Digital Money and the Future of Payment

Whether it’s for the startling rise in value or the recent plummet that happened just as suddenly, bitcoins have been making news. Recent estimates say that there is more than $2 billion dollars worth of the digital currency circulating around the internet, which means that, wherever this may lead, it’s a phenomenon that deserves a closer look. While detractors say it’s a crazy scheme and economists warn that it’s just another bubble about to burst, there’s something happening here that could have an impact on the future of currency and traditional payments.

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What Is Bitcoin and How Does It Work?

Bitcoin is a digital currency that is bought, sold, and otherwise traded on a peer-to-peer network without any form of centralized governance. It was invented by an anonymous programmer about five years ago, and it remains an open-source system for tracking transfers and new issuances of bitcoins.

Users can send money from their tablet or PC to any other user around the world, or use it to buy real goods, swap for cash, and otherwise exchange it just like any other currency. The biggest difference, of course, is that it isn’t backed up by any government or private company.

Bitcoin is run by computer code that distributes the currency at a specific rate to people who commit their web servers to running the code. There are thousands of computers around the world currently running these programs, racing to solve a complex puzzle every 10 minutes. If they solve the puzzle first, they receive a certain number of bitcoins. This is referred to as “mining” bitcoin, and it can be done by anyone with the right technology and enough dedication. There’s no qualifying tests or certifications involved.

This digital currency has been called the most provocative (or at least the most passively interesting thing) to happen to the global currency market since the euro was adopted. It has performed surprisingly well for what some would call an economics experiment, even better than many other national currencies, but there are many concerns that come with it.

Why Is It So Popular?

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(Graph courtesy of: zerohedge.com)

A lot of the sudden growth of bitcoins has been attributed to the debt crisis in many European countries. Bitcoins shot up in value in March, right about the time when Cyprus announced plans to impose losses on bank deposits. As the government considered taking a percentage of all its citizens’ bank accounts to deal with the financial crisis, many people lost confidence in government-backed currencies. As other European nations watched this unfold, many of their citizens started looking at different options in case their own government tried the same thing.

Another possible reason for increased interest could be related to the official regulations in the U.S. on private digital currencies. Now, as companies exchange digital bitcoins for real money, they will have to comply with the same regulations that affect any other currency exchangers (verifying the identities
of people exchanging money and reporting large transactions to the government). It wasn’t so much the actual regulations that boosted the popularity, but the idea that somehow there is validity to the currency if the government is willing to regulate it.

The Most Volatile Currency

New currencies don’t just slip in unnoticed, and an endeavor like this is bound to see its share of troubles. In April alone, bitcoin reached its highest price point at $260. Six days later it dropped to $60.

But just when you think it would be out of the game after such a steep decline, it had another bounce and, at the time of this writing, sits at over $100. The potential of this new currency is hard to predict, and any speculation should only be done by those who understand all the risks (of which there are still plenty).

Will It Become a Mainstream Payment Method?

Currently, most of the bitcoin usage is done only on the internet, but digital payment methods (like Google Wallet) become more prevalent, it’s not inconceivable that bitcoin could make the leap into other environments. Someone working on a tablet PC in a coffee shop could use it directly pay for a refill, or money could be sent from one smartphone to another and stored in their digital wallets. There is a lot of potential here that will have economists watching its evolution very closely for years to come.

About the Author:
Paul Mansour is enthusiastic about start-ups along with consumer and small business technology. Working within Dell.com, he needs to stay up-to-date on the latest products and solutions and best-in-class ecommerce strategies. In his spare time he can’t resist taking apart his latest gadget and forgetting how to put it back together.