BitCoin Virtual Currency: Scam or Legitimate?

BitCoin Virtual Currency: Scam or Legitimate?

A better question to ask can you trust a virtual currency? All currencies are based on trust and faith: that that their value is stable and people will continue to believe in their future value. The question as whether BitCoin is a scam or legitimate is a bit more complex because it isn't backed by a precious metal (as the US dollar used to be) or on the perception that the currency is "too big to fail" (as the US dollar is currrently based).

Here is the bottom line, followed by a discussion of the background and refernces.

The Bottom Line:

It is too soon to tell. For those who bought into BitCoin early, it has been good.  Only time will tell whether the idea (and currency) takes off or fails. Like any investment, common sense not to put all of your eggs into this basket., nor to invest more than you can afford to lose.

History of BitCoin

Bitcoin (BTC) is a digital currency incented in 2008 paper by a developer using a fake name of Satoshi Nakamoto.  This anonymous person called Bitcoin an anonymous, peer-to-peer, electronic payments system. There were other virtual or electronic currencies before Bitcoin, such as Linden Dollars, the unit of exchange in Second Life.

On April 10, 2013, bitcoin crashed from a price of $266 to $105 before returning to a value of $160 within six hours.

 

How does Bitcoin work?

Bitcoin creation and transfer is based on an open source encryption protocol (computer code) which is not managed by any government or central authority. The creation of new bitcoins is automated and may be accomplished by servers, called bitcoin miners that run on an internet-based network and confirm bitcoin transactions by adding codes to a decentralized log, which is updated and archived periodically. Each bitcoin is subdivided into 100 million smaller units called satoshis, defined by eight decimal places. This means instead of Ben Bernake deciding to print dollars, a computer program decides when to print more Bitcoins.

Bitcoins can be transferred through a computer or smartphone without an intermediate financial institution. Each time bitcoins change hands, a transaction history encoded in a string of characters is passed to the network of users, who authenticate the ownership of bitcoin balances by using dedicated servers (the bitcoin miners) and using a public-key encryption scheme. Each 10-minute portion or "block" of the transaction log also allows for a predetermined number of new bitcoins to be awarded to miners based on computational data added to the log and confirmed by other miners. Essentially, everyone who holds Bitcoins agrees on who owns what, which ensures people can't counterfeit by copy-and-pasting the transactions.

 

Getting back to "printing dollars", the creation of a new bitcoin is a special case of a transaction in which the new bitcoin deemed issued in exchange for solving a computationally intensive encryption problem. The number of newly created bitcoins per period depends on how long the network has been running. Currently, 25 new bitcoins are generated with every 10-minute block. This will be halved to 12.5 BTC during the year 2017 and halved continuously every 4 years after until a hard limit of 21 million bitcoins is reached during the year 2140. This may be why some critics say it is like a Ponzi or Pyramid scheme in which those who get in early do best.

But currently, Bitcoin is accepted in trade by various merchants and individuals in many parts of the world. On the negative side, a  large share of such commercial use is believed to be for illicit drug and gambling transactions.

Advocates supporting Bitcoin

  1. John Stossel on Fox Business News - Bitcoin is a Great, Nearly Anonymous Currency.

Detractor's positions against Bitcoin

  1. Funny Money: Why Bitcoin Is a Scam Why Bitcoin Is a Scam, Tim Fernholz
  2. Charles Munger (a Warren Buffet partner) "I think it is rat poison". Varney and Company, May 6, 2013

News stories about Bitcoin

  1. Bitcoin: Open for Business; EVR operating owner Alex Likhtenstein explains his reasoning for accepting bitcoins as payment on Fox Business Network
  2. April 10, 2013 - Is it Too Late for Investors to Cash in on Bitcoin Boom? Steel Vine Investments CIO Spencer Patton and Expensify CEO David Barrett on the outlook for Bitcoin. Fox Business Network

 

For a comprehensive list of national and international agencies to report scams, see this page.