For many people, the first time they saw or heard the term “Bitcoin,” it was on the pages of the business section or on CNBC or Fox Business as analysts reported that large quantities of the digital currency went missing.

While there are only around 200,000 registered Bitcoin addresses with at least one bitcoin, what made the news of this relatively underused digital currency grab headlines is that the disappearance of these bitcoins represented a loss of around $460 million.

Bitcoin was the first “cryptocurrency,” created in 2009 as an all-digital form of money that can be spent between individuals using a peer-to-peer public ledger that keeps track of all transactions.

While many other forms of digital currency have come since Bitcoin was unveiled, including the Canadian government-backed MintChip, Bitcoin has remained the most widely used cryptocurrency.

“You assign your computer to do some hard math problems in its spare time and when it’s done, you’ve mined one bitcoin. They’re so hard and take such a long time that it creates a cap on the number of bitcoins that can be created.”
Megan Squire, associate professor of computer sciences at Elon University, said this is because of the creators of Bitcoin overcoming programming issues early on, as well as a more sociological reason.

“It’s hard to understand, but there might be a first-users benefit,” Squire said.

Bitcoin is viewed as a possible alternative for those who feel the dollar and other government-backed currency is in decline, like Natalie Cuzmenco, president of Elon’s Young Americans for Liberty.

“I think it’s awesome, especially for young people, because we grew up with so much technology and advancement, and we are really good at adjusting to new technologies,” Cuzmenco said. “I think that any kind of progress forward to replace the failing system that we have now is good.”

On the other side, Stanley Black, Lurcy distinguished professor of economics at the University of North Carolina at Chapel Hill, said currency needs to be a means of payment, a store of value and a unit of account — all of which Black said do not apply to Bitcoin.

“The more widely a currency is used, the better the quality of the currency. The dollar is widely accepted, so it’s more useful as a currency. Bitcoin is not widely accepted,” Black said. “And you’d want something with a stable value if you want to store your wealth in [it].”

Mechanics of Bitcoin

Unlike the dollar, which has a central bank and regulatory agency, Bitcoin is essentially run by the users of the Internet. The public ledger gives anyone access to information about inflation rates, quantity and who sells to whom. Squire said the power of minting or “mining” bitcoins is also put in the hands of the people.

“You assign your computer to do some hard math problems in its spare time and when it’s done, you’ve mined one bitcoin,” Squire said. “They’re so hard and take such a long time that it creates a cap on the number of bitcoins that can be created.”

Black said this could create economic issues similar to when the dollar was limited in quantity and value by the gold standard.

“Every year, there was a drain on money supply around August time, which was the ‘Christmas-time’ of the 19th century when people did a lot of buying and selling. That led to recurrent financial crises every fall,” he said. “Bitcoin cannot handle that kind of issue if it were ever to be widely used.”

However, Libertarians like Cuzmenco do not find the way the Federal Reserve regulates and changes the dollar’s supply to produce any better effects.

“Whenever they’re trying to manage inflation and manage unemployment, inflation is actually higher than what they report,” Cuzmenco said. “I think it’s due to the fact that our Federal Reserve is constantly printing out money and is sending our economy down the tank.”

As more people mint and use bitcoins, the value of the currency can change drastically. Based on data from BitcoinCharts, one bitcoin was worth about $10-20 in December 2012, but grew to $600-800 in December 2013.

“If the demand for bitcoin were to rise, then the prices would have to rise as well, which means that the value in terms of other things would go down,” Black said. “That’s not a virtue in a currency if you want your economy to grow. People are going to need more money, unless you want price levels to fall over time, and it’s not clear that we want that.”

Black added that stability is more important than inflation or deflation and, in an economy where there is a set number of bitcoins that can exist, the economy would be subject to “serious deflation.”

Headline grabber

Bitcoin has become a recent topic of discussion because of the recent bankruptcy of Bitcoin exchange company Mt. Gox. While many companies exist to facilitate bitcoin trades for goods and services, Squire said Mt. Gox managed write better programs to be one of the top players in the emerging market.

“Mt. Gox found a way to quickly write to the public ledger,” Squire said.

But over the past weeks, Mt. Gox, which comes from the acronym for the company’s original intention, “Magic: The Gathering Online Exchange,” revealed that millions of bitcoins worth more than $400 million were gone. While some news outlets have reported that hackers took the cryptocurrency, Squire is not so sure.

“Some security people are saying it was an error within Bitcoin itself,” she said.

That problem is that each bitcoin transaction that gets recorded to the public ledger sometimes misses the accompanying identification number, which means there is no evidence the sale took place.

“That vulnerability could have been taken advantage of, but if it had been hackers, they would have been quicker to say so,” Squire said.

Cuzmenco said the controversy with Mt. Gox does not affect her outlook on Bitcoin’s potential future.

“It’s a new innovation, and it needs to find out what’s going to work best for it, and I think that there are going to be failures along the way,” she said. “If the idea of digital currency came about with absolutely no failures and nothing going wrong, I’d be really surprised.”

Squire said Mt. Gox was one of the companies that tried to make Bitcoin use easier, and its problems do not affect the currency as a whole.

“Email doesn’t need Gmail,” she said. “But what Bitcoin needs is to fix the transaction problem.”


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