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Bitcoin has people talking this month after its value surged to almost $20,000 a coin before crashing down to $14,500 on Thursday. Even with this drop, Bitcoin has still risen by almost 2,000 percent in 2017.
The online digital currency never fails to generate conversation. True believers argue it is the future of commerce. Speculators see a market offering big risks and big gains. Critics say it’s an unregulated platform ripe for scammers, leading some business leaders and investors to call it a “fraud” and “fad.” And all of the above could be true.
If Bitcoin leaves you scratching your head, here’s everything you need to know.
Bitcoin is a digital currency — the technical term is “cryptocurrency” — that is not regulated by a central bank or backed by any government. Instead, it operates on a digital platform that is both secure and transparent. Whenever Bitcoins are created, bought or sold, the entire network is notified. Yet Bitcoin owners remain anonymous.
Bitcoin is not the only digital currency (there are more than 1,000), but it is the largest and best known. Bitcoins are not minted or printed, nor are they held in banks. Instead, they are bought and sold on Bitcoin exchanges like Coinbase and stored electronically. As many as 5.8 million people are using digital currency, according to a University of Cambridge study, and most are using Bitcoin.
Perhaps most intriguing: The person who created Bitcoin remains anonymous, using the pseudonym Satoshi Nakamoto. But as Nathaniel Popper, author of a book on virtual currencies, put it, “At this point, the creator’s identity is no longer important to Bitcoin’s future.”
Like most currencies, you can buy things with Bitcoin. More than 100,000 vendors now accept it, including Microsoft, Expedia and Overstock. Others are experimenting. Subway, for example, accepts Bitcoin in some stores in Buenos Aires.
Bitcoin is also subject to speculation by investors. Wall Street even created futures contracts. But unlike other investments, Bitcoin is not backed by anything. While stocks are backed by company assets, revenues and performance (at least theoretically) and currencies are backed by governments, Bitcoin is not supported by any underlying asset or income stream.
Instead, Bitcoin is worth whatever the market says it is worth, and that makes it volatile. Some in the financial press have argued that Bitcoin is a huge bubble. Regulators in Massachusetts even issued a warning to investors.
Without any underlying assets to support it, supply and demand drive Bitcoin’s value. There are currently about 16 million Bitcoins and the system is limited to 21 million. As Stephan Goss wrote in Fortune, “There is a finite supply, and since Bitcoin has become a mainstream brand name, demand has increased, therefore driving up the price. By default, a non-asset backed currency trades purely on hype.”
Interestingly, Goss says Bitcoin has more in common with the art market than the dollar. “Like Bitcoin, a great painting has no asset-backed value, but it is a scarce resource,” he wrote. “When an auction house estimates the value of a Picasso, it doesn’t do a fundamental analysis of what the paint, the canvas, etc., is worth. Instead, it attempts to predict the demand for the painting, which is the key driver of how much someone is likely to bid.”
In recent years, U.S. regulators ruled that Bitcoin is both a virtual currency and a commodity, and the IRS calls it taxable. In 2016, a federal court plainly ruled that Bitcoin is money. “Bitcoins are funds within the plain meaning of that term,” the judge wrote.
However, a battle is expected in 2018 over whether Bitcoin should be more heavily regulated. A Senate money-laundering bill would classify organizations that handle Bitcoin as financial institutions, meaning they would be subject to some of the same regulatory requirements as banks. Bitcoin advocates say that would stifle the industry. Groups like the Chamber of Digital Commerce, Coin Center Inc. and the Bitcoin Foundation are fighting the bill.
Advocates of Bitcoin say that it is a giant step closer to frictionless commerce. It facilitates faster transactions, generally costs less in transaction fees, and is more accessible than other forms of payment. They also claim it is more private and more secure because, unlike credit cards, Bitcoin transactions require no personal data to change hands.
Advocates also say that Bitcoin users are free from government regulation or intervention, and that Bitcoin is not subject to inflation. Because there is a finite supply, the value of Bitcoin does not erode like other currencies.