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Imagine a world in which there is one universally accepted currency not controlled or regulated by any government but rather by the people who use it.
You may not have to imagine this scenario for much longer because Bitcoin, a virtual currency, also known as cryptocurrency, is on its way to making this vision a reality — maybe.
But when will it be ready for prime time? When will we be able to purchase a car, a carton of eggs or a glass of wine with our Bitcoin? This is the question many people are asking.
According to information published on the bitcoin.org site, a growing number of businesses are accepting Bitcoin including: Overstock.com and Reddit, as well as brick-and-mortar businesses.
But if you have heard about Bitcoin, but still could not explain it if your life depended on it, you are not alone.
According to a study conducted by Rutgers University and published in 2016, even those using Bitcoin don’t fully understand how it works. And today when Bitcoin is getting more press than ever, most people still have a fuzzy understanding of it.
One of the study authors, Janne Lindqvist, assistant professor of electrical and computer engineering at Rutgers University, said it’s not surprising that many people are still perplexed it.
“Bitcoin and cryptocurrencies in general are not trivial or easy to understand. But at the same time, it’s not like many people really understand how traditional money works either,” he said.
Janne Lindqvist, assistant professor of electrical and computer engineering at Rutgers University and a member of WINLAB, said it’s not surprising that many people are still perplexed it. “Bitcoin and cryptocurrencies in general are not trivial or easy to understand. But at the same time, it’s not like many people really understand how traditional money works either,” he said. (Photo: ~Photo courtesy of Janne Lindqvist.)
So what is Bitcoin?
Bitcoin only exists in the virtual world. Unlike traditional currency, it has no representation in the physical world such as coins and paper money, and it is not backed by gold or controlled or regulated by any government agencies such as The Federal Deposit Insurance Corporation (FDIC).
You have access to its value, but you can’t touch it, drop it or accidentally send it through the washing machine.
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In a world in which there is a growing distrust of government power, it’s understandable that a currency not controlled by the government would be gaining in popularity.
Bitcom.org claims that Bitcoin is not illegal in most jurisdictions, but states that countries such as Argentina and Russia severely restrict or ban foreign currencies and other countries such as Thailand may limit the licensing of certain entities such as Bitcoin exchanges.
Bitcoin is said to be self-controlled, in that everyone who participates, plays a role in keeping the virtual ledger accurate by a process called ‘blockchain.’
Okay, this is where it gets a little more complex and most people’s eyeballs begin to roll back in their heads.
So here is as simple an explanation as I can summon.
For the average Bitcoin user, the experience is similar to making online payments or using PayPal to send or receive money. But it’s the process behind the curtain that is rather perplexing. It is described on Bitcoin.org in the following way:
“The Bitcoin network is sharing a public ledger called the ‘block chain.’ This ledger contains every transaction ever processed, allowing a user’s computer to verify the validity of each transaction. The authenticity of each transaction is protected by digital signatures corresponding to the sending addresses, allowing all users to have full control over sending Bitcoins from their own Bitcoin addresses. In addition, anyone can process transactions using the computing power of specialized hardware and earn a reward in Bitcoins for this service.”
Processing transactions utilizing specialized hardware is known as ‘mining.’
Are you thoroughly confused yet? This is where half the readers usually decide they are hungry, tired or thirsty.
How do people feel about virtual money?
The Rutgers study, titled “Of Two Minds, Multiple Addresses, and One Ledger: Characterizing Opinions, Knowledge, and Perceptions of Bitcoin Across Users and Non-Users,” included 20 participants, 10 Bitcoin users and 10 non-users, aged 18 years or older across the United States.
Lindqvist, and his co-authors, Xianyi Gao and Gradeigh D. Clark, concluded in part that “Non-users mistakenly believe they are incapable of using Bitcoin, users are not well-versed in how the protocol functions and have misconceptions about the privacy of transactions, and that Bitcoin satisfies properties of ideal payment systems as defined by our participants.”
While generally those who believe in the value of Bitcoin appreciate that it is not regulated by the government, 50 percent of the Bitcoin users in the study said they believed the government should establish safeguards against fraud and abuse of financial institutions dealing with Bitcoins.
Two Bitcoin users or 20 percent of users in the study said it should not be regulated at all. One of them said, “The entire concept and process was developed with the intention of not having a third party especially the big brother, regulating.”
When the study was published more than a year ago, the authors concluded that it was unclear if consumers will treat Bitcoin as a replacement to traditional currency or as a commodity for long term speculation.
Today, Bitcoin is being accepted by the global financial investment community. The CME Group, a global leader in the derivatives marketplace, announced on Dec. 1 that it self-certified the initial listing of its Bitcoin futures to launch on December 18.
As described by the Rutgers study, “Bitcoin is a peer-to-peer version of electronic cash that allows online payments to be sent directly from one party to another without going through any financial institution.”
According to the study authors, any potential problems with fraudulent accounting are remedied by the blockchain.
Could bitcoin be the 21st Century equivalent of the tulips craze centuries ago? (Photo: File photo)
The good, the bad and the ugly of Bitcoin
Let’s start with the ugly. Bitcoin is not regulated, so while enthusiasts value this very attribute, it makes most people very nervous. For instance, if something goes wrong with a transaction — who do you call? If there is a run on Bitcoin, since it is not backed by the FDIC, how do you protect yourself from overnight losses?
Lindqvist said Bitcoin could prove to be similar to “Tulip mania,” which he said was one of the first recorded bubbles in history which took place during the Dutch Golden Age when the prices of certain tulip bulbs reached extremely high levels only to dramatically crash in February of 1637.
Of course, even with tulip bulbs that have lost their original value, at least one has a bulb to plant that could provide beauty in seasons ahead. But if Bitcoin loses its value, what remains? This leads to a critical question about how we view wealth and why we value what we value.
Some have asked — what is Bitcoin’s intrinsic value and beyond that — what problem is it solving or how is it making life easier for those who use it?
According to Lindqvist, Bitcoin itself may very well go by the wayside or be replaced by another cryptocurrency. However, he said the underlying process — the illusive “blockchain” may indeed hold the greatest potential.
He said utilizing a virtual public ledger may lead to many more useful applications beyond virtual currency.
Again, the ultimate question is – what do we invest in and why?
While Bitcoin may end up benefitting those who invested early, its volatility and limited practical application at this time should be considered before taking the plunge.
When considering investments in Bitcoin, Lindqvist offers up the sobering quote by Warren Buffet, “Never invest in a business you can’t understand.”
This is why, at this time, I’ll keep investing in the Universal Bank of Karma.
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