Massachusetts Daily Collegian

A free and responsible press serving the UMass community since 1890

A free and responsible press serving the UMass community since 1890

Massachusetts Daily Collegian

A free and responsible press serving the UMass community since 1890

Massachusetts Daily Collegian

The rise of cryptocurrency

Flickr/Zach Copley
Flickr/Zach Copley

On Oct. 1, the FBI raided a public library in San Francisco, arresting Ross William Ulbricht and shutting down his black market site called the Silk Road. The Silk Road was used to traffic drugs, launder money and even hire contract killers, exclusively using the cryptocurrency Bitcoin to make exchanges. At the time of the bust, the site had generated revenue worth more than 9.5 million bitcoins, valued over $1 billion.

Bitcoin’s central role in the facilitation of the Silk Road black market did not gain it the best reputation, but that did not stop many mainstream outlets from accepting the cryptocurrency. Overstock.com, eBay, Gyft gift cards and thousands of small businesses now accept Bitcoin, and the trend is catching on. These retailers are attracted to Bitcoin because transactions can be made internationally and without the fees and inconveniences of credit card companies. Transactions are made directly from one individual to another, meaning no banks, no fees and no identification needed.

Bitcoin was created in 2009 by an unknown individual or group of individuals using the alias Satoshi Nakamoto. The cryptocurrency exists through an open-source software program and bitcoins are produced in strict adherence to a computer algorithm. There is no central control of Bitcoin; it is operated by a community of developers, and bitcoins can be “mined” by anyone with a computer by solving complex algorithms. Like all currencies, Bitcoin’s value is determined by what people believe it is worth. Right now, one bitcoin is worth over $800.

Chairman of the Federal Reserve Ben Bernanke told Congress that crytpocurrencies “may have long-term promise.” There are unique advantages to Bitcoin that cannot be matched by current government-maintained currencies. The value of Bitcoin is not influenced by any one authority, and the currency can be fully maintained outside of any institution. Transactions are made directly from one individual to another and the only one capable of authorizing a payment is the owner of the Bitcoin wallet. The currency also allows a significant degree of anonymity as no personal identification is tethered to one’s bitcoins or their wallet.

Bitcoin does have drawbacks, however. As a virtual currency, it is vulnerable to hacks, though such misfortune can be avoided if bitcoins are stored offline. Also, the price of Bitcoin is highly volatile, increasing from $13.50 to $1200 during 2013 only to plummet to less than $500. This makes the currency a risky bet; it could be highly lucrative or a complete waste of money. It is also necessary to consider future regulations: as Bitcoin continues to rise in popularity, governments are eyeing the currency. China recently banned Bitcoin from its largest online exchange and Europe is considering regulating it.

The opinions on the future value of Bitcoin are extremely varied. Nobel Laureate economist Robert Shiller says that Bitcoin is a bubble waiting to burst, and finance professor Mark Williams warns that Bitcoin’s value could crash to $10 by mid-2014. Meanwhile, hedge fund manager Hugh Hendry believes that its value could reach $1 million.

While the speculations about Bitcoin’s worth are up in the air, cryptocurrencies are here to stay. There are now over 83 different cryptocurrencies on the market, each with their own unique algorithms and control structures. These currencies are challenging the prevailing monetary supply. They are subverting the power of central banks by placing financial control directly in the hands of users.

This new form of money makes it nearly impossible for authoritative regimes to restrict the funds of human rights activists and political dissidents, as Bitcoin does not need any intermediaries. It also provides a secure monetary supply to populations without access to banks and facilitates their connection to the global economy. This opens the possibility to a financial world with a much more decentralized power structure where individuals have significantly more control over their own money.

While speculating on the Bitcoin market is risky business, you can bet that the cryptocurrency will have a significant role in the future of finance. We stopped backing our currency with gold half a century ago; now cryptocurrencies aim to back money with nothing but computer code. The difference is that it is not the central banks deciding to do so, yet.

Jason Roche is a Collegian columnist and can be reached at [email protected].

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    mikeFeb 6, 2014 at 10:05 am

    Bitcoin is not currently valued correctly because the market is irrational. The true value cannot be attained with the current markets in place. For example, there is no ability to easily short the currency.

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