Proponents of virtual currency call it forward-thinking, and businesses who accept it leading the next generation of technology and money. Critics have decried it as unstable. Federal regulators have also issued warnings about risks, and reminded consumers virtual currency it is not federally insured.
Bitcoin, a peer-to-peer or “cryptocurrency,” is in some senses an artificial representation of currencies that are valued based on scarcity, said Benn Konsynski, a professor of Information Systems and Operations Management at Goizueta Business School.
“You’re not likely to see Bitcoin solely persist – other currencies will emerge,” Konsynski said. “The question is, ‘Will the people pay in the market and hold in the market,’ and more and more are gaining acceptance. It’s more related to anxieties in the current system. That doesn’t mean there is one solution, but it recognizes there may be a problem.”
In the last two years, Bitcoin has increasingly gained in popularity and notoriety. The cost per Bitcoin skyrocketed to more than $1,100, yet this month was listed at less than $400, according to Blockchain, a wallet service.
“It’s a commodity that’s traded in the market,” said Tom Smith, assistant professor in the practice of finance at Goizueta. “Its value can fluctuate tremendously.”
Most currencies are based on faith, and Bitcoin’s faith always seems to be suspect, said Clifton Green, associate professor of finance at Goizueta. “It’s not anything close to being a real, live currency. It’s still a novelty.”
In an example Konsynski used in class several years ago, for demonstration, he purchased $100 of Bitcoin, which at the time was valued at 0.6 of Bitcoin. But because he couldn’t remember his password, following rejection of several password attempts, that value of Bitcoin was essentially taken out of the market, which made the remaining Bitcoin more valuable.
“That value is created by a limit set on the currency,” Konsynski said.
The system is based on transparency, not trust, as each transaction is public, traceable and permanently stored in the Bitcoin network.
One positive of Bitcoin, according to Konsynski, is it provides a more secure path to a transaction, so it reduces the chance of theft that’s present with a credit. A criticism is it could allow loopholes for gambling or money laundering, similar to issues Konsynski discovered in 2007 with virtual worlds like Second Life.
“The trust comes in the system management,” Konsysnski said. “As trust builds, people are willing to participate.”
He said that roles emerge for “miners, exchanges and wallets” that make money as the engines of the currency governance.
Still, Smith said he wouldn’t be surprised if technology companies like Apple and Microsoft would soon accept Bitcoin.
At a financial services industry conference in Boston recently, Microsoft co-founder Bill Gates told Bloomberg TV that, “Bitcoin is better than currency in that you don’t have to be physically in the same place and, of course, for large transactions, currency can get pretty inconvenient.”
Also during a speech at the event, Gates said future financial transactions will, “be digital, universal and almost free.”
Bitcoin could also lead a movement to make money transfer transactions and check swiping cheaper, Green said.
Georgia Tech this month became the first university to accept Bitcoin payments for stadium concessions, student dining and shopping. When the school and virtual money payment processor Bitpay made the announcement, they said Bitcoin users cut out the middlemen like banks or credit card processors to pay sellers directly.
That announcement followed PayPal’s decision to allow merchants to accept payments after it signed deals with processors BitPay, Coinbase and GoCoin. The processors convert the coins into dollars for merchants for a percentage of the transaction.
Blockchain, a Bitcoin wallet provider and software developer, recently announced that it closed a $30.5 million fundraising round.
Because people using Bitcoin at Georgia Tech, or with PayPal merchants, could pay for those purchases with U.S. dollars, it’s clear Georgia Tech and PayPal are using it for public relations — to appear to be forward-thinking, Green said, adding the institutions acknowledge the risk in lost value.
For Bitcoin to become a mainstream payment method, consumers would need to know the exact value for each transaction, be it groceries or coffee, Smith said.
Unlike the dollar, a Bitcoin is a commodity similar to gold because there is a limited supply.
“Every day, the dollar equivalency changes,” Smith said. “But that doesn’t stop us from going to Starbucks, even though it may be worth 72 cents or 75 cents in Euro. We’re not thinking about the European Union. But when a dollar becomes less, it takes more money to buy Starbucks. The way that we know our dollar has changed is we see a different price on the menu.”
While consumers would need up-to-the-minute knowledge of its value, companies would also need to know the value, and both sides would need an understanding that that the value could change drastically the next day, or the next week.
The virtual currency met some headwinds earlier this year when Mt. Gox Co., at one time the largest exchange, filed for bankruptcy, which caused critics like personal finance expert Dave Ramsey to recommend to his radio listeners against investing in Bitcoin.
Ramsey said currency is only as good as someone else’s willingness to accept the item in exchange.
“I hope it works,” Ramsey said on his radio show in March. “It may work, and it looks like it’s failing as we speak. In 10 years, it may have stabilized, in the mean time, I’m going to tell eight million people every day that Bitcoin is Bitcon, and it’s the equivalent of the Iraqi Dinar of the web.”
That was the same sentiment that came from the Consumer Financial Protection Bureau when it issued a warning in August. Director Richard Cordray called virtual currencies like Bitcoin akin to “stepping into the Wild West.”
It remains a speculative investment product like any currency, Green said.
“Currency inherently should not be an investment, it’s a speculation tool,” Green said. “It’s not a long-term investment. No one invests in the Euro in their retirement account.”
While the value of a given currency, and its exchange rate, may change dramatically because of geo-political events, those don’t affect consumer purchases in the U.S.
“We’re not exchanging in these every day,” Smith said. “These are currencies where the value of the dollar can change very dramatically. It may change behavior in Venezuela, but doesn’t in the U.S.”
“Currencies that transcend the sovereign state management are a threat, and an opportunity,” Konsynski said. “These currencies herald new possibilities that change our options for commerce and society.”
