Bitcoin gains legitimacy with US government, companies

Bitcoin, a virtual currency, was recognized by the US Department of Justice as a “legal means of exchange” last week, and the number of companies accepting it in payment continues to grow. The most recent additions to the Bitcoin club include Virgin Galactic and Europe’s University of Nicosia.

A number of smaller companies also accept Bitcoins for products and services, as does Etsy, GadgetsDirect, WordPress, Reddit and NameCheap.

And, just in time for the holidays, Bitcoin Black Friday is a site that gathers together holiday deals and discounts for people who shop using Bitcoin.

Read more about the Department of Justice report here and here.

Read the Virgin Galactic’s announcement.

Read the University of Nicosia announcement.

Pros and Cons

The value of Bitcoins lies completely within its network of users. The more business accept Bitcoin, and the more people trade it, the more value the currency has.

If the network of users grows faster than the supply of BitCoins — which is constrained by the mathematical algorithm used to generate them — then the value of the Bitcoins increases.

It is completely independent of government fiscal policy, national debt loads, and other traditional measures of the value of a currency.

But this independence from governments and dependence on the user network is both a strength of Bitcoin and its major weakness.

As MySpace and Friendster have learned, social networks are fragile. A new, cool platform comes along and everyone just switches over. Just think of the kids fleeing Facebook now because their grandparents are on it.

A Bitcoin network is just as fragile. Without a government mandating that people have to use this currency, there is no penalties or costs for businesses and customers who decide to switch to something else.

If a newer and cooler virtual currency comes along — I’m going to call it BieberCoin for the sake of this argument — businesses who have already figured out the logistics of accepting Bitcoin can easily add BieberCoin to their payment platforms. Teenage girls will flock to BieberCoins in droves, driving up its price, and investors hungry for the next bit thing will sell their mature Bitcoins and buy the young, growing BieberCoins. But as the Bitcoins get sold, their value will start to drop, inspiring others to liquidate their Bitcoins before they drop further. As prices drop, businesses will become reluctant to accept Bitcoins so as to avoid getting stuck with a virtual currency that’s losing value. Media attention on the rise of BieberCoins and the fall of Bitcoins will speed up this process, until the people still holding Bitcoins are left with nothing except a string of numbers in a digital wallet.

My advice? Don’t keep more money in any virtual currency — whether Bitcoin, Litecoin, Feathercoin, Ripple, or Linden Dollars — than you can afford to lose.

And if BieberCoin does come out, be sure to buy it early. And maybe you can be the next guy who accidentally turned a $27 Bitcoin investment into $1 million.

maria@hypergridbusiness.com'

Maria Korolov

Maria Korolov is editor and publisher of Hypergrid Business. She has been a journalist for more than twenty years and has worked for the Chicago Tribune, Reuters, and Computerworld and has reported from over a dozen countries, including Russia and China.

  • hack13

    I kinda feel like bitcoin is a perfect example of a currency to usurer in the new year and kinda disappointing I didn’t invest as much as I should have in the start of bitcoin. I just want to point out that I am not a big anti-government or anything like that, I just simply put that people are always saying that “bitcoin is not real, it is something given worth by people” and well I kinda have to say so is the US Dollar, if you really think about it. Yes multiple country at the moment, accept it, but if you keep hearing many countries are starting to deny its worth, requiring other medium of exchange.

    So having a currency like bitcoin prevents the governments such as our own from allowing them to inflate the worth of the USD thus making less and less of the world want to consider it, thus honestly just like many people in the early of bitcoin “it is just given worth by someone else, no real value” well we are kinda doing that now with how the USD keeps in failing, just look over the past 4 months at the USD and the Pound. We went from 1-1 to now 0.4 to 1pound it is scary in how short of time. Economist alike around the world keeping telling people cash out your USD invest in gold, silver, or into another currency.

    See this is what I love about BitCoin, and honestly no one really appreciates this because no one really will take the time to really understand how impossible it is to fake making money etc with bitcoin. It is really amazing if you look at its code base, secondly it is self regulating, people can’t just make it magically worth more or less, if fluxes based on real usage just like a real currency should. But unlike currencies of USD, EUR, etc no bank can just inject like it can in the US and inflate the worth dramatically. The only way this can occur in bitcoin is by someone being crazy and setting these prices really high or really low, and messing up, but that is one person, it operates like a really currency should. Without government intervention allowing it to be inflated and worth loss because of the actions of a few but rather the whole.

