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New post on DES: The Cost of Virtual Currency
The advantages seem awesome, in light of the current global economic crisis. Virtual money and virtual transactions can occur strictly between people, or person to company—banks and governments aren’t included. They can be traded with fair, level exchange rates that are (ideally) reflective of the Bitcoin (BTC) marketplace. And, to expand this idea further, competing online currencies could pop up, keeping prices honest and acting as a check and balance to currency monopolies. And for a time it was awesome, even with one investor purchasing $20,000 worth of BTCs at less than a dollar each in February 2011, only to turn around and sell them that June at $30 for a single BTC. That’s a 45,152% growth rate, and one hell of a way to make millions with twenty grand.
Then a great correction occurred in the form of a computer hack. Mt.Gox, the leading BTC exchange, was attacked in mid-June first by newly discovered Malware that pilfered away $300,000 worth of BTCs, then later that week a Bitcoin account was hacked into and the perpetrator tried to sell 400,000 BTCs (6% of the total circulating at that time) for $17.50, the going price in June. This amount of BTCs up for sale led to a massive devaluation sending the exchange price below $1.
And so there are some drawbacks to the virtual currency model—namely security and value protection. Also, as long as people like Mr. $20,000-to-millions continue to look at Bitcoin as an investment, instead of as a currency, it will always bubble up with investor hype, then eventfully burst. Hardly the stability needed for the exchange of goods and services.
Also some related articles, for further reading:
What Is Bitcoin? (npr.org)
The BitCoin Dilemma: Can We Trust It? (makeuseof.com)
Google Launches Google Wallet - But Not For Everybody (makeuseof.com