Weigh In on Bitcoins: Good or Evil?

If you follow Papercut on Facebook, you might have seen our post about bitcoins from a few weeks back. The basis of some lively discussion around our office, bitcoins are a form of digital currency that seem to have taken the financial world by storm over the last few years and shaken things to their core. Their creation and use have formed definite camps of enthusiasts and detractors. Regardless of which side of the debate you fall on, there’s no denying that the implications of bitcoins are huge, and we’re watching with bated breath to see how things shake out over the next few years.

What Is a Bitcoin?

As mentioned above, bitcoins are, in the simplest terms, digital currency that is passed through the Internet. The concept was first introduced in a notorious 2008 whitepaper titled “Bitcoin: A Peer-to-Peer Electronic Cash System” produced by an unknown author using the alias Satoshi Nakamoto. Several theories about Nakamoto’s identity exist, but to date, the inventor of the bitcoin remains anonymous.

Bitcoins were first produced in 2009, and they are created through a method commonly referred to as “mining.” Essentially, mining involves using a computer equipped with bitcoin mining software to solve extremely complex math problems. This creates a series of encrypted transactions known as a “block.” When a person decodes or solves a block, they get bitcoins (Source: Bitcoin for Idiots: An Introductory Guide). Individuals can acquire bitcoins by either mining them for themselves, accepting them as a form of payment for a transaction, or purchasing them through bitcoin exchanges, such as Mt. Gox in Japan.

The bitcoin itself is two strings of unique letters and numbers: a public key and a private key. Physical representations of the bitcoin exist, but its true essence is these encrypted keys, and they are necessary for transactions to take place.

All bitcoin transactions are logged in a public database known as the “blockchain.” The blockchain is maintained and updated by bitcoin miners who run the required software and validate transactions.

The value of a bitcoin fluctuates according to market demand. At its height last year, a single bitcoin was worth over $1,000. The day this post was written, a bitcoin was worth just over $573.

In recent years, an increasing number of businesses and merchants have begun to accept bitcoins as a form of payment. One of the first products ever bought with bitcoins was a pair of alpaca socks, but they can now be used to purchase everything from NFL apparel to pizza. Even Overstock.com has added them to its list of accepted forms of payment.

As you can imagine, this “crypto-currency” comes with an extensive lists of pros and cons. Here are just a few of each:

Pros

• Bitcoins are transferred peer to peer – Some might see this as a con, but most enthusiastic supporters find this to be the bitcoin’s most attractive quality. Because they are transferred from one individual to another, bitcoins cut out the middleman, meaning there are no banks involved and no imposed regulations.
• You can spend bitcoins anywhere – If you’re traveling abroad, there’s no need to exchange your bitcoins for the local currency. They’re accepted around the world.
• They have lower fees – Again, because there is no middleman in bitcoin transactions, the fees are much lower than those associated with credit cards. Sometimes, fees are even non-existent. This makes bitcoins even more appealing to merchants and business owners.
• Bitcoins allow for instant transactions – Given that bitcoins work by direct transfer, transactions are completed almost instantly. There’s no need to wait for a bank to remove the money from your account or for a credit card company to process the charge.

Cons

• They’ve been used for some pretty shady stuff – By their very nature, bitcoins disguise the identities of the buyers and sellers involved in transactions. This has made them very appealing to individuals looking to purchase drugs or participate in other illegal activities. In late 2013, the FBI shut down Silk Road, a notorious black market site that facilitated the sale and purchase of drugs through bitcoins, its only accepted form of payment.
• Bitcoins take a massive amount of energy to mine – Mining bitcoins requires very powerful computers (more powerful than the average PC), and these have to run constantly. The result is a massive amount of energy being consumed for bitcoin production every day, much to the dismay of environmentalists.
• The security can be compromised – If a computer can crack the cryptography that produces and secures bitcoins, they will be rendered useless. We already know that hackers have found a flaw in the bitcoin system and are wreaking havoc on some of the top exchanges, including Bitstamp and Mt. Gox, both of which have been forced to freeze withdrawals in recent weeks.
• Once a bitcoin is gone, it is gone forever – Bitcoins aren’t insured by banks like paper money is, so if someone gains access to your digital wallet (used to store bitcoins) and your stash, it’s gone forever. This lack of security also means bitcoin holders are out of luck when it comes to fraudulent transactions. There’s really no way to get your money back.

What Is the Future of Bitcoins?

Right now, the future of bitcoins seems to be tenuous at best, and some would argue that the currency is in the midst of a crisis that will determine whether it stands the test of time or fades into obscurity. In December 2013, bitcoin prices dropped 20% after China banned banks from trading them. Other recent blows include the previously mentioned hacking breach and a growing push for regulation from government officials, not to mention the fact that their value seems to be dropping daily. All this is to say that, for the time being, all things bitcoin are relatively uncertain.