That's The Way The Bitcoin Crumbles

Source: TheDigitalConsultant

Is Bitcoin imploding? It's a question that needs to be asked.

In the past few weeks we have had the Mt. Gox Bitcoin exchange go 'belly up' in a rather spectacular fashion. It reportedly lost 750,000 Bitcoins, blaming its demise on a 'bug in the Bitcoin system'.

This has been followed by Canada's Flexcoin who closed down after losing around 440,000 euros worth of Bitcoins to hackers. 

Today there are reports of the American CEO of Bitcoin exchange company First Meta, who is based in Singapore being found dead near her apartment. The reason for her death has yet to be explained.

Also today we finally discover, through the investigations of Newsweek, who the founder of Bitcoin actually is. Mr Satoshi Nakamoto is a 64-year-old Japanese-American and has subsequently disowned the project and strongly denies any current association with the crypto-currency.

"I am no longer involved in that and I cannot discuss it," he says, dismissing all further queries with a swat of his left hand. "It's been turned over to other people. They are in charge of it now. I no longer have any connection" he told Newsweek.

However, all is not what it seems as it turns out that the Mr Nakamoto was in fact NOT the creator of Bitcoin after all.

It is barely two days since the Monetary Authority of Singapore (MAS) issued a warning to consumers and businesses 'to be cautious with transactions involving Bitcoin, as virtual currencies are unregulated and consumers may not have legal recourse should there be problems'.  

Clearly this prophecy has come to pass and these recent developments are hardly reassuring for those who have taken the plunge and are, or were, playing the Bitcoin market.

Not to be deterred, Singapore also recently installed two Bitcoin ATM's where people can insert their hard-earned Singapore dollars and convert them to Bitcoins.  I shouldn't imagine there is much of a queue to do so given all of the above.

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Bitcoins, Baubles and Business

E-Commerce and its currencies can be a topsy turvy world.  Just when you thought everything was on an even keel along comes a (relatively) new kid on the block that shakes up the status quo.

So it it is with Bitcoin, which is either a boon or a bubble depending which side of the fence you choose to sit on. There are those who firmly believe it is the currency of the future but for folks who are not economists, it is difficult to see objectively beyond the hype.

Semil Shah of Tech Crunch at least attempted to make sense out of Bitcoin by asking five economists their take on the online currency.  Harvard Professor Chris Roberts neatly sums up the nagging feeling that many of us have about Bitcoin's longevity in his statement:

"It would really be something if intelligent people chose to invest more trust in a currency system built and managed, in large part, by anonymous computer hackers than they did in currency systems built and managed by governments of the people, by the people. Fortunately, we are not there yet."

In the same article Peter Rodriguez, Professor at Virginia’s Darden School of Business, makes two further points about the currency:

"In some ways, Bitcoin is just a virtual pack of smokes. But in other ways, it’s revolutionary. Cigarettes have inherent value and alternative uses, like cotton and even gold. Bitcoins are valued in and of themselves. They have even less alternative uses than paper currency or baseball cards".

"Even it they just serve to measure the value of goods ultimately transacted in ‘real’ currencies, Bitcoins will have become something entirely new: a true, stateless, virtual currency rooted in nothing other than confidence in the set of rules that surround them".

It is perhaps this last dimension, a stateless currency that is a huge part of Bitcoin's attraction, especially in an economic climate where traditional currencies and banking systems have been taking such a hammering of late.

Rwanda-based Nyaruka suggests that it is developing countries that will and do benefit most from Bitcoin and its pretenders.

"Rwanda, like its neighbours, is very much a cash society, which means that most digital goods are out of reach, not because they aren't affordable, but simply because most Rwandans don't have credit cards."

As this very good blog article states, Bitcoins are simply digital cash and because of this works well in any society where cash is the norm.  And of course digital cash is far easy to get hold of without going through the hassle of applying for, and managing a credit card.

It may be a surprise to some to learn that the decentralised, cryptographic, Bitcoin isn't exactly new.  It was launched four years ago as an open-source digital currency by Satoshi Nakamoto, who it turns out is probably not 'his' real name and could in fact be a group of people hiding behind a pseudonym.  Hardly reassuring news to any enterprise assessing business risk and contemplating the digital currency.

Purely digital currencies such as Bitcoin have an inherent problem; that of double-spending. i.e. someone concurrently sends a single unit of currency to two different sources.

Thomas Lowenthal notes that "digital products like a movie or a text file are non-rivalrous. If you have a copy of my pseudo-trip-rock band's new MP3 album, there's still just as much MP3 to go around for everyone else who wants one. That's not a problem for files, but it is a problem with currency, since the whole point is that there's a limited supply."

The key question to me is, does the use of cryptography do away with the need for an intermediary verification process, such as that which Paypal uses?

I am personally not convinced at this stage that business adoption is a wise move but I would be delighted to be proved wrong.  You need to ask yourself, is it safer to mine Bitcoins or to mine gold - or for that matter neither?

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