I haven’t posted for a while because I have been researching Bitcoin, an anonymous form of online “crypto-currency” that has been popping up in the news. Some are calling it the future of money. The most popular answer from a software developer posting on the Q&A site Quora calls it “a scam.” I still don’t fully grasp the mechanics of how Bitcoin works, but the news is piling up. What has gotten the most attention is the use of Bitcoins to pay for drugs through a peer-to-peer network called Silk Road. It was first widely reported on June 1 on Gawker. That attracted the attention of two U.S. senators who are now calling for a federal investigation of Silk Road. The association of Bitcoin with Silk Road is triggering official scrutiny of Bitcoin. Obviously, governments do not like unofficial currency floating around. But it is not clear whether authorities can do anything to end its use. Bitcoin likely will thrive or fail based on whether users remain confident that it has transferable value. I figured that a good way to help me understand Bitcoin is to try and get some for myself. That, however, is not something simple and easy to do.
I found a how-to site that made it seem easy. You can’t buy Bitcoins directly with a credit card or PayPal. You have to make a bank wire transfer, or you can set up an account at the Dwolla website, which works like PayPal buts doesn’t frown on Bitcoin like PayPal does. You can also mail a check, money order or actual cash to a third-party. In the case of the Mt. Gox online trading exchange, checks, money orders, and cash go to one Matthew Courtney in Virginia. He charges a 2 percent commission. Tradebitcoin.com allows you to set up meetings with Bitcoin users in your area to personally trade cash for Bitcoins. So far, I have several accounts on these various sites and am ready to accept Bitcoins. However, I’m now hesistant about testing the waters. Earlier this year, the exchange rate was about 1 dollar (USD) to 1 Bitcoin. When the Gawker article was published, it was reportedly trading at close to $8.70. When I checked this weekend, it had skyrocketed to more than $18. As I write this, it is trading close to $30.
Back to the the software developer calling it a scam. One of the features of Bitcoin is that it becomes available based on an algorithm, ultimately reaching 21 million “coins.” That results in built-in deflation. The currency increases in value while the goods for purchase remain the same value.

“If your money is getting predictably more valuable, why would you want to spend it?”

Good question. Not a good formula for a healthy economy. In that scenario, he argues:

“It’s designed to enrich early adopters…that is why it is a scam. Period.”

A counter-argument is proposed by another responder on Quora:

“Sure, early adopters get rewarded more, but so what? That’s true of a lot of things in life. I’d prefer that early adopters are rewarded than the buddies of some unelected bureaucrat are.”

Another Quora responder argued that calling it a currency is wrong:

“Bitcoin is a protocol for online payments and is used in a similar way to PayPal or credit cards, but has several advantages over legacy payment systems for online transaction.”

That makes sense. Unless you set up shop as a business and accept Bitcoins from the start, you will need to buy them with other types of money. Like I said, the debate over Bitcoin is complicated.

Again, I think it likely will succeed or fail on its own merit, not because someone is trying to shut it down. I could be wrong. Watch this video: