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Bitcoins - The New Gold?

Bitcoin is among the first and most successful new wave of e-currencies. It may be in 'bubble' mode now, but so was the internet not so long ago - and that's still around.

Bubble or not, the "anonymous" person who created Bitcoin uses the name of Satoshi Nakamoto which is probably a pseudonym. Do you smell a rat?

A community of developers now 'runs' Bitcoin, as a free open source project.

 

WHAT THE HELL ARE BITCOINS?

Bitcoins are a form of electronic money and they're grabbing attention in the financial world after the price went stratospheric in recent weeks - but most people have never heard of Bitcoins.

Bitcoins are a money supply or a virtual currency that you can use to buy stuff online. It's not the first such system, but it is by far the most successful. So how can you buy some Bitcoins?

You choose a virtual wallet from one of the various providers. This means you can start to receive coins from other users, and send them onwards. You can buy Bitcoins on specialist online currency exchanges, and they also change hands over online marketplaces such as eBay.

Why is everyone suddenly talking about Bitcoins?

Because the price has exploded. It's jumped from just over $10 per Bitcoin last November to $147 at one point last week. Bitcoin gets rid of the need for a central bank. It has a system that is built around trusting individuals instead of institutions like the government and the central banksters. People are buying and selling this virtual stuff for what we laughingly call real money via more than 40 online exchanges like Mt Gox.

WHAT'S WRONG WITH THIS PICTURE?

  • Bitcoins Are Not Widely Accepted

Bitcoins are still only accepted by a very small group of online merchants. This makes it unfeasible to completely rely on Bitcoins as a currency. There is also a possibility that governments might force merchants to not use Bitcoins to ensure that users’ transactions can be tracked.

  • Wallets Can Be Lost

If a hard drive crashes, or a virus corrupts data , and the wallet file is corrupted, Bitcoins have essentially been “lost”. There is nothing that can done to recover it. These coins will be forever orphaned in the system. This can bankrupt a wealthy Bitcoin investor within seconds with no way form of recovery. The coins the investor owned will also be permanently orphaned.

  • Bitcoin Valuation Fluctuates

The value of Bitcoins is constantly fluctuating according to demand. As of June 2nd 2011, one Bitcoins was valued at $9.9 on a popular bitcoin exchange site. It was valued to be less than $1 just 6 months ago. This constant fluctuation will cause Bitcoin accepting sites to continually change prices. It will also cause a lot of confusion if a refund for a product is being made. For example, if a t shirt was initially bought for 1.5 BTC, and returned a week later, should 1.5 BTC be returned, even though the valuation has gone up, or should the new amount (calculated according to current valuation) be sent? Which currency should BTC tied to when comparing valuation? These are still important questions that the Bitcoin community still has no consensus over.

  • No Buyer Protection

When goods are bought using Bitcoins, and the seller doesn’t send the promised goods, nothing can be done to reverse the transaction. This problem can be solved using a third party escrow service like ClearCoin, but then, escrow services would assume the role of banks, which would cause Bitcoins to be similar to a more traditional currency.

  • Risk of Unknown Technical Flaws

The Bitcoin system could contain unexploited flaws. As this is a fairly new system, if Bitcoins were adopted widely, and a flaw was found, it could give tremendous wealth to the exploiter at the expense of destroying the Bitcoin economy.

  • Built in Deflation

Since the total number of bitcoins is capped at 21 million, it will cause deflation. Each bitcoin will be worth more and more as the total number of Bitcoins maxes out. This system is designed to reward early adopters. Since each bitcoin will be valued higher with each passing day, the question of when to spend becomes important. This might cause spending surges which will cause the Bitcoin economy to fluctuate very rapidly, and unpredictably.

  • No Physical Form

Since Bitcoins do not have a physical form, it cannot be used in physical stores. It would always have to be converted to other currencies. Cards with Bitcoin wallet information stored in them have been proposed, but there is no consensus on a particular system. Since there would be multiple competing systems, merchants would find it unfeasible to support all Bitcoin cards, and therefore users would be forced to convert Bitcoins anyway, unless a universal system is proposed and implemented.

  • No Valuation Guarantee

Since there is no central authority governing Bitcoins, no one can guarantee its minimum valuation. If a large group of merchants decide to “dump” Bitcoins and leave the system, its valuation will decrease greatly which will immensely hurt users who have a large amount of wealth invested in Bitcoins. The decentralized nature of bitcoin is both a curse and blessing.

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