    Now while I do agree with you on there are tons of copy cats out there, but then again, no different than the real world. I mean if you honestly look at the real world today, many countries have stopped using their own currencies and switched to more universal currencies like the EUR. However, in the beginning and in fact in the beginning of the USA we had the worst problem in US history. If you went from Virginia to North Carolina your money was no good because North Carolina made its own to Virginia’s. So I mean it is people trying to compete for their own surprimicy, but the one that is dominantly used will rise or fall based on the market’s use of it and not third party banks ability to inflate it by introducing arbitrary amounts.

    • http://www.hypergridbusiness.com/ Maria Korolov

      I’ve written about the volatility issue before — http://www.hypergridbusiness.com/2013/04/bitcoin-revisited-beware-the-bubble/

      Switching from the US dollar or Euro to Bitcoins because of volatility is like saying Maine is too cold, then moving to the North Pole.

      In the past couple of years, Bitcoin prices have been ranging from $0 to $175. Euro prices ranged from $1.20 to $1.60. So yes, the Euro is volatile … but its rock solid compared to Bitcoin.

      Saying that the US dollar or other fiat currency is given worth by people is technically true, but it doesn’t address the actual concern. The US dollar is as reliable as the US government. Sure, you may not have a lot of faith in the US government, but it’s been around for 200 years and, despite all the doomsayers, looks like its still going to stick around for a while, Obamacare and all. And while it’s around, US dollars will continue to have value because it’s a fiat currency — the law mandates that people have to use it in certain situations. At the very least, when paying taxes. If you want a hedge against the US dollar, a better bet would be the Euro, or some other national currency.

      If the US and Europe were both to collapse, your balance in Bitcoins is not likely to serve you as well as, say, your stockpiles of cured pork.

      Bitcoin is backed by a relatively small social network. And we’ve recently seen very large social networks — Friendster, MySpace — virtual disappear. Social networks are highly sensitive to fashion, and to generational change.

      Ripple is a virtual currency backed by the notion of mutual debt exchange, so it might be less vulnerable to this kind of risk. And folks might figure out some other kind of way to anchor Bitcoin, so that people can’t just decide to switch to something else one day and have it disappear.

      But it’s still very early days. We’ll probably see a lot of innovation in this space in the next few years.

      • hack13

        I think you miss understood me, I am saying that not being governed by governments is a good thing to have the alternative of a currency that doesn’t require its usage. While I don’t have much faith in the people running my government, I do have faith that the US government is not going to go away. I just know for a fact, that sooner or later our dollar is going to sky rocket to huge inflation amount and we are going to have to recover from it. But it will not be the nightmares you hear about on TV, but it will be just the continued decrease of available jobs.

        As far as the solidness of the currency, yes the Euro or USD are pretty solid and have been around for quite some time. But honestly if you been reading Germany is considering launching their own digital currency like the Bitcoin some German reporters have already been talking about it. We are moving into the age of digital currency, even though if you want to be honest, we already were because honestly how many people carry more than 100usd cash in their wallet, most people use debit or credit these days. It is honestly not much different, your money on that debit card is just bits and bytes of data just like a bitcoin is. We just backup the bits and bytes on a debit card with USD in America.

        New currencies are going to emerge as time moves forward, and I am really excited to see cypto-currency lead the way. The inability for a currency to be inflated my a company or individual really makes me feel more secure. Am I saying go all gun-hoe onto it now? No because bitcoin as you state, and you are correct is still pretty much in its infancy, but when Germany launches their crypto-currency or a well trusted bank does. I think that honestly, I will drop more money into that, because the inability for government or business breakage of the currency really equals out to a more stable currency over all.

        I view bitcoin kinda how people view gold, its worth fluxuates. You need to watch it closely, as you never know how much its worth is, it is a game of chance. Example prices of gold have gone up 20 to 40% in the past and dropped right back down sometimes over night. Granted gold is physical, but at the same time, if you understand cryptography, it is pretty much as physical as gold is in digital standards.

        It is really up to how you want to view the new world and age, but what I was trying to say is, I think crypto-currency is where we need to go, it will help stabilize and equal out the world’s economy in my opinion. Maybe not over night, but it really code keep things stable as its worth, is what can be maintained by the amount of people who are part of the currency, and not by some business or government say “we are injecting blah into the euro” it can’t be done.

      • Tony

        With the Chinese central bank just stating that the time has now come to let the dollar collapse, I highly doubt that the USD will stick around for a while. This is wishful thinking.

        • wolftimber

          We have the power to tell china to shove it and stop payments on all debts to them, what can they do about it LOL!

    • trsdata

      You can still get in on the fairly undervalued currency, Litecoin. You can either buy them online or mine them with a custom desktop PC. Currently, a custom desktop PC that sets you back around $1,600 will generate about $700/mo worth of Litecoins. You can verify the calculations for yourself at http://www.coinminingrigs.com

    • wolftimber

      ” no one really appreciates this because no one really will take the time to really understand how impossible it is to fake making money etc with bitcoin.”

