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What's Driving The Bitcoin Revolution
The lure of digital currency is obvious it: is easy to transport, transcends borders and is not subject to governmental monetary policies. The value of bitcoins has been soaring.
Latest Update: Nov 2013
Bitcoin has surpassed Paypal in daily transaction volume $416M vs $397M.
Back in October, the FBI shutdown Silk Road (a website on the Tor network) the underground marketplace where users could buy cocaine, heroin, meth, and more using the virtual currency Bitcoin. They also siezed 26,000 Bitcoins worth about $3.2 million dollars. The value of all Bitcoins immediately dropped by ~20%. Here is a link to an article describing the alleged illegal activities at Silk Road.
The shutdown of Silk Road illustrates some of the inherent instability and price swings of Bitcoins. Shutting down Silk Road is a good thing for Bitcoins investors, it paves the way for more Bitcoins to be viewed as a mainstream medium for conducting transactions.
The bitcoin network came into existence Jan 03, 2009 created by Satoshi Nakamoto, whose real identity is unknown. A bitcoin was originally worth less than a cent, by March 2013 they were trading at $30/each, a month later they peaked at $260 and today they are worth $122/each; There are currently approximately 11.2 million bitcoins in circulation that number will increase each year until the year 2140 when the upper limit of 21 million bitcoins will be in circulation.
Should you trade in Bitcoin
Bitcoin transactions are typically referred to as anonymous. While it may be possible to obscure your identity in many cases you can be identified. Few merchants currently accept bitcoin. The real opportunity starts when there is mass adoption of bitcoin by merchants looking to escape high ATM/credit card transaction fees. Currently the people who are most bullish are the early bitcoin owners who are "in the money" they are essentially betting bitcoin values will increase. More people are using the currency, in April, a record, $1 billion in bitcoin changed hands.
Bitcoin has four major downsides: (1) volatility, the value of a bitcoin is not static; (2) security, there have been several documented cases of Fraud and theft, Some bitcoin exchanges have been hacked and some have shutdown without refunding customers money; (3) competition Ripple, a competitor is trying to gain traction. Venture capital is pouring into bitcoin companies. Adam Draper who runs Boost, a startup accelerator is looking for 7 bitcoin companies; (4) public policy, while virtual currency is legal in the United States, it has not been given a governmental seal of approval. Regulatory roadblocks, not demand may be the biggest hurdle keeping bitcoin from going mainstream.
To get started you need a software wallet, there are dozens of options. Your wallet contains two sets of keys: Your private key keeps track of your bitcoin(s). Your public key allows you to transact with the outside world. Note: if you lose your private key, or its hacked, your bitcoin(s) most likely cannot be retrieved. To get bitcoins you either sell something and receive bitcoin in return, purchase or mine them.
High profile venture capitalists such as Andreessen Horowitz and Union Square Ventures have invested in virtual currency related companies. Established players such as Google and PayPal have taken notice of bitcoin. Google is supporting Opencoin. PayPal is teaming with OANDA.
For the next couple of year’s bitcoin may be a victim of its own success, the huge price swings caused by speculation may get worse. Once the newness wears off the currency may reach its potential but significant obstacles remain: government policy, security and competition but the bitcoin ecosystem will grow and improve and eventually stabilize the bitcoin.