Is Bitcoin Worth Your Time and Money?

During the past few months, Bitcoin has been used to create millionaires, sell drugs, and avoid inflation. But today, it will become the subject of government scrutiny, as the Senate Committee on Homeland Security and Governmental Affairs holds a hearing on the controversial new currency.

Of course, the first question they will need to address is the most basic: what is Bitcoin?

Bitcoin is digital money used to purchase goods and services online. It has three primary benefits that have made it so popular:

  • Anonymity: You don’t have to provide your name when using Bitcoin to purchase or sell goods. Instead, Bitcoin users are identified by long alphanumeric codes, or addresses.

  • Unregulated: The creator of Bitcoin is a mystery, but who controls it is not: its value is determined by its users and the law of supply and demand, not by the government. And

  • Lucrative: There are about 12 million Bitcoins currently, and that number will max out at 21 million by 2040. The limited supply has allowed Bitcoin’s value to soar as demand rises.

But these same strengths can also be viewed as its weaknesses:

  • Is Anything a Secret? No one’s online identity is completely safe. Last month, the FBI arrested a man whom they said operated a website called Silk Road, where Bitcoin users could buy illegal drugs and services like computer hacking and professional forgeries.

  • How Long Will it Remain Unregulated? The U.S. Senate is not the only government agency investigating Bitcoin. The New York State Department of Financial Services will also be holding hearings on the digital currency over the next few months.

  • Is it Lucrative, or Highly VolatileThe virtual currency jumped to a record of about $265 in April as interest in the currency grew. But in early October, in the wake of the bust of an online drug-trafficking website that used the currency, it plunged to around $90. This week it was trading at $400.

Does it pay to use Bitcoin? It depends who you ask. Some say it’s a commodity, not a currency, and its bubble will burst as soon as people realize its worth. Others say it’s the future, and point to its growing popularity around the world.

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If you’re convinced and ready to buy Bitcoins, the easiest way is visit an online exchange, and trade in your U.S. currency. You can also try obtaining Bitcoin on your own through mining, a complex process that involves finding a certain sequence of data with a computer. Since mining gets harder as more people join in, the process is constantly becoming more difficult, and mining companies have developed to fill the need. Like any investment, you would need to assess the risks and rewards before deciding to mine.

There is no shortage of articles about Bitcoin online; a simple Google search will produce some interesting and educational reading for those who want to learn more. And if you want to know more about Monday’s hearing, check out the agenda.

David Novich is a staff writer for SuperMoney. His mission is to help fight your evil debt blob and get your personal finances in tip top shape.
Photo: zcopley