Catherine Martin Christopher, assistant professor at Texas Tech University School of Law, studied Bitcoin. It is a virtual currency generated on the internet using mathematical algorithms. Participants can obtain bitcoins by solving math problems from home to generate them or purchasing them using dollars or other government backed currency in a virtual exchange. Using Bitcoin can help people to:
- Speculate and benefit
- Keep identity private
- Trust system of bitcoin generation
- Preserve spending power
Bitcoin as an investment
Bitcoin’s exchange rate relative to the U.S. dollar has fluctuated substantially. In April 2013 a single Bitcoin was worth about $230 and it is trading at about $481 as of September 1, 2014. Some speculators purchase Bitcoin to profit from changes in exchange rate. For example, Kristoffer Koch spent about $27 in 2009 to buy 5,000 Bitcoins and by the end of 2013 he had $886,000.
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Apart from the perennial speculation risk that Bitcoin prices could decline, hackers can steal Bitcoin and transfer it to a different account by accessing a user’s private key. Such key is equivalent to an ATM pin. Computers have no way of determining whether the Bitcoin’s owner is the one authorizing transactions from an e-wallet. Like cash, once Bitcoins are stolen they cannot be traced. The U.S. Internal Revenue Service has announced that income and gains from Bitcoin are taxable but guidance provided is confusing. This could expose Bitcoin owners to IRS issues if taxes are not paid correctly.
Bitcoin digital exchanges can also be hacked. Value of traded Bitcoin could decline if Bitcoin cannot be accounted for or transactions cannot be completed. Bitcoin is not backed by any government or guarantor and only has value because users believe it does.
For privacy and transparency
Establishing a Bitcoin e-wallet or using Bitcoin to purchase goods does not require the user to disclose identity. The user’s name does not need to be associated with a Bitcoin account. Unfortunately, this feature also presents risks for some to use Bitcoins as a means to execute crimes. This has already happened as there have been reported cases of Bitcoin use to purchase illegal weapons and drugs as well as to launder money.
Computer programmers and others who have lost trust in the central bank system see Bitcoin as an alternative, more transparent currency. They believe that generating Bitcoins using mathematical algorithms provides predictability about the rate of growth of the currency and limits the amount in circulation. The code used to generate Bitcoin will stop production when there are about 21 million Bitcoins circulating.
To protect against inflation
Users see the virtual currency as a way to preserve purchasing power. Merchants, however, have discretion on whether to accept Bitcoins or not. In contrast, merchants are required to accept U.S. dollars as they are legal tender. While Bitcoin is increasingly being accepted by internet merchants, some mainstream merchants and retailers may be reluctant to accept it as a payment means. The virtual currency’s association with criminal activity together with its volatile exchange rate adds to this hesitation. Bitcoin currently appeals to a small portion of the population. It will only become appealing to the general population once it is more widely accepted by retailers, landlords and banks and it becomes more user-friendly.