To purchase bitcoins, users buy them from one of several digital exchanges, then set up a software program on their computer that operates like a virtual wallet or pocketbook.
In the past few days, Tokyo-based bitcoin exchange Mt. Gox has frozen withdrawals because it hasn’t been able to fix a software bug that could allow thieves to steal its customers’ digital money. For now, bitcoin owners are stuck and many worry their money could have evaporated. While the value of bitcoins on some exchanges is more than $570, Mt. Gox bitcoins' value dropped to below $100 this week for the first time since July, but they have no real value since they can’t be traded.
Such a drastic drop in value is tough-luck for bitcoin owners because the currency isn't backed by a government guarantee. That’s a big difference between dollars and bitcoins, according to Joseph Bailey, professor of information systems at the University of Maryland.
“Most of us transact in U.S. dollars and don’t think how important it is in guaranteeing the transaction,” Bailey said. “One of the issues of bitcoin is the volatility of how much it is worth.”
Even for bitcoin traders on the so-called dark Web of illicit online marketplaces, the advantage of secrecy may be losing out to the fear of rip-offs. In October 2013, FBI agents shut down the Silk Road marketplace and took its $3.5 million worth of bitcoins. In November, the similar Sheep Marketplace lost $6 million to hackers, while last week, a revived Silk Road claimed it lost $3.5 million in bitcoins it had in escrow to hackers, according to CNN.
Indiana’s Castronova believes that bitcoin is an example of a virtual currency akin to frequent-flyer miles, loyalty programs or other imitators like “Doge Coin,” that are experiencing a lot of hype right now, but just aren’t quite ready to replace dollars, euros or Chinese yuans anytime in the near future.
“Bitcoin is Myspace,” Castronova said, referring to the nearly defunct social media site of the early 2000s. “There’s a Facebook coming, but I don’t think it will look like bitcoin.”