Bitcoins Skyrocket to $900, But Risks Remain

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Bitcoins keep climbing higher, touching $900 today as regulators in the U.S. consider what they could be used for and whether they are a legitimate currency. There’s a lot of volatility in their price right now, however, as Japanese bitcoin exchange Mt. Gox reported a range of between $901 and $503 today alone.

Prices are a little less volatile and also significantly lower on U.S.-based exchange Coinbase, which records the current price of around $608. Their chart doesn’t appear to work very well because I wasn’t able to get it to actually display just one day of trades even when I changed the settings to just one day.

Regulators call bitcoins “legitimate”

So with all this volatility in bitcoins, is it a good idea to drop money on them right now? Regulators at the U.S. Department of Justice declared them “a legitimate financial service” today. The BBC reports that regulators suggested that they have the same risks and benefits as other online payment services. Meanwhile hearings at the Homeland Security and Governmental Affairs Committee continue to explore bitcoins and whether they can be good for the government and society.

Regulation is the biggest challenge to bitcoins

Goldman Sachs analysts Roman Leal and Jac Charles recently hosted a meeting with Tony Gallippi, CEO of BitPay, and Stephen Pair, chief technology officer of the company. They weighed in just briefly on BitPay but spent most of their research note reviewing bitcoins themselves. They believe there are two big challenges to the bitcoin right now, with regulators being the biggest hurdle for the digital currency to overcome.

BitPay handles bitcoin processing for online merchants to enable them to accept the currency just as they do credit cards and PayPal. The company processes about $5 million in bitcoins every month for 12,000 different merchants and makes up 85% of all ecommerce transactions made using bitcoins. The company told Leal and Charles that it believes its planned software-as-a-service pricing model, which involves a monthly fee with no transaction fees, could disrupt the industry.

BitPay wants “balanced” regulatory approach to bitcoins

BitPay told the Goldman Sachs analysts that regulation of bitcoins varies from country to country. Of course in the U.S. this week, regulators are intensifying their scrutiny of the currency. In addition to the two hearings going on this week (at the U.S. Senate Committee and Governmental Affairs and the U.S. Senate Committee on Banking, Housing and Urban Affairs), the Government Accountability Office has also asked the Internal Revenue Service about taxing transactions made in bitcoins.

Of course all this scrutiny is bound to have some effect on the digital currency. From the skyrocketing value of bitcoins right now, it sounds like investors think the effects will be good. BitPay is hoping that government agencies take a more balanced approach which limits fraud while making it possible for the technology behind the currency to grow. The company thinks this will be good for bitcoins.

Other problems with bitcoins

The Goldman Sachs analysts also note there are some limitations on bitcoins in addition to the regulatory hurdles. BitPay said the whole bitcoin network is able to handle just seven transactions per second. That’s compared to the approximately 20,000 transactions Visa Inc (NYSE:V)’s network can process every second.

Security is another issue, especially at retail locations and through mobile wallet transactions. The analysts say most of these exchanges require passwords which are short. Shorter passwords are generally easier to hack than longer ones. And we already know that hackers have targeted bitcoins recently, hitting up one online digital wallet company and stealing more than a million dollars in bitcoins last month.

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