Goldman Sachs Global Macro Research published a report titled “All About Bitcoin” yesterday. This in-depth report on the emerging and controversial virtual currency was edited by Allison Nathan and includes analysis of the recent Mt. Gox bitcoin exchange hacking and a number of interviews with legal, business and technical experts regarding the future of Bitcoin.

Not likely to become a widely-used currency

One of the first points made in the report in that Bitcoin is not likely to replace the dollar, yen or pound as a monetary currency. The currencies used in most countries today are called “fiat currencies” as they are based on a government declaration of the currency as a legal tender, even if the currency is not backed by physical assets such as gold.

University of Chicago law professor Eric Posner says, “Bitcoin would not be a good substitute [for fiat currency] because we actually do want the government to control the money supply.”

A corollary to this thesis is that regulations regarding Bitcoin will likely continue to move forward in many countries. In an ironic dilemma, many Bitcoin users bitterly oppose the idea of regulating Bitcoin transactions on a national level, but as several analysts point out in the report, government regulation is exactly what Bitcoin needs to become viable as a currency or in other applications.

Bitcoin security issues

The recent Mt. Gox bitcoin exchange debacle where many millions of dollars of bitcoins were stolen by hacking highlights the security issues surrounding bitcoin transactions. IT security expert Dmitry Dain describes why bitcoins are vulnerable.

“The most common way that bitcoins are stolen is through the use of “malware”, malicious software that gets into your computer through perhaps a seemingly innocuous email attachment. Malware looks for a Bitcoin application installation, and tries to locate the text file that contains your private key. Once the malware finds it, hackers simply download it onto their computer and, voila! They can transact your bitcoins out of your public address and into their own. Basically, as long as somebody is able to read a file on your computer remotely, they can potentially steal your bitcoins.”

However, Dain goes on to say that strong IT security measures and basic common sense can prevent almost all malware attacks.

Big Savings

Bitcoin hypothetical savings

Payment platform potential

Dominic Wilson and Jose Ursua of Goldman Sachs Group Inc (NYSE:GS) say Bitcoin could emerge as a viable payment platform akin to PayPal.

“Bitcoin currently shows more promise in terms of its payments technology than as a stable store of value. Although it is not yet “widely” accepted, the ability to pay for goods and services using bitcoin is growing. And the fundamental obstacles to bitcoin being used more broadly in the payments system are arguably not insurmountable, though connections with the conventional banking system are ultimately essential to its functioning.”

Wilson and Ursua also mention the issue of “reversibility”. Although merchants may welcome it, the lack of “reversibility” of bitcoin transactions is a liability according to many analysts.