This is a guest post from Bob Walters. Bob Walters is the Chief Economist and Vice President of the Capital Markets Group at Quicken Loans.
I’ve received a ton of questions about Bitcoin in the past week or so. Given that most of our Zing readers are financially curious and engaged people, I thought a quick recap of what Bitcoin is and what it might mean might be helpful to some of you.
What Is Bitcoin?
Bitcoin is money/currency/dinero/cheese. Just like those pieces of paper in your pocket or the bits and bytes that make up the numbers in your bank account, Bitcoin represents a unit of value.
Why So Much Chit Chat About Bitcoin Lately?
I know when my 65-year-old aunt, who thinks Wall Street is a street lined by walls, asks me about Bitcoin, something is going on.
Answer: Because Bitcoin has been exploding in value. Check out this graph. The exchange rate between Bitcoin and U.S. Dollars was one Bitcoin for 50 cents in 2010.
Today (brace yourself), the exchange rate is one Bitcoin for more than $1,000. Yep – you read that right. If you bought $1,000 of Bitcoin in July 2010, it would be worth about one million U.S. Dollars today.
Who Makes Bitcoin?
Unlike “fiat currency” (a fancy way to refer to money that is created by a government), Bitcoin was created by some mysterious dude who goes by the name “Satoshi Nakamoto.” He created Bitcