Bitcoin has been on an interesting ride over the past few years. After all, creating a brand new, completely unregulated international currency isn’t something you expect to be easy. The brainchild of an unknown business man using the alias Satashi Nakamoto, Bitcoin aims to provide a currency that is free of middle men, has no banks, no transaction fees, and is untraceable. The fact that Bitcoin transactions can’t be traced is one of the many reasons regulations are being proposed and passed to reign in this new currency system. Bitcoin value has been subject to wild fluctuations over the past 6 months, starting at around $400 and advancing to above $1100 before dropping back into is current value at around $400. Let’s take a look at the current status and future expectations for Bitcoin in the US, as well as the viability of a free, untraceable currency systems.
In 2013 Bitcoin posted the largest annual price increase in history, with a compound annual growth rate of 84,066%. This has drawn the attention of investors, entrepreneurs, and regulators alike. While the US much of Europe have been somewhat friendly, more strict countries including Russia and China have been much more hostile. Growth receded as a result of Chinese regulatory actions and statements, combined with the looming threat of competition from other electronic currencies like Litecoin or Peercoin, seems to have kept Bitcoin’s value relatively stable as of late.
Two Sides to Bitcoin – 2012 vs 2013
The crackdown on file sharing and black-market websites in 2012 painted Bitcoin in a harshly negative light. Its association with sites like Silk Road, where visitors could purchase drugs and other illegal things, and The Pirate Bay, the famed file-sharing site, brought the untraceable nature of Bitcoin to the forefront of the debate. Would there be a future for electronic currencies? It almost seemed unlikely.
2013 brought Bitcoin into a new light. Entrepreneurs such as Richard Branson saw potential for crypto-currencies, and this led to widespread acceptance. Vendors such as PayPal, Overstock.com, and Tesla Motors accept Bitcoin, and many other large merchants are following suite. Former Federal Reserve chairman cleared the air with the statement that Bitcoins ‘Hold Promise’ and signaling that the Federal Reserve would not seek to regulate electronic currencies.
Bitcoin Becoming Mainstream
Whether or not you are aware, Bitcoin is slowly creeping into the everyday life people across the globe. There are now ATM operators, investors, a myriad of applications, as well as full time, devoted Bitcoin miners. All this attention, while a great thing for innovation and entrepreneurship, has brought a lot of attention from regulators across the globe. Most of this attention has been positive or simply inquisitive, but some has been downright hostile.
Current US Bitcoin Regulatory Actions
Fortunately, or unfortunately depending on your viewpoint, Bitcoin is and will continue to be legal in the United States. The Financial Crimes Enforcement Network (FCEN), FBI, and US Commodity Futures Trading Commission (CTFC) make up some of the veritable alphabet soup of agencies that are working to come up with regulations to track and limit Bitcoin transaction activity.
Both California and New York have requested a dialogue with Bitcoin to discuss its business and possible regulations governing virtual currencies, and the Internal Revenue Service declared in March that Bitcoins will be treated as property rather than currency. Both of these actions seem to suggest that Bitcoin may be here to stay, and treating Bitcoins as property keeps Bitcoin users and private Bitcoin Miners, users who create Bitcoins for strictly spending purposes, from falling under the same regulations as currency transmitters. This is a firm win for currency freedom and entrepreneurship in the United States, but not all foreign governments agree on the benefits of Bitcoin.
The lack of regulation does not mean that taxes can be avoided by using Bitcoin. All users must keep track of not only transaction history, but also track the market value of Bitcoin and perform the calculations necessary to pay their capital gains taxes (or claim losses).
Is Bitcoin Safe?
Anyone who pays attention to Information Technology news surely heard of the Mt. Gox shutdown. Situations like these make even the most trusting person wonder if Bitcoins are a safe way to store money for any amount of time. Mt. Gox’ problems were the result of lax security in its transaction systems, allowing hackers to manipulate transactions in the following manner:
- Person A sends Bitcoins from their Mt Gox account to Person B
- Person B receives the transaction, but tricks the Mt Gox computers into thinking the payment failed
- Mt Gox automatically performs the ‘failed’ transaction again
This vulnerability caused Mt Gox to lose millions of dollars in deposited Bitcoins, and as a result the company has filed for bankruptcy and will most likely be liquidated. The untraceable nature of Bitcoin combined with the lack of regulatory controls means many of the people who lost money will probably never get it back. This regulatory gap also meant Mt Gox was not compelled to inform the public when the vulnerability was discovered, allowing it to be exploited until the company did not have enough money to pay out withdraws or process transactions.
So, to answer the question at hand, Bitcoins are only as secure as the company with which they are deposited. Regulation may be able to help in making companies more transparent, but until then, users must be sure to spend time investigating the security practices of the companies they do business with.
Will Bitcoin Value Stay Stable?
Bitcoin exchange rates have been subject to many ups and downs, especially over the past 4 months, and this may make many potential users wary. If you are one of them, it may be best to wait it out until the virtual currency business is more stabilized. As regulations get created, user numbers increase, and exchanges are set up, Bitcoin values will inevitably become more normalized and not change much over any given time period. Overall stability of Bitcoin is not something that is likely to be established in the near future, but virtual currencies are surely here to stay.
The Future of Bitcoin
The nature of today’s business and IT environment lends itself very well to the idea of a virtual currency market. It is impractical to think that any one country or government has enough of an influence over the global marketplace to destroy Bitcoin, and most businesses and governments have been relatively receptive. Regulations and controls are the two most pressing matters for the future, and a lack of either will ensure that Bitcoin is unstable, unsecure, and the main driver behind illicit transactions.
While many businesses and individuals may ask for reduction of regulation in other areas, the virtual currency market should not be one of them. Many entrepreneurs and businesses agree with this sentiment, and are hesitant to accept Bitcoin as payment. Why should they? Who would accept money worth 10 dollars today and 1 dollar tomorrow? Controls and regulations can ensure this isn’t the case.
Summing it Up
Bitcoin has provided a volatile, somewhat unstable currency market since its inception in 2009. Many of Bitcoin’s problems stem from its key benefits, the lack of banks, regulations and middle men. While each of these results in fees for the end users, each of these can provide an element of security. The interest in a virtual currency has been high, unsurprising in dynamic, technology oriented world, and this interest shows no indication it will be going away. Bitcoin, as the first and most popular currency in this market, has a unique position as the only truly established brand. Overall, businesses, individuals, countries and governments must come to an agreement over the kind of regulations and controls necessary to foster a healthy Bitcoin market. Until this happens, we can expect changing prices, lack of business acceptance, and reluctant individual use.