Bitcoins: Will They Make a Viable Currency?

The recent hype in the bitcoin market has drawn a lot of attention to this digital currency.

The question in many people’s minds is whether or not these can make a viable currency. The recent trade results had just slashed the value of bitcoin by half in just a few hours. The value has just rebounded half-way in also a matter of hours. It leads many to question the feasibility of bitcoins to stand the challenges it is currently facing. Read on to learn about bitcoin’s viability as a mode of monetary exchange.

The Depth of the Bitcoin Market

Just how big the bitcoin market is can provide an idea of its feasibility as a currency. Mt. Gox, which is responsible for two-thirds of bitcoin exchange trade, is said to have 270,000 accounts and counting. But because there can be multiple exchanges and the possibility that some account are abandoned, the total number of bitcoiners is estimated to be around 295,000. In terms of the number of downloads the bitcoin client software have had, the number is placed at 2 million since the beginning of bitcoin era (August 2008). During the first three months of the current year, there were around 180,000 downloads alone.

Meanwhile, Coinbase says that it has 104,000 users with the number of transactions reaching 103,000 per month. The site provides that the bitcoin currency has a total market capitalization of around a billion US dollars. Coinbase is a platform where transactions between merchants and consumers take place. These pieces of information have been retrieved on April 20, 2013.

The bitcoin can be used to buy real-world commodities and services. One of the important things that one can consider as a measure of its viability is its acceptance by merchandisers like stores, and restaurants. A website called spendbitcoins.com claims that there are 472 sites that accept bitcoins directly based on information retrieved on April 20, 2013.

OKCupid, a popular dating website that has around 4 million active participants, just recently announced that it will accept bitcoins from its users. It will become the largest online site to accept the digital currency although the site’s co-founder Sam Yagan expressed that it will not hold bitcoins but rather it prefers to have it exchanged to US dollars through Coinbase. Namecheap, one of the biggest domain registars also announced that they are also accepting bitcoins as a form of payment. The adoption of major tech company is an indication of the increasing popularity and acceptance of bitcoin as a mode of exchange.

The Merits and Lure of Bitcoins

The lure of bitcoin is in its decentralization and anonymity. Transactions via bitcoins do not go through the scrutiny of any central authority, clearing house, or any financial intermediary entity, therefore leaving no trace of the transaction. In short, the payment is made person to person with no intermediary. With this kind of transaction, the fees are much lower, which is very attractive and exciting, not to mention profitable.

It’s a very efficient way to transfer money because there are no prerequisites. Imagine getting an account instantly without the verification process that is normally required for banks and other financial intermediaries. You don’t need to sign up, agree to the terms and conditions, or provide an email address for confirmation of your account. Sending and receiving bitcoins are indeed very simple. In addition, a huge advantage is that there are no random limits to the transactions. You can send as many bitcoins as you can.

Bitcoins are not only extremely appealing to those who are fascinated with the mathematical beauty of mining bitcoin blocks, but also to those who simply cannot stand the hassles of tedious banking processes that they need to go through. They say that bitcoin is the currency of the distrustful because the people participating do not need to trust anyone but on the network as well as on the algorithm that makes mining bitcoins possible. Despite the rise and fall of late, it remains to be increasingly adopted into mainstream e-commerce.

Its More Indispensable Potential – Inflation Control

Perhaps one of the most notable merits of bitcoin is its potential to control inflation. In fact, the plausibility of such a scenario that this currency can provide has been famously called for by the great economist Milton Friedman. Friedman wanted to have the Federal Reserve abolished and be replaced by a system that is likened to the bitcoin system where the supply of money can be increased at a known rate.

Such system will have a command on inflation unlike traditional money markets where a government can mint paper money if it deems necessary but which has inflationary risks associated with it. If not done properly, printing money and increasing the money supply can cause serious disaster to the economy. On the contrary, because bitcoin’s rate of increase has been programmed by an algorithm protected by an extensive computing power, inflationary tendencies are eased.

Will It Last?

In the past, many have actually predicted that this virtual currency is not likely to last, yet bitcoins survived through much doubt. It is a proof that it is something more than just meaningless outputs of some computer networks. But whether it can last amidst all the criticisms and doubts that people have on their minds about it is something that is yet to be proven. The currency is young; if it will ever evolve to become a mainstream currency remains a question yet to be answered. But in order to help it become primary form of payment for merchants and consumers, the currency will have to evolve a bit more and prove to people that it is a secure form of financial transacting.

If bitcoin is to survive even as a small niche currency, it will be because there are individuals and groups who would prefer to transact anonymously without nosy authorities. These people are willing to forego the comforts brought by the banking system or any intermediary body for the ease of getting deals done. It has established a following among these people. As long as there are people who like to do away with the traditional banking system, bitcoins will remain a great alternative.

Sources:

https://www.weusecoins.com/en/

http://en.wikipedia.org/wiki/Bitcoin

http://www.cbsnews.com/8301-505144_162-57580115/in-bitcoin-we-cannot-trust/

http://www.bbc.co.uk/news/technology-22105322

http://arstechnica.com/business/2013/04/okcupid-says-it-will-accept-bitcoin-as-currency-falls-to-recent-low/

http://thegenerallifeblog.blogspot.com/2013/02/how-popular-is-bitcoin.html

http://www.businessweek.com/articles/2013-03-28/bitcoin-may-be-the-global-economys-last-safe-haven#p2

About the Author

Trent is a recent college graduate who graduated with an Economics degree. He now owns a personal finance blog called Finance&Career.