A shop in Hong Kong trumpets its support for the digital currency bitcoin.
About a half-billion dollars’ worth of it vanished from an online exchange in Tokyo. A prosecutor in Manhattan arrested the 24-year-old vice chairman of its most prominent trading body on drug-related charges of money laundering. Its founder’s identity remains a mystery, and last year, it shed two-thirds of its value, losing an additional 44% in just the first two weeks of January. In his year-end letter to investors, Warren Buffett’s advice about it was emphatic: “Stay away.”
Bitcoin is, quite simply, one of the most powerful innovations in finance in 500 years.
The digital currency known as bitcoin is only six years old, and many of its critics are already declaring it dead. But such dire predictions miss a far more important point: Whether bitcoin survives or not, the technology underlying it is here to stay. In fact, that technology will become ever more influential as developers create newer, better versions and clones.
No digital currency will soon dislodge the dollar, but bitcoin is much more than a currency. It is a radically new, decentralized system for managing the way societies exchange value. It is, quite simply, one of the most powerful innovations in finance in 500 years.
If applied widely to the inner workings of our global economy, this model could slash trillions in financial fees; computerize much of the work done by payment processors, government property-title offices, lawyers and accountants; and create opportunities for billions of people who don’t currently have bank accounts. Great value will be created, but many jobs also will be rendered obsolete.
Bitcoin has some indisputable flaws, at least in its current iteration. Its price fluctuates too wildly. (Who wants the cost of their groceries to vary by 10% from week to week?) Its anonymity has made it a haven for drug dealers. “Wallets” (as the individual software applications that manage bitcoin holdings are known) have proven vulnerable to cyberattack and pillaging, including the wallets of big exchanges such as Tokyo’s Mt. Gox and Slovenia’s Bitstamp.
Bitcoin matters more than you think
Paul Vigna and Michael Casey discuss their new book “The Age of Cryptocurrency” as well as the mystique and challenges facing bitcoin and the virtual-currency business overall.
Even though the core program that runs bitcoin has resisted six years of hacking attempts, the successful attacks on associated businesses have created the impression that bitcoin isn’t a safe way to store money. Until these perceptions are overcome or bitcoin is replaced by a superior digital currency, the public will remain suspicious of the concept, and regulators will be tempted to quash it.
Like any young technology, bitcoin is a work in progress, but its groundbreaking core software program is constantly being improved. It is open-source and copyright-free, and thus accessible to anyone who wants to peer inside it, copy it, suggest improvements or create applications for it.
Inspired by this potential, “probably 10,000 of the best developers in the world are working on bitcoin,” estimates Chris Dixon, a partner at the venture-capital firm Andreessen Horowitz. This volunteer army has developed military-grade encryption to make bitcoin wallets more secure and insurable and also new trading tools to help stabilize the price. The faults of digital currency are being resolved.