While Bitcoin seems to gathering virtual steam -- and could soon be dispensed at some ATMs or accepted at your local coffee shop -- experts warn that the currency’s instability and hype could soon leave bitcoin owners with a big hole in their online pocketbooks.
Bitcoin is a form of virtual money that can be used to buy or sell real objects: kitchen utensils on Overstock.com, tickets to the Sacramento Kings basketball team, or even contraband like drugs, guns or sex. In past, some of those illegal items could be purchased on the now-closed virtual marketplace, Silk Road.
Bitcoins were invented in 2009 by a secretive software developer that calls himself Satoshi Nakamoto; some believe he is a U.S. programmer. Additional coins are "mined" by having computers solve increasingly difficult math problems. Nakamoto made it so the number of bitcoins that could be mined would be limited 21 million coins. As of Feb, 2014, there are about 12.4 million bitcoins in circulation, according to Blockchain.
Bitcoins are traded over the Internet and like gold, the value of an individual bitcoin on any given day varies. The advantage of bitcoins is, like cash, they are passed directly from buyer to seller without going through a bank, clearinghouse or government agency. That makes bitcoins ideal for keeping transactions secret, while avoiding taxes at the same time.
Bitcoin’s popularity has led to some businesses to start accepting it as a legitimate form of payment including Tiger Direct electronics, Richard Branson’s Virgin Galactic space flights and marijuana dispensaries in Washington State.
“The idea is to have an economy that is truly free,” said Edward Castronova, professor of telecommunications at Indiana University and author of the forthcoming book, Wildcat Currency: The Virtual Transformation of the Economy.
“And bitcoin delivers on that,” he said.
The problem is that bitcoin is that owners still face big risks, according to Castronova.
“There are certain features that make it great for secrecy people and digital enthusiasts, but I don’t see much reason for the average person to get excited about bitcoin in their daily lives,” Castronova said. “Right now it’s harder to use than the dollar.”