Bitcoin is a virtual currency, existing only on computers and in the cloud, but some believe it is the future of money. Bitcoin made big news recently when the value of one “coin” quadrupled to more than $1,100 in just six months, and again when $450 million in Bitcoins went missing from a “virtual vault” at the world’s biggest Bitcoin exchange in Japan.
John Veitch, an expert in financial analysis, and the associate dean for graduate programs at the USF School of Management, answers five questions.
1. Bitcoin is called a digital currency. But is it money?
No, it’s not money in any traditional sense. It doesn’t hold its value and it’s not a common medium of exchange. That’s partially because Bitcoin has no physical presence and exists only on the Internet. If you want to buy something in the real world with a Bitcoin, you generally have to exchange it for legal tender.
That said, about 30 merchants in San Francisco already allow you to use Bitcoins, and you can buy anything from groceries at Buyer’s Best Friend market to a bowl of ramen noodles at Ramen Underground. Merchants use Bitcoin as a marketing tool to attract a certain kind of clientele, mostly techies.
2. How does a Bitcoin work?
You can buy or sell Bitcoins through your online bank account.
Once you’ve opened a Bitcoin account, or “wallet,” and converted your cash into Bitcoins, you can pay for things at the register by scanning a QR code on your smartphone. You can also buy things directly from some online merchants like Overstock.com and pay in a similar manner to PayPal.
3. Why has Bitcoin attracted such attention?
While Bitcoin isn’t money, it has made some people a lot of money as an investment. Its value is entirely speculative, which is why it fluctuates so dramatically.
It’s a craze, like tulip mania in Holland in 1637.
People love stories about things that double and triple in value. Over the past 12 months, the value of a Bitcoin ballooned from about $250 to more than $1,100, but then tumbled to about $595.
Those gyrations have attracted the attention of famous investors like the Winklevoss twins, who are famous for their lawsuit claiming Facebook was their idea. They reportedly own $40 million in Bitcoins, and spent a half million dollars in profits buying seats on Virgin Galactic’s space plane. That just fed the frenzy.
Before their value skyrocketed, about the only folks interested in Bitcoin were techies and people who distrust government.
4. What’s ahead for Bitcoin?
I think it will either disappear because exchanges collapse and people lose lots of money or it will be professionalized and brought into the fold of legal currency. Right now, the U.S. government is allowing Bitcoin to be used for purchases because it’s a small player in the grand scheme of things. If Bitcoin usage continues to grow, the government will take further steps to regulate it—as it did in March when it said Bitcoins should be treated like stocks for IRS tax purposes.
5. Is Bitcoin the future of money?
I don’t think Bitcoin is a bellwether for anything. We already have digital currency and we’ve had it for a long time. It’s called online banking, and we use it on our computers and phones every day. Banks and countries make billion-dollar transactions with the click of a mouse.
One thing Bitcoin has shown, however, is that there’s an interest in streamlining our current banking system, and to make it faster and cheaper. The best-case scenario might be that the U.S. banking system and others move in that direction in response to customer demand.