tax planning. Under federal tax law, cash does not need to change hands for a taxable transaction to occur. Barter and other non-monetary exchanges continue to be taxed. There is no reason why transactions involving bitcoins are treated differently.

Outside of the criminal element, the main devotees of Bitcoin are speculators, who have no intention of using bitcoins to buy anything. These investors are convinced that the limited supply of bitcoins will force their value to follow a continuous upward trajectory.

In fact, Bitcoin has seen some significant spikes in value. But it has also experienced significant losses, including an 80 percent decline in 24 hours in April. Earlier this month, bitcoins fell to around $ 90, from a high of $ 266 before the April crash. They were trading close to $ 97 earlier this week, according to mtgox.com.

The Winklevosses would facilitate investing in Bitcoin by allowing smaller-scale investors to profit or lose, as the case may be, without the hassle of buying and storing the electronic currencies. Despite security claims, storing Bitcoin has proven problematic. In 2011, an attack on the Mt. Gox exchange forced it to shut down temporarily and caused the price of bitcoins to briefly drop to almost zero. Since Bitcoin transactions are all anonymous, there is little chance of tracing the culprits if you suddenly find your e-wallet empty. If the Winklevosses get regulatory approval, their ETF would help protect investors from the threat of individual theft. However, the ETF would do nothing to address the volatility problem caused by large-scale thefts in other parts of the Bitcoin market.

While Bitcoin comes wrapped in a high-tech layer, this newer of the coins has a surprising amount in common with one of the oldest currencies: gold. Bitcoin’s own vocabulary, in particular the term “mining”, highlights this connection, and on purpose. The mining process is designed to be difficult as a supply control, mimicking the extraction of more conventional resources from the ground. However, far from providing a sense of security, this rhetoric should serve as a warning.

Gold is an investment of last resort. It has little intrinsic value. It does not generate interest. But because its supply is finite, it is considered to be more stable than forms of money that can be printed at will.

The problem with gold is that it does nothing. Since gold coins have fallen out of use, most of the world’s gold now resides in the vaults of central banks and other financial institutions. As a result, gold has little connection to the real economy. That may seem like a good thing when the real economy feels like a scary place. But as soon as other attractive investment options appear, gold loses its luster. That is what we have seen with the recent declines in gold prices.

In its push to bring Bitcoin to the mainstream, its promoters have accepted and, in some cases, sought further regulation. Last month, Mt. Gox registered as a money services business with the Treasury Department’s Financial Crimes Enforcement Network. It has also increased customer verification measures. The changes came in response to a March directive from the Financial Crimes Enforcement Network clarifying the application of its rules to virtual currencies. The ETF proposed by the Winklevosses would bring a new level of accountability.

However, in the end, I hope that Bitcoin will once again disappear into the shadows of the black market. Those who want a safe, regulated currency that they can use for legitimate business transactions will choose one of the many currencies already sponsored by a national government equipped with extensive resources, a real-world economy, and far more transparency and security than the world of Bitcoin. I can offer.

After the Bitcoin bubble bursts, we won’t even be able to use the leftover coins for jewelry.

Source:

1) Bitcoin, “About Bitcoin”

2) Bitcoin, “Bitcoin for business”