Over the past few weeks I’ve been hearing a lot about a new virtual currency called Bitcoin. It is considered to be the future of money, if not now, sometime in the foreseeable future. Stephen Chapman has done an excellent introductory article explaining what Bitcoin is. I’ll try to do a summary:
- Bitcoin is virtual, no hard cash
- There is no central authority
- Total amount of Bitcoin currency is $21Million
- Bitcoin has a stock exchange like conversion where the worth of a Bitcoin in terms of $ keeps fluctuating
- Users can buy goods (from the offline world) with Bitcoins and also use it as a barter system commodity
- Bitcoin is open source and has a sophisticated algorithm
- Users install the Bitcoin software on powerful computers to mine Bitcoins (compute the algo)
- A laptop can take upto 5 years or more to complete one cycle of mining – that’s 20 Bitcoins
That’s a brief overview of Bitcoin, to get a better grasp you should read the article I’ve linked above. As an enthusiast and early adopter I find Bitcoin intriguing and as someone who liked PayPal before the governments decided to limit the service, Bitcoin sounds interesting. Unfortunately, as I read more about Bitcoin I’ve become more sceptical about the service. Here’s why:
- You lose control of your PC, you lose your Bitcoins
- People with powerful PCs will have more Bitcoins and the service has a huge first-mover advantage
- Bitcoin index is volatile
My biggest concern is the first point. One of the engineers associated with Bitcoin says you can lose money from a bank too, but here’s the thing… if I keep my money in a bank, the bank is liable for security. Not me. Even if you don’t lose physical access to the PC, for a trojan to access your Bitcoin wallet and take your Bitcoins, it’s possible. Strong passwords is a practice but in a service like Bitcoin who do you go to since there is no central authority? I can call my banks if I realize someone hacked into my account or stole my credit card.
If I have multiple PCs with multiple GPUs to mine for Bitcoins, I’ll have to be rich with real cash to buy such computing power. This probably the only light at the end of the tunnel, even if Bitcoin tanks and you lose your Bitcoins, you still have your hardware. I believe this nerd excitement is getting Bitcoin the attention it has right now.
Like any currency conversion, Bitcoin’s value keeps fluctuating but my hesitation is due to Bitcoin being a secondary index. In case the dollar sees major fluctuation due to any reason, Bitcoin is affected. In a way, there’s a new scale added that can impact my wealth. This volatility was evident when Bitcoin’s value tanked on reports of Mt.Gox – a Bitcoin exchange, being hacked.
From what I understand, the number of Bitcoins will remain the same after a point which in turn increases their exclusivity. This exclusivity bothers me. It reminds me of the Tulip Mania of 1600 where the prices of Tulip bulbs sky-rocketed due to people’s craze for Tulips and then suddenly crashed for a variety of reason. This is regarded as among the first economic bubbles.
A thread on the Bitcoin forums highlights some more flaws in Bitcoin’s model.
I am probably a little more sceptical when it comes to money, I don’t have a lot. Bitcoin’s model as of now does not make me comfortable and I believe it is not ready to be used widely. PayPal offered money transaction with banks not being involved, it was easier and simpler for me as a user. I had more control over my money and there were transaction flexibilities. I’d rather have governments giving PayPal a break over Bitcoin.