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Cloud Currency: Bitcoin & the Rush to Fill Your Cyber-Wallet

Bitcoin global currency

Hm, where to get a drink? For those with Bitcoin, the Pembury Tavern could be the obvious choice. Why? Well, Bitcoin is on the tip of many Internet and finance-savvy tongues – as well as many not so savvy ones – so a bar is sure to get noticed by the press when it says it’ll take the alternative online currency (as indicated by its appearance in The Telegraph in an article about the topic).

Bitcoin has revolutionized the worldwide reception of online currency. It’s a major victory for a concept previously unknown or regarded as highly questionable.

Now the question is this: Is turning your money into Bitcoin really a good idea? The question must be asked as to the real value of an invented cryptocurrency (a cyber-currency built and identified using cryptographic algorithms).

Holes in Bitcoin?

Bitcoin is quickly becoming a household term. It has been around since 2009, but it certainly seems to be trending skyward. People shouldn’t be completely sold on an unproven virtual dollar. The market is incredibly volatile. It seems to invite fraud and may not always have the code sophistication or identity parameters to fight it.

Both those points were proven a few days ago, when  the Japanese Bitcoin exchange Mt Gox announced it had found a bug that makes fraud possible. The loophole in the code allowed users to perform transaction malleability, making it seem like a transaction to a Bitcoin wallet did not occur when it actually did.

Unlike the US dollar, the Japanese yen or the British pound, Bitcoin does not have a track record and does not exist except as a virtual computer file. To be fair, any currency, commodity, stock, entire industry or economy is susceptible to manipulation or bad press. Take the US dollar’s volatility during the debt ceiling battle in October or the global real estate and finance markets. Everything is susceptible to failure.

The Rise of Bitcoin

Bitcoin gains steam

Regardless of setbacks, Bitcoin is riding high – and its prominence seems to be steadily growing over time. Digital currency like Bitcoin is now accepted by several restaurants and other brick-and-mortar locations. Reddit accepts it. So does WordPress.

Bitcoin is popular because it functions as cash – based on its current value vs. the dollar – but the buyer isn’t identifiable. There are no fees. Funds simply switch from one account to another within the Bitcoin peer-to-peer (P2P) network (i.e., one in which all devices bear an equivalent amount of responsibility for processing data). Bitcoin cannot be stolen or go missing and there’s less chance of identity theft than there is when alternatives such as credit and debit cards are for purchasing.

History and the Parameters of Bitcoin

Bitcoin was unveiled by an unidentified hacker – possibly multiple hackers – five years ago, under the assumed name Satoshi Nakamoto. The online user posted a conceptual framework on the new currency, including a description and general reasoning for its existence. Open source software was made available, but the Nakamoto figure has never resurfaced.

Like some other open source software, no one person or group is in control of Bitcoin. The virtual currency in the hands of those who own it, exchange it and run its software. It remains to be seen whether handling a currency that has no executive controllers is wise.

The model is attractive to those in the open source and hacker communities. It is also of interest to libertarians and others who distrust governmental regulations and prefer a system designed by and for the people. Bitcoin is not just a niche idea anymore, though. It has become more universally attractive as investors and everyday people seek safe havens for their earnings in an increasingly unsure global financial environment.

Bitcoin Alternatives

Business Insider took note of Bitcoin in November 2013, when its value (whether inflated or not) had risen to over $1000 per coin. The magazine explored alternatives to bitcoin, which are manifold. Here are three of them:

Litecoin

Litecoin exploded onto the scene in 2013. Also rooted in open source, cryptographic formulas and exchanged in a peer-to-peer manner, Litecoin gets its name for obvious reasons: it does not require the same computing power for transactions as does Bitcoin. Rather, standard PCs can be used for Litecoin transactions.

Namecoin

Another cryptocurrency founded in the open source community, Namecoin functions within its own domain name system (DNS). Because Namecoin does not exist within the standard DNS controlled by the Internet Corporation for Assigned Names and Numbers (ICANN), it is its own animal. Namecoin is free of the constraints of websites operated within the ICANN system. However, Namecoin is not a darknet because its users are not anonymous, at least not with regards to their historical behavior within the network.

Peercoin

Peercoin is P2P currency built to address some of the problems critics have cited with Bitcoin: lack of security, lack of protections against fraud and inefficiency in its algorithmic framework.

Is Bitcoin a Scam?

In 2011, Tim Fernholz argued in Good that Bitcoin is a scam. Why? Here are his four basic arguments:

  1. It’s not secure. Shortly prior to Fernholz’s article, numerous Bitcoin accounts were targeted by hackers. One user had almost $400,000 worth of bitcoins stolen. With Mt Gox’s recent revelation, security still seems to be a major flaw.

  2. It’s not a better way to pay. Now, here’s one thing that seems to be changing rapidly. Fernholz argues that Bitcoin is not preferable to credit cards: it doesn’t represent anonymity because even if you’re using strong privacy mechanisms, “Internet forensics could likely track you down” if you purchase something illegal.

  3. Trust isn’t great. Currencies work when people recognize them as legitimate and use them frequently. Again, this is changing rapidly, but Bitcoin will work only if it is widely accepted and trusted.

  4. Processing power wins. Bitcoin is based fundamentally on computing power: the growth of the network determines its fairness and balance. At the time of the Good piece one collective called Deepbit.net processed a third of all Bitcoin transactions. Popularity of specific mining collectives remains an issue in 2014.

At Solar VPS, we specialize in Cloud VPS and certainly want to see developers and the online community become stronger and engage in new forms of interaction. Bitcoin and other open source currencies are a fascinating idea and may end up altering our financial world for the better, but the cryptographic currency market should be viewed with a heavy dose of skepticism.

By Kent Roberts

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