When the value of a single bitcoin rose to a record 1124.76 USD, former Federal Reserve chairman Alan Greenspan appeared on Bloomberg television and stated that bitcoins were “a bubble.” “It has to have intrinsic value,” he argued. “You have to really stretch your imagination to infer what the intrinsic value of Bitcoin is.” Greenspan meant that because bitcoins did not have a traditional backing of gold or silver, its current valuation was a hype and its real value was virtually nothing. He was right, partially. Two weeks later, the price of a bitcoin fell more than 50 percent overnight from $1200 to $572, razing more than seven billion dollars off of bitcoin’s market capitalization and confirming fears that a bubble did exist. What Greenspan did not predict was a currency that fought back. A month after the crash, bitcoins surged back to $800. Along the way, it acquired two online retail backers, Overstock and Tigerdirect, and a certain measure of stability. While Greenspan realized the short term forecast, he failed to recognize the potential that bitcoins possess as a long term currency.
As a digital currency, bitcoins are distributed by a solid circulation system. Created in 2009 by Satoshi Nakamoto, bitcoins are a peer-to-peer digital currency that rely on trust to complete a transaction between two parties. Bitcoins distinguish themselves from normal currencies because a middle-man, like a banker, is not needed for transactions to occur. Like any other currency, bitcoins can be exchanged from one user’s “wallet” to another’s. When such a transaction is successfully processed, it is recorded on the bitcoin public ledger. Currently, bitcoins are at a value of approximately 840 USD
Although the concept of the bitcoin system is simple, the longevity of bitcoin use depends on security and popularity, both of which are boasting an upward trend.
One of the main issues that plagues the Bitcoin world is theft. An often highlighted example is the 2011 MtGox data theft incident. In June 2011, MtGox, which is the world’s largest bitcoin exchange, experienced a severe security breach that saw the price of a single bitcoin plunge from $15 to $0.01 within an hour. Following the incident, bitcoin users began to wonder whether their own bitcoins could be safe if even MtGox could be compromised.
MtGox, however, quickly resolved the problem and subsequently strengthened security measures. MtGox also later reported that the overall compromise was caused by the breaching of an auditor’s computer that had access to MtGox’s database, meaning that MtGox was not hacked into. This proves that MtGox’s security breach was caused by a human error rather than a computing error, which is immeasurably more grave.
Considering MtGox, a powerhouse of the bitcoin world, has not been penetrated by cyber attacks, its reaffirming presence demonstrates confidence that the bitcoin currency can not only survive a struggle, but also grow stronger. Like the US dollar, which was backed by the US government in gold until 1971, bitcoins rely on large exchanges such as MtGox to handle crises and maintain its value after such incidents happen.
One major indication of how much value bitcoins possess lies in the share of businesses that accept bitcoins as a form of payment. Currently, the largest businesses that accept bitcoins are online retailers. These retailers take into account the advantages of using bitcoins, including a lower processing fee as well as access into a wider market of consumers: Bitcoin owners. Bitcoin owners have seen the purchasing power of bitcoins rise dramatically since their inception in 2009, owing to a recent surge of merchants accepting bitcoins. Currently, there are more than 35,000 businesses worldwide that accept bitcoins and that number is increasing. Bitcoin processing company Coinbase, which partners with at least 20,000 of those 35,000 merchants, adds new merchants at a rate of 1,000 per week. Such a rate demonstrates that there is growing interest in the use of bitcoins. And, it makes sense. When Overstock.com Executive Vice Chairman Johnathan Johnson was asked what the incentive was to accept bitcoins, he replied, “We are merchants, and we are willing to accept any practical form of exchange that allows [Overstock.com] to sell goods in exchange for value.”
If Overstock.com and Tigerdirect.com are both willing to exchange their goods for bitcoins, what possible reason could there be for others not to follow? A valid argument could be bitcoin’s stability. If so, retailers have to remind themselves that they control the stability, and therefore the value of bitcoins. As more stores accept bitcoins, bitcoins’ backing will increase and the currency will become increasingly stable. Therefore, it is logical that after the first wave of newcomers begin to accept bitcoins, an exponential trend will follow. After all, the only thing other retailers are losing is a slice of the market. We can view Overstock and Tigerdirect’s step in accepting bitcoins as the ice breaker to a pot of gold at the end of the rainbow. Once the passage is cleared of ice, more will follow, and likely in greater numbers.
From Mt. Gox, bitcoin owners see security. From Overstock and Tigerdirect, they see stability. However, for those who worry about bitcoin’s volatility, which are in levels higher than established currencies, it is best to give it time. Most large businesses in the world started out small, unsteady and unsure of the future. They could offer nothing more than promise and yet, they rose from the ground because people began to believe that they could be something big. In C. Joybell C’s words, “All you have to do is to push the seed into the soil. And what makes anyone plant any… seed? It is the belief that in the seed, there is the tree. So, believe. To have a seed, is to have everything.”