With Euro Instability, Can Bitcoin Now Compete with Hard Currency?

 

It is at once the ‘net’s most inspired invention or its most dangerous project ever, depending on who you ask.

Bitcoin might be nothing more than the latest Internet scam, a virtual ponzi scheme designed to enrich early adopters, while adding no real value for anyone else, aside from serving as an anonymous outlet for illicit black market activity like prostitution, money laundering, or buying drugs online. Or is it the first successful implementation of a peer-to-peer open source currency, a virtual replacement for cash, and the first true mathematically grounded and elegantly secure replacement for government backed fiat money?

A media-fueled hype bubble only exacerbated the confusion, which pushed the infant currency’s value up from less than $1 to more than $30 in a matter of months starting in April last year. Its subsequent and inevitable crash caused some to declare its death, and that it was just another passing fad.

For all its controversy however, Bitcoin remains a compelling, if not polarizing mix of freedom of speech, cryptography, networked computing, finance, economics, and even politics. And one year after the bubble popped, the cryptocurrency is, against all odds, alive and well. In fact, its price has finally stabilized.

Finding equilibrium? Or the calm before the next storm?

It’s a promising show of resilience, the underlying concept having weathered its first real disruption. In spite of highly publicized security breaches and government intervention, the currency has survived. It’s “a good indication that the core concept is holding up,” Gavin Andresen, a developer and community champion that works on Bitcoin’s flagship client, stated. “Nobody’s found any theoretical reasons why it can’t scale up and why it can’t continue to process transactions and be secure.”

So it looks like Bitcoin is here to stay, but it’s not without problems. Much of its demand is still driven by illegal activity: “drugs, gambling, pornography, getting money out of countries where there are restrictions on moving funds,” Jerry Brito, a researcher at the libertarian Mercatus Center at George Mason University, stated. “That’s where it’ll establish itself first." It’s an understandable symptom of a hard-to-trace cryptocurrency that does little to temper the online cash substitute’s image problem. Thanks to the virtual currency’s anonymous convenience, we now have virtual Bitcoin strip clubs via Reddit. Of course, if Bitcoin were to succeed, it wouldn’t be the first time the adult entertainment industry helped bootstrap a fledgling technology.

Bitcoin is also finding legitimate purposes, surely fueled in some part by PayPal’s questionable track record in recent times. For some American businessmen working abroad, Bitcoin’s decentralized convenience means international efficiency, in areas where local restrictions on money transfers to foreign companies make legal businesses cumbersome. “I’ve been able to have cash in my bank account in a matter of hours using Bitcoin, rather than three days with traditional banking,” one British businessman in China told Reuters.

In embattled Europe, Bitcoin offers some a viable alternative against central banks, said a Greek owner of an island bar and restaurant who accepts payment in Bitcoin. “I don’t put money in the banks,” Gerald, who did not give his surname, told Reuters. “I trust the euro as a note, but I don’t trust banks. I don’t want them making money out of my earnings.” Indeed, Europe’s financial woes are caused an unprecedented surge of interest in the alternative currency, as the continent loses economic credibility with each new bailout, according to a report by the Financial Post.

“European volume has been skyrocketing,” Charlie Shrem, chief executive of Brooklyn-based BitInstant LLC, a firm that enables Bitcoin transfers across a pool of international currencies, told the Post. “We’re getting requests from people literally saying, can we mail you euros? We can’t do that legally, but they keep asking.” In fact, it was Bitcoin’s best week ever, euro-wise, pushing the struggling continental currency past the British pound for number two spot on the list of currencies traded against Bitcoin.

 

Bitcoin: less risky than the euro?

Meanwhile, Bitcoin is starting to attract serious attention from savvy financiers such as the recent $500,000 investment by Silicon Valley venture capital giants Draper Associates in Bitcoin mining startup CoinLab. Wall Street is also taking notice. Reuters reports that banking employees at Morgan Stanley and Goldman Sachs visit online Bitcoin exchanges up to 30 times a day. “Bitcoin is not run by people with hot sexual appetites for hotel maids. It is not run by corporations. It is not governed by people with budgets to meet. It is governed by a mathematical formula,” one London trader and Bitcoin enthusiast told Reuters.

All of which speaks loudly for the robustness of Bitcoin. Similar to an information network, a currency is only as valuable as the people and entities that use it. And people are clearly using Bitcoin with the currency now widely available for exchange for the likes of US Dollars, Chinese Yuan, and even World of Warcraft gold. Its very existence, and potential rise to prominence raises questions of what money actually is, its economic consequences still frustratingly opaque. Governments are admittedly wary, but how anyone (even the US government) might regulate a decentralized virtual currency is frighteningly unclear. Without a central authority managing its fluctuations, Bitcoin’s own future is inherently uncertain. But it’s not going anywhere anytime soon.

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