Bitcoin currency of the future

Many of you have probably heard of Bitcoin, a peer-to-peer payment system and digital currency that was introduced 5 years ago and gained tremendous popularity over the past year. Today we’ll discuss the relevance of Bitcoins and answer some of the questions we’ve been asked about it. This is not an investment recommendation: we are not suggesting that you purchase Bitcoins or transact in the currency.

What is Bitcoin?

It makes sense that the first “digital” currency has its share of skeptics. We, too, are skeptical about the future viability of the currency and the risks to holders of Bitcoins. The anonymity allowed by Bitcoin intermediaries reportedly made the currency popular in illegal transactions such as drugs and online gambling, which hasn’t helped its reputation and has also brought about regulatory intervention. At the same time, even as regulatory pressures increase, there are still plenty of major companies, including Overstock.com, the NBA’s Sacramento Kings and Zynga, that accept Bitcoins as a method of payment.

As of November 2013 there were more than 35, 000 Bitcoin-accepting merchants online as well as 1, 000 “brick and mortar” businesses willing to take them. As of this writing, the value of 1 Bitcoin (BTC) is approximately $558. Click here to see the historical USD/BTC conversion rate (value of 1 Bitcoin in US dollars).

Bitcoins as a “real” currency

Clearly Bitcoins are a different animal from most universally-accepted currencies, but there are also a number of similarities that may allow Bitcoin to become a “real” (and more widely accepted) currency. Like the US dollar, whose supply is regulated by the Federal Reserve, the growth and creation of Bitcoins is regulated by the Bitcoin protocol, which has similarities to a “central bank.” There are over twelve million Bitcoins in circulation with an approximate creation rate of 25 more every 10 minutes. These new issues are created, or “mined, ” from transactions that award payment processors with newly issued Bitcoins that are added to the “block chain.” The Bitcoin money supply is kept in check, in part to monitor and prevent excessive inflation. Not surprisingly, this is also a mandate of the Federal Reserve.

The total supply of Bitcoins will be capped at 21 million, and every few years or so the creation rate will be halved, meaning that new Bitcoins will continue to be created for more than a hundred years (if they still exist that far into the future). While online wallets are the more popular method for storing and transacting in the currency, owners of Bitcoins can turn their online currency into physical bills and coins.