Bitcoin is a complete unknown to most people, but is quickly gaining attention as more companies use the quasi-currency and its exchange rate with the U.S. dollar soars to record highs.
The current Bitcoin exchange rate for U.S. dollars is nearly $47, nine times higher than it was a year ago when it was valued at $4.93, according to Mt.Gox. But what is Bitcoin?
Bitcoin is, in essence, “digital cash” that is easily tradable online. It’s decentralized, meaning that it’s not controlled by any one entity or organization, it’s open source and it’s tradable peer-to-peer. It was introduced by a software developer under the pseudonym Satoshi Nakamoto, about whom little is known, in 2009.
Here’s a short video further explaining how Bitcoin works.
One example of a common Bitcoin use is sending money from the U.S. to your Aunt Clara in the old country. With Bitcoin, you can do so directly online, without any bank (or banking fees). And the transaction is anonymous—sent with an online address that you set up but may not be attached to your name. Also, the transfer happens almost instantly.
Bitcoins are convertible to U.S. dollars or any other global currency and are traded on the Mt.Gox, a Tokyo-based electronic exchange that calls itself the most widely used Bitcoin currency exchange in the world.
“Bitcoins have been doubling every month, and I think they’ll continue to,” said Steve Dakh, a web developer from Freehold, New Jersey who’s been using Bitcoin for over two years.
“I think next month it’ll be at $80 or even $100, maybe even more. It’s growing at a really fast rate, and nobody really knows about this yet.”
Archive.org, a non-profit digital library based in San Francisco, will begin next month to pay 16 of its employees in the form of bitcoins.
Archive.org founder and digital librarian, Brewster Kahle, says the company became aware of the digital currency when users wanted to give donations to the site using Bitcoin. In 2011, they received around $2,000 in donations, and in 2012, that amount tripled to $6,000. Archive wasn’t sure what to do with the bitcoins, but were approached by a few employees who were interested in being paid that way.
“We’re the internet archive. We’re born of the net,” said Kahle. “This whole organization exists because of the Internet, so we see it being part of our role in helping people to understand and promote the Internet and all of its experiments.”
“There’s websites where you can go on and you can buy Amazon gift cards, you can buy American Express gift cards. You can even buy gold with bitcoins,” said Dakh.
There are also websites that act as intermediaries for Bitcoin users by purchasing goods or services on the user’s behalf without requiring a credit card number or even the customer’s name.
If that sounds sketchy, it sometimes is.
Anonymity allows users to subvert the law, as in the case of the Silk Road marketplace, a website that sells illegal substances, such as marijuana, among other things. Since the sales aren’t traceable through a name or credit card number, it’s difficult for law enforcement to track down the buyer.
In fact, two U.S. Senators, Charles Schumer (D-NY) and Joe Manchin (D-WV) began drafting legislation in December to make any use of Bitcoin illegal in the U.S. on the principle that only Congress may create and print money.
Another problem for the U.S. government is that Bitcoin is not technically defined as a currency, putting it outside the realm of taxable income (Archive.org has said it will pay taxes on the company’s bitcoins).
The Bitcoin market can be volatile and subject to mishaps. Mt.Gox was hacked in 2011, causing the dollar exchange rate to drop to zero. This week, a technical glitch in the Bitcoin software caused the value to drop by 23 percent before it was fixed a few hours later.
“It sort of made me think, my god, how fragile is this [Bitcoin] system? And then I started thinking, well how fragile is the money system?” said Kahle. “So, I don’t know, I’m not transferring my savings into Bitcoin, but it’s been great fun.”