Bitcoin’s Success Gives Virtual Currencies Room to Grow

bitcoin

To many people, bitcoin — the peer-to-peer virtual currency that functions without the oversight of a central regulator — seems to be a harbinger of a futuristic, overly-digital tomorrow. However, thanks to interest from prominent investors and increasing acceptance from regulators, bitcoin has cemented its grip on the world of virtual money. The question is whether it will become the new gold or the next Dutch Tulip craze, and depending on who is asked, either scenario is likely. Or, in other words, is this virtual currency the solution to a dangerous link between governments and monetary systems or a threat to global financial stability? As bitcoin attracts more and more adherents, the powers that be are wondering if more regulation is needed. Yet, these issues have not prevented bitcoin competitors from emerging.

Bitcoin was first mentioned in a 2008 paper published under the pseudonym Satoshi Nakamoto and released on an obscure hacking forum. Due to its decentralized nature, bitcoin is known as a cryptocurrency, meaning it uses cryptography to control transactions and prevent double-spending, a common problem for digital currencies.

De-centrality is an essential part of the currency’s identity. The genesis of bitcoin was explicitly motivated by contempt for the tyrannical and intrusive nature of the fiat money regime. First launched in 2009, bitcoin is traded from person to person, not through banks, and there are no issuing or regulating countries. The thousands hours of work that have been devoted to the creation of bitcoin and similar virtual currencies shows how convinced their developers are that they have found the future of money.

“It’s a very intriguing thing, because in principle, you can have a kind of money with some advantages that have never been possessed by any past forms of money,” George Selgin, an economics professor at the University of Georgia at Athens, told the New York Times. However, the same qualities that enable virtual currencies to be innovative also allow them to be used for fraud and illegal activities. Detractors may point to the anonymity of bitcoin’s digital transactions as a problem because it makes the currency attractive for those looking to buy drugs and guns online, but overall, altcoin supporters are more concern by how easily governments can track bitcoin. The transactions are all recorded on a public ledger.

Today, the decentralized and nonpolitical bitcoin is the world’s most widely used alternative currency. Although it was first embraced by cypherpunks, anarchists, and libertarians, the virtual money has attracted a mainstream following as faith in fiat currencies weakens with each passing round of monetary stimulus. Now, popular mainstream services like the dating site OkCupid, the blogging site WordPress, the Chinese web services company Baidu, and the social news site Reddit accept bitcoin.

The popularity of bitcoin largely stems from its intelligent peer-to-peer framework that enables rapid and anonymous exchange across geographic boundaries and political lines. Unlike fiat money supplies that can be expanded with a quick keystroke, bitcoins are “mined” into existence when challenging proof-of-work problems are solved, usually by highly specialized and powerful computers. The difficulty of these puzzles is poised to increase over time, thereby ensuring that the supply of bitcoins grows at a diminishing rate until the final bitcoin is created in 2140.

Bitcoin may be the most well known virtual currency, but is by no means the only one. There are dozens of digital alternatives — PeerCoin, Litecoin, and anoncoin — all of which have backers that espouse their currency’s advantages over bitcoin. Plus, programmers and mathematicians release new models nearly every week. This noise has drawn the attention of officialdom. On November, 18, Congress held its first hearing on virtual currencies in order to examine the “potential risks, threats, and promises” of code-based currency operating largely outside any governmental control structures. With only about 600 online businesses worldwide accepting bitcoin and fewer brick-and-mortar establishments, the currency is used in only a tiny number of transactions, but outlets for paying with bitcoin are increasing. That is why rival virtual currencies are vying for acceptance amid growing concern from officialdom.

All these variations, known as altcoins, have benefited from the bitcoin’s rise. As the New York Times reported Sunday, the value of bitcoin has increased to more than $900 at one point during the month of November, and it is up approximately 6,000 percent since the beginning of the year. In the world of virtual currencies, newly created money can be worth millions of real dollars in a matter of a few months. Alongside bitcoin’s meteoric rise, many of the altcoins have advanced at similar pace, with gains driven by the belief that the Internet marketplace has room for more than one form of virtual money or the bet that a bitcoin alternative can dominate.

“Looking down the road 10 years from now, I definitely see bitcoin being ousted,” Lawrence Blankenship, a Missouri-based software engineer told the Times. “Everyone’s going to start switching to other coins, and hopefully PeerCoin comes out ahead in that.” PeerCoin, a cryptocurrency, created by software developer Sunny King, that borrows much of the source code and technical implementation of bitcoin. Blankenship believes that currency most closely approximates the perfect communal money, but for now, bitcoin is light-years ahead of its rivals. The value of bitcoin is measured in the billions of dollars while only a few of its competitors have surpassed a hundred million.

In basic terms, bitcoin and its competitors appear very similar; they attempt to imitate its open-source computer code, have no central authority, and employ a mathematically determined rate of expansion. They also share bitcoin’s biggest weakness: its violently fluctuating value. Real currencies have an appeal is because they have stable values that make them good units of exchange whereas virtual currencies are more akin to speculative commodities, at least for now. But that problem has not hampered the growing popularity of virtual currencies. Litecoin — considered to be the second most popular virtual currency — had a total value of $250 million last week.

To a small degree degree, Litecoin has been given some legitimacy due to the fact that its creator is Charles Lee, a 36-year-old former programmer at Google (NASDAQ:GOOG), not a shadowy figure like bitcoin’s Satoshi Nakamoto. But like bitcoin, new Litecoins created created through a mining process: computers compete to solve mathematical problems, and the coins are awarded to the first that succeeds. As Lee told the Times, the currency’s goal is not to replace bitcoin but to be “silver to bitcoin’s gold,” meaning faster-moving transactions and a more democratic mining process. “People like choices,” added Lee, who now works for Coinbase, a provider of virtual currency wallets. “You want to diversify your crypto-currency investments.”

Follow Meghan on Twitter @MFoley_WSCS

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