The Uncertainty of the Bitcoin

09 February 2015 11:11:55 AM


In January 2014, New York became the first state in the U.S. to propose a regulatory framework for the Bitcoin that would follow similar regulations already applied to all financial firms in New York and those operating under federal laws such as FINRA and NFA.

Despite this introduction of some semblance of official regulation, the future of the Bitcoin as a bona fide currency remains clouded.

What is a Bitcoin? The Bitcoin is a type of digital currency whose operation is regulated and managed electronically instead of by a central authority, i.e. Bitcoins are decentralized. Rumor has it that the Bitcoin was developed in 2008 by one Satoshi Nakamoto but no one has actually seen or met the man and it is assumed this is a fictitious name.

Bitcoins are not coined or printed like dollars or euros. They are created digitally by a group of people and anyone can use them. This virtual money can be accessed by machines that use specific software to solve the associated mathematical equations. Bitcoin transactions are quick and the currencies are sent directly to and from electronic Bitcoin wallets. Processing fees are miniscule.

The problem with Bitcoins is that despite their claim to being totally transparent, since the actual bitcoin has no physical presence and doesn’t really exist anywhere, all communications are stored internally leaving customers without any firm way to keep track of their dealings. Even worse, because there is no regulation, it is almost impossible to monitor the company through which the Bitcoin has been purchased and there is no recourse should a discrepancy arise.

Unregulated Bitcoin

This unregulated marketplace has led several Bitcoin exchanges, such as Japanese Mt. Gox, to close its doors last year while holding millions of dollars of investor money. Mt. Gox was a leading bitcoin exchange before the disappearance of 850,000 bitcoins.

And more recently, the second largest dollar-bitcoin exchange, U.K.’s Bitstamp, was reported to have made off with nearly 19,000 bitcoins.

The price of the digital currency has dropped from a high of $1000 last January to below $250 this year. According to Juniper Research, a U.K. –based research firm, Bitcoin transactions could be cut in half as a result of lack of regulation and connections to illegal activity, potentially declining to $30 billion in 2015 from over $71 billion a year ago.

"The decline is attributable to the combined impact of exchange collapses, Bitcoin theft and regulatory concerns around crypto-currency's role in funding dark web purchases," Juniper Research said.

Some experts predict a continued struggle for broader acceptance of the digital currency. While others see the introduction of regulated exchanges as a step towards price stabilization and this could lead to greater acceptance of the Bitcoin in the retail market. Indeed, last week’s launch of the first licensed exchange in the U.S. - the Coinbase bitcoin exchange - is seen as a step in the right direction for the currency.

Cina Coren is a former Wall Street broker and financial advisor. She holds a Master's degree in Communications and spent many years writing for international news outlets and journalistic publications. Today, Cina spends most of her time writing internet articles and blogs, and reading various newspapers to stay on top of the news.

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