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Bitcoins better than ‘real’ cash?

By Claes Bell · Bankrate.com
Tuesday, March 26, 2013
Posted: 5 pm ET

Bitcoins may be the biggest beneficiary of the mistrust in the financial system stirred up by the banking crisis in Cyprus.

Even before news that Cyprus' banking system was on the verge of collapse and considering confiscating a portion of account holders' balances to cover the shortfall, the value of bitcoins was rising. But since news of the severity of Cyprus' troubles broke, the price of a single bitcoin on the world's largest exchange, Mt. Gox, has risen from around $47 to nearly $80, according to BitCoinCharts.com.

That may have something to do with the fact that holders of bitcoins would be essentially immune from the troubles that hit consumers in a Cyprus-type crisis. For instance, Cypriot checking accounts have been severely restricted as part of a "bank holiday" since March 18. Such a freeze is impossible with bitcoins because their processing network is highly decentralized, says Jon Matonis of the nonprofit Bitcoin Foundation board.

"In order to stop bitcoin transactions, the authorities would have to disable Internet connectivity like they did in a limited way in Egypt during the protests," Matonis says.

Vinnie Falco, a computer programmer and bitcoin investor, says for those worried about government tampering with their savings Cyprus-style, that attribute has value.

"No one can stop you from making a payment or receiving a payment," Falco says.

Matonis says the value of a bitcoin also can't be eroded through inflation caused by a central bank. Rather than being minted by some central authority as most national currencies are, bitcoins are awarded to "miners" who use computers to solve what amounts to a very complex math problem. Once they solve it, they are allowed to create bitcoins and then sell them on the open market. A predetermined schedule controls how many bitcoins can be created in a given period of time, and that schedule calls for mining to taper off until it reaches essentially zero.

"A major selling point is that (bitcoins are) inflation-proof," Matonis says.

However, the freedom that bitcoins afford users isn't free.

Falco says the most difficult aspect of investing and using bitcoins is buying them. He's experienced delays in receiving bitcoins because exchanges have had trouble keeping up with the influx of national currency they've received.

Matonis says regulations may be set to get tougher on bitcoins. The Treasury's Financial Crimes Enforcement Network released guidance this month saying that anti-money-laundering regulations apply to exchanges that convert dollars and other currencies into bitcoins.

And while it's riding high at the moment, the value of bitcoins has also been extremely volatile. For example, the currency made headlines by falling from $30 in June 2011 to below $5 in October 2011.

"People have gone their whole life thinking of money in a certain way, so to understand bitcoin, and for someone to move any considerable amount of wealth into it, it's really a leap of faith," Falco says.

Matonis says wild swings in value are to be expected in what's still a relatively small market. "It's a thinly traded market. Bitcoin has only a $700 million market cap, so you could have some Wall Street guys throwing a billion dollars around, manipulating the market if they wanted to," he says.

For some perspective, consider that the market capitalization of a medium-sized company such as Royal Caribbean Cruise Lines is 10 times as valuable all the bitcoins in the world put together.

As a currency, bitcoins still have a ways to go. While companies like WordPress and Reddit have recently begun accepting bitcoins, and Amazon will soon allow independent sellers to do so, most businesses still don't accept the virtual currency.

Bitcoin transactions aren't free, either. Those sending bitcoins to another person usually have to attach a fee to entice one of the organizations that process bitcoin transactions to handle it, Matonis says.

Security also can be an issue, but not in the way you might think. While counterfeiting a virtual currency might seem to be as easy as hitting the "copy key," it's never actually happened, Matonis says. All bitcoins are tracked on a giant ledger that's constantly updated and shared between the decentralized network of bitcoin miners worldwide.

Where security comes into play is on individual computers. If a thief does happen to steal your password and gain access to your individual bitcoin account, he could clean it out and spend your bitcoins. Unlike a bank account, there is no recourse for fraud victims involving bitcoins.

For that reason, Falco says he keeps his pass phrase memorized and uses a separate laptop to conduct bitcoin transactions.

"(Security) is another obstacle to mainstream adoption," Falco says. "You do have to exercise care."
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