By Brittany N. Cox, Associate Advisor at Nestlerode & Loy, Inc.
In a world where we can control just about anything with our cell phones, virtual money is becoming more popular. It started with putting our store loyalty cards in our phones to create a virtual keychain. Now we are entering in our credit and debit card numbers so we can wave our phones in front of the card reader and not have to pull out our wallets.
Well, the next new way to pay is here: virtual currency.
Virtual currency is a type of unregulated, digital money which is issued and usually controlled by its developers. It is used and accepted among members of a virtual community.
If you haven’t heard of virtual currency, maybe you’ve heard of Bitcoin? Its surge in value has put it in the news recently. Bitcoin is a virtual currency created in 2009. The ideas were set out in a white paper by Satoshi Makamoto, a pseudonym for whom an identity has yet to be verified. Bitcoin promises lower transaction fees than traditional online payment methods and is operated by a decentralized authority, unlike government-issued currencies.
You may have seen photos of Bitcoin, but in fact, there are no physical Bitcoins. The balance is kept on a public ledger in the cloud. Bitcoins are not backed by any bank or governments. While government issued money can be inflated at will, Bitcoin is mathematically limited to 21 million bitcoins which can never be changed. Currently, one Bitcoin is equal to $4,572.77 USD.
It is now possible to have a Bitcoin app on your phone to purchase this virtual currency and then use it to purchase goods and services. It is important to note that your “digital wallet” which is stored on the cloud could act as your Bitcoin “bank account.” However, it is not insured by the FDIC like a traditional U.S. bank account. This has spawned an increase in hacking of cell phones and devices by people who are stealing bitcoins.
Transactions in Bitcoin are anonymous and you will not know the identity of the person on the other end of the exchange and they will not know you. Since transactions are private, you may guess that this has become the currency of choice for the purchase of drugs and other illicit activities.
You can also “mine” Bitcoins. This is a competition type setup where people use computers to solve complex math puzzles and are awarded with new Bitcoins. Currently, mining is the way in which Bitcoins are created. They are pumping out at a rate of 25 Bitcoins about every 10 minutes. I assume this will slow down as more are created since there is a cap of 21 million.
Who accepts Bitcoins? The list of retailers who accept Bitcoins is growing, but you can’t shop just anywhere. The most popular way to buy goods with Bitcoins is to use them to purchase gift cards for the places you want to shop. To do this, you will pay about 5-10 percent more for the gift card than if using Bitcoins themselves to pay for the goods. Some popular places that have begun to accept Bitcoins as payment are Subway, Dish Network, Overstock.com and Expedia. It is possible to use Bitcoins for purchases at many other retailers with the use of other apps and workarounds similar to purchasing gift cards.
Many claim that Bitcoin is the riskiest investment available today. While the internet is flooded with articles and people claiming to have made a fortune from them, there are many of us who remain skeptical.
There are some primary concerns surrounding Bitcoin. First, as mentioned, it is not backed or regulated by the government, a bank, or any other entity. Some people have compared Bitcoin to Monopoly money since it is not an actual currency nor is it based on anything tangible. That means that its worth is based on what people “think” it is worth. While not untrue for other forms of currency, Bitcoin is in a more precarious position due to its unregulated nature.
Secondly, Bitcoin is not traded on Wall Street. They cannot be bought or sold through a brokerage. Instead they can only be bought in an account exclusively for Bitcoins. This makes Bitcoin less liquid than equities. It also is much more volatile with more rapid swings in value.
Finally, there are higher rates of theft and fraud through uninsured Bitcoin exchanges. If your Bitcoin is stolen or there is fraud in your account, you cannot call your banking institution and report the fraud and receive a refund as you can with your “traditional” bank account.
*Nothing contained in this article should be interpreted as a promise or guarantee of earnings or investment results nor a recommendation for the purchase or sale of any security or sector.