Bitcoin: Currency or Commodity?

Earlier this month, a US Senate committee described virtual currencies as a “legitmate financial service” and since then the value of a single bitcoin has surpassed $1,000. In January, it was trading at $20.

There has been continued debate about whether bitcoin is a a ponzi scheme or poised to change the world. Earlier this week, The Guardian reporter Alex Hern explained, “Until now, what pundits called in a rolling-eye fashion ‘the new peer-to-peer cryptocurrency’ had been seen just as a digital form of gold [and silver], with all the associated speculation, stake-claiming and even ‘mining’; perfect for the digital wild west of the internet, but no use for real transactions.”

The Senate Hearing

This month, The FBI and Justice Department’s Criminal Division warned the committee about the increasing use of such currencies by “malicious actors” including drug dealers, pornography traffickers and perpetrators of large-scale fraud.

Committee chairman, Senator Thomas Carper, observed, “Virtual currencies, perhaps most notably Bitcoin, have captured the imagination of some, struck fear among others, and confused the heck out of the rest of us.”

But the Senate committee described virtual currencies as a “legitmate financial service” and since then the value of a single bitcoin has surpassed $1,000. In January, it was trading at $20.

Bitcoin offers unprecedented flexibility and now PC Game Supply, an online retailer specializing in the digital delivery of game and gift card products, accepts Bitcoin via Bitpay. Target, America’s third largest retailer accepts Bitcoin via mobile gift card startup, Gyft. Bitcoin may likely become part of our future economy.

The chairman of the US Federal Reserve Ben Bernanke, the Bank of England, and other key players like law enforcement officials, regulators and economists are starting to take Bitcoin more seriously, even after last month’s shutdown of Silk Road—which let users buy drugs anonymously over the internet using Bitcoins. One step towards Bitcoin’s legitimacy is Bernanke’s intention to make it part of US currency regulation.

In October, the world’s first Bitcoin ATM opened in Vancouver, Canada, which allows users to exchange bitcoins for cash and vice-versa. The Chicago Federal Reserve said the currency was “a remarkable conceptual and technical achievement, which may well be used by existing financial institutions or even by governments themselves.”

Indeed, the virtual currency was quickly adopted in China, where one exchange – BTC China – is said to be the most active globally. Bitcoin’s popularity in China is based on its reliability of getting money out of the country.

Writing about why the Chinese are paying premiums for their Bitcoins, Forbes contributor, Gordon G. Chang, points out, “there are a number of reasons why Beijing undoubtedly likes the new currency. For one thing, digital money can undermine the dollar’s status as the world’s reserve currency. Bitcoin is on track to becoming the world’s first trillion dollar non-fiat form of money.”

While Bitcoin differs from conventional currencies, the idea of virtual currency for the Internet has taken hold. Hern says, “the only reason people are willing to pay money for the currency is because other people are willing to as well.” But while widespread adoption is possible, Bitcoin would need to develop a banking system akin to conventional money.

How it works

Once you have installed a Bitcoin wallet on your computer or mobile phone, it will generate your first Bitcoin address and you can create more whenever you need one. You can disclose your addresses to your friends so that they can pay you or vice versa. In fact, this is pretty similar to how email works, except that Bitcoin addresses should only be used once.

In terms of processing, mining is a distributed consensus system that is used to confirm waiting transactions by including them in a block chain, a public record of Bitcoin transactions in chronological order. To be confirmed, transactions must be packed in a block that fits very strict cryptographic rules that will be verified by the network. A block is a record in the block chain that contains and confirms many waiting transactions.

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