Recently, I had someone ask me about Bitcoins. I most certainly had heard of them before, but I was not able to give an answer that I felt was acceptable. So, I decided that a little education on the matter was in order.
To start off, the best definition of what a Bitcoin actually is that I was able to find was this-a decentralized digital currency based on an open-source peer-to-peer protocol. Translation-a non-physical item that's tracked through a database that functions as a ledger that records, and processes debits and credits between two parties.
One important thing to add is that it is not attached to any government or entity, so they are decentralized, and has no counter party risk. (In theory)
As I pushed forward, I found a recent interview with Erik Voorhees from bitinstant. A website that offers many services including payment in Bitcoins, exchange locations, and a blog that talks more about the system itself.
Now, the questions in the interview were fair, and addressed some of the concerns one may have with a non-physical currency. How one then interprets those answers would be what is most important if this is something one thinks is worth getting involved with.
As always, each person should always do their own homework before doing anything that is monetary. With that said, the questions, and then of course the answers that followed that I found most interesting were.
Q: If the Bitcoin system is internet based, what if the internet goes down?
A: All Bitcoin accounts would be frozen in time and when the system is back up, your account would be intact. No different from your online banking, credit cards, or ATM machines.
Q: Can Bitcoins be debased?
A: Only to a certain extent. Bitcoins get created every ten minutes based on a formula, and cannot exceed 21 million Bitcoins, ever. That would be the most amount allowed created according to the programs software. Each Bitcoin can be broken in 100 million pieces, allowing for them to increase in value and still be useable in smaller purchases.
Q: Who is behind Bitcoins, is there a company or entity?
A: Nobody is behind Bitcoins. It is a self-governing software program that has artificial intelligence attributes working on a predetermined schedule, and the codes cannot be changed.
Q: What if I want to remove my Bitcoins from the system and convert them to cash?
A: Bitcoins will be exchanged for cash at exchange locations, as well as, with any person that is willing to exchange them for a rate that is agreeable to both parties.
Q: Can one look at Bitcoins as not just a digital currency, but also as an investment?
A: Yes, but one considered highly speculative due to the fact that there are no guarantees that people will decide to use them, and their newness in general.
Fair questions and fair answers I thought. There was more to the interview that went on for about an hour, and I also read a lot more into the system itself.
What I walked away with was that it Bitcoins are a new currency that people are using to either, protect them self from currency devaluation, remove counter-party risk, or to just stick it to the man by not having to play in their system of Central Banks. All of which I have no problem supporting.
For me, I see no reason to jump into the system myself at the moment. However, I truly wish the people who are using this system the best, and I hope it does not turnout like E-Gold, which was then closed when it became a threat to the powers that be.
The system has seemed to try to work that in as it is not a company that you can go kick the door in, and is a coded software system that is running on an open network (I question that).
I do think that there will be some people who make large amounts of money on this due to things that are going on with bank deposits and the looming threat of them being confiscated in part by banks and governments.
But, for me that type of investment strategy seems somewhat questionable. With the last man into Bitcoins possibly left holding the bag if the Bitcoin system should go the other way.
As always, investments or participating in new systems carries risks, and one would be well advised to walk through this world with eyes wide open when considering such activities.
One thing to be added is that at the moment, the price of the virtual currency is approaching parabolic level and that maybe a reason to give pause, and watch what unfolds.