      Best to keep bitcoin where it belongs- buying 10 cent virtual items in various GAMES like SecondLife.

      Might want to read this:

      How Hackers Could Burst The Bitcoin Bubble

      Over the past week, hackers have stolen bitcoins from digital wallets
      and hijacked computers to create new bitcoins — the equivalent of
      minting money.

      But hackers have also found a way to bring financial ruin to most
      everyone involved in the Bitcoin craze. They have shut down sites where bitcoins are exchanged for cash, creating a panic that causes values to plummet, then buying up cheap bitcoins and profiting when the currency rebounds.

  • Steve Avro

    Any currency, regardless of issuer only has value based on the faith that this value will remain. Paper money & coinage only has value based on the faith that the Government that issued it can back it with hard assets. The question to ask oneself, how much “faith” do I have that I will get the value of what is held in trust… Trust & Faith in something in-tangible is a tad much …

  • http://edmundintokyo.wordpress.com/ Edmund in Tokyo

    The Bieber angle sort-of trivializes what should be a good point: It’s probably not true that someone will displace Bitcoin with something similar but with better branding; Money has very strong network effects, so it’s very hard to displace an incumbent, and the world does have a tendency to settle on inferior standards then get stuck with them (I’m looking at you, QWERTY) unless the alternative brings a lot more to the table.

    That said, I think you could get a viable competitor to Bitcoin, that could grow on its own merits until it had big enough network effects to displace it, with any of the following features that Bitcoin lacks:
    1) Stronger anonymity / privacy. (See Zerocoin etc)
    2) Cheaper transactions, still available at scale. This isn’t much of an issue now, but it could become one as Bitcoin grows.
    3) Exchange rate stability. (This is hard to do without a trusted third-party, but it may be possible.)

    • Sebastian

      There’s already a cryptocurrency with exchange rate stability built-in design, though it is in beta phase – eMunie. There are still many improvements to be made in cryptocurrencies.

  • wolftimber

    How fast people forgot, and this statement says it all:

    “Bitcoin is a virtual currency that only exists online. It is not
    backed by a central bank or government, and its value is based on the
    confidence of its users”

    Thursday, 4 Apr 2013

    Online currency bitcoin had 20 percent knocked off its price overnight
    on Thursday as one of its major exchanges became the victim of a hacking
    attack leading to a sell-off in the virtual currency after reaching an
    all-time high.

    But by Thursday morning bitcoin prices had fallen to $132 from Wednesday’s record price of $147.

    The most popular bitcoin exchange, Tokyo-based Mt.Gox announced
    overnight that it had been the victim of a hacking attack after
    experiencing a severe lag with its systems. The complications meant the
    price quickly sank to below $115 before regaining ground to $130 by 6.00
    a.m. London time on Thursday, according to Bitcoincharts.

    Attackers wait until the price of bitcoins reaches a certain value,
    sell, destabilize the exchange, wait for everybody to panic-sell their
    bitcoins, wait for the price to drop to a certain amount, then stop the
    attack and start buying as much as they can. Repeat this two or three
    times like we saw over the past few days and they profit,” Mt.Gox said. “There is pretty much nothing that can be done. Large companies are frequently victims of these kinds of attacks.

    Another bitcoin associated company Instawallet – an online storage
    service – was hacked earlier this week and its service was suspended
    indefinitely.

    “Our database was fraudulently accessed, due to
    the very nature of Instawallet it is impossible to reopen the service
    as-is,” it said on its website.

    How Hackers Could Burst The Bitcoin Bubble
    Over the past week, hackers have stolen bitcoins from digital wallets
    and hijacked computers to create new bitcoins — the equivalent of
    minting money.

    But hackers have also found a way to bring financial ruin to most
    everyone involved in the Bitcoin craze. They have shut down sites where
    bitcoins are exchanged for cash, creating a panic that causes values to
    plummet, then buying up cheap bitcoins and profiting when the currency
    rebounds.

    “Attackers try to exploit any system where they think they can profit
    and get away with it, whether that is robbing banks, stealing online
    banking credentials, or attacking a Bitcoin exchange,” Gavin Andresen,
    chief scientist at the Bitcoin Foundation, a nonprofit organization that
    works to standardize and promote the digital currency, said in an
    email.

    Bitcoin is a virtual currency that only exists online. It is not
    backed by a central bank or government, and its value is based on the
    confidence of its users. People buy bitcoins with cash

  • wolftimber

    Bitcoin plummets as China’s largest exchange blocks new deposits
    cryptocurrency has lost almost 50% of its value overnight after BTC
    China said it could no longer accept deposits in the Chinese currency

    The Guardian,
    Wednesday 18 December 2013