You may have heard about bitcoins. The internet is abuzz these days with tweets and articles about the digital currency that’s been around since 2009, but has lately soared to record-high prices.
Bitcoin is a decentralized and anonymous way to exchange money. Yes, they have real cash value. On Wednesday morning, when this story was filed, one bitcoin was worth a record $266. (In the afternoon, its value dropped by nearly half, however, before rising overnight to $168. Find the current value at http://preev.com/.)
But bitcoins are not regulated by any centralized government agencies or financial institutions.
Not having the strong arm of government to protect ordinary citizens might scare some people; but, for others, lack of regulation and anonymity is precisely the appeal.
Because you can trade bitcoins without anyone knowing who you are (your bitwallet is basically a random string of 27-34 numbers and letters), shady buying and selling is possible. Bitcoin could allow someone to purchase guns, drugs, and other questionable products without leaving a paper trail, which has law enforcement officials concerned.
However, because it is not associated with any banks, folks can also transfer money to anyone in the world without paying fees, which is appealing to law-abiding citizens as well.
Is it legal? Yes, technically—though some lawmakers think it is just a complicated online money laundering scheme. U.S. law prohibits the creation of tangible coins, bars, or bills that resemble any real currency, but bitcoin is virtual. Since nothing like bitcoin could have been imagined when the laws were written, bitcoins don’t fall under the categories outlined. In other words, bitcoins are legal because they are not deemed real money.
Still, you can exchange bitcoins for real cash. About 80% of those exchanges are done through https://mtgox.com/. Or, if you want the convenience of brick and mortar, just wait, a bitcoin ATM could be in your neighborhood soon.
How do you get bitcoins? You can buy bitcoins online by wiring cash straight from your bank account. You can trade products or services for bitcoins. Or, you could mine for them...
Huh!? What’s virtual mining? "Miners" find 64-digit numbers by decrypting equations with the complexity of rocket science. Every "block” mined is worth about 25 bitcoins (currently worth more than $6,000). But don't reach for your virtual pickaxe quite yet. You need an advanced degree to even understand the questions. Plus, working alone, it could take you about 3 years to solve one block.
There are other options: you can download some software and rent your computer’s processing power to a pool of miners. Leave your computer on 24 hours a day and you’ll reap a share of the mining profits equal to the amount of processing power you contributed. It is like crowdsourced cooperative mining. But is it worth making the effort?
Some people certainly think so. The value of a bitcoin has increased substantially in a very short amount of time and some analysts think it will skyrocket up to about $400 per bitcoin. But others say it is just a passing fad and the bitcoin bubble is about to burst.
My take: As much as I love a good science-fiction futuristic fantasy, bitcoin is probably not the future of money. I doubt it will replace the dollar as the preferred international currency anytime soon. However, as Jared Keller at the Atlantic has pointed out, "it may become the de facto dollar for technical services in the digital space."
If you don't sell something that requires anonymity there's probably no advantage to dealing in bitcoins yet. And if you just like the idea of currency exchange as an investment, there are much safer options. Consider an ETF or mutual fund that trades in foreign currencies. The potential payout is smaller, but so is the risk.