Bitcoin, the virtual currency anonymously exchanged through an online peer-to-peer network, has hit the mainstream radar as ironically, a technical glitch caused a “flash crash” this week, sending Bitcoin on a 23 percent tumble and into financial headlines.
Created by Satoshi Nakamoto, “Bitcoin is not controlled by any government or central bank,” explains Business Insider. “And two, it’s private. In the world of conventional finance, governments can see every time you use your credit card, withdraw cash at an ATM, or make a wire transfer. Yet with Bitcoin, they don’t have this ability. And this is a key reason why Bitcoin has become so popular, especially in places like Argentina where people are getting squashed by their government.”[more]
In Cyprus, citizens “are finding out that their duly elected representatives have now sanctioned theft of their private bank account,” according to a release. “President Nicos Anastasiades first proposed the wealth confiscation this last Friday. Under his plan, parliament would levy a 6.75 percent tax from all bank deposits of 100,000 Euro or less and 9.9 percent on bank deposits of more than 100,000 euro.”
Cypriots with Bitcoin (or gold and silver) are exempt as “they have hard assets in their possession at any given time and can use those assets to barter and trade with.”
“Unlike modern currency, which can be brought into existence at the whim of politicians or a central bank, leading to each note being devalued, the number of Bitcoins is governed by predictable mathematical algorithms,” according to CNET. The Financial Crimes Network (FinCEN) of the U.S. Treasury just released a new guidance note on the management and usage of virtual currencies like Bitcoin…and Facebook Credits, basically outlining that “Bitcoin users that sell their virtual currency to others for real money could be classified as transmitting the currency. If so, that would bring them under regulation, and therefore require them to become FinCEN registered, and subject to reporting and record-keeping regulations.”
“Without regulation or integration into existing banking structures, Bitcoin doesn’t yet appeal to investors looking to park large amounts of money,” Bloomberg notes. “But as the currency grows more mainstream, with banking confidence eroding, Bitcoin is something to watch.”
Zach Harvey and Matt Whitlock, partners in Lamassu Bitcoin Advisors, are trying to sell-in their Bitcoin ATM. “It’s the opposite of a traditional automated teller that dispenses currency,” CNET reports. “Instead, these Bitcoin ATMs will accept dollar bills—using the same validation mechanism as vending machines—and instantly convert the amount to Bitcoins and deposit the result in your account. “
But it’s the Bitcoin accounts that are the most-questionable aspect of the new technology. Charlie Shrem, a Bitcoin trader, was recently hacked and robbed of more than $12,000 digital dollars from his brokerage account. While traditional banks can often trace and replace stolen funds, Bitcoin doesn’t work that way. “Bitcoins are the digital equivalent of cash, and they can be traded instantly and anonymously. So once they’re gone, they’re gone for good,” Wired reports. The good news is that Shrem doesn’t keep all of his Bitcoins in his brokerage account. In fact, he wears the rest around his finger, in the form of a silver ring that is engraved with his unique Bitcoin address and private key. Never too careful, Shrem engraved all but one of the key numbers on the ring—the other is locked away in his head, and only his head. “Even if all of your assets are in Bitcoins, you have to diversify them,” Shrem says. “Twenty percent you should keep on your computer. The rest should be kept in cold storage.”
Ironically, the best type of “cold storage” is a tangible object, such as an encrypted USB drive, a computer not connected to the internet, a piece of paper, or physical coins, surely odd for a completely virtual product.
Despite realized security threats, Bitcoin has experienced a surge in value over the past few months, reaching an all-time trading high of £21 per BTC in February, Wired reports. Applications are popping up in unexpected places, such as a Bitcoin hedge fund in Malta, Germany switching its cash reserves and then there’s Canadian Taylor More, who wants to be the first person to sell his house for Bitcoins.
More listed his two-bedroom Alberta bungalow, asking 405,000 Canadian dollars (£261,000; $395,000)—or the equivalent in Bitcoins. “Three years ago, 10,000 BTC bought two pizzas. Now that can comfortably buy a house.”
Image courtesy Daniel Roberts.