What happened it Bitcoin? A few months ago it was seen as
the gold of the future and now it seems like it will flame out by years end.
Bitcoin is a decentralized, peer-to-peer cryptocurrency
developed in 2009 by an individual or group under the name Satoshi Nakamoto.
Bitcoin has generated substantial media attention over the past 18 months due
to its surging popularity and controversy surrounding its use in illegal
transactions.
Unlike a traditional currency, Bitcoin is not maintained or
manipulated by a central bank. Rather, it is maintained by a decentralized
network of individual hosts (referred to as nodes). Individuals secure
transactions using digital signatures, which can be thought of as the
mathematical analogue of a physical signature. One of the most significant
characteristics of Bitcoin is the ability to maintain anonymity as a user; when
transactions take place, they take place between mathematical identities in the
Bitcoin network that are not associated with real-world identities. Bitcoins
are stored by associating them with cryptographically generated addresses,
which can be stored via web services, hardware, or on paper printouts.
The future of Bitcoin is extremely uncertain. In December,
the currency had returned over 5,000% year-to-date, and reached its peak at $1,147.25
on December 4th, according to Coindesk.com. The rapid rise in value,
growing from $99 at the beginning of October to its peak in December, led many
investors to conclude that Bitcoin is a highly overvalued asset bubble. Certain
investors are attracted by its anonymity, the ability to transfer funds
directly between users, and the upper limit on its supply, which prevents any
institution from inflating away its value by printing more.
Last Friday Bitcoin took a huge hit, as exchange center Mt.
Gox filed for bankruptcy and announced that they had lost over 100,000 of its
own Bitcoin and 750,000 that belong to customers. In total, the loss approached
$500 million. US Senator Joe Manchin wants the currency banned, calling it “highly
unstable and disruptive to our economy” and an aid to “illicit activity.”
Bitcoin gained a lot of its traction from the Silk Road, an illegal drug website
that was shut down in October but was running again in November. Users liked
that they could use the Bitcoin to buy their drugs and no one could track them.
Today the price of Bitcoin sits around $560 and has been on a
steady decline over the past month. Some say that Bitcoin is going to come back
from its latest fall even stronger. Barry Silbert, CEO of SecondMarket, which
operates an investment fund for owners of Bitcoins, says, “If you look at the
short history of Bitcoin, there’s been a series of bubbles and busts, there’s
been a series of disruptions, there have been hacks, there have been thefts.
And really, after every single event, Bitcoin has emerged stronger.”
While it’s impossible to predict the future value of Bitcoin,
its surging popularity and increasing legitimacy make it an exciting new
technological phenomenon that is going to be interesting to see how it
recovers.
Sam Campbell
Coindesk.com
Wsj.com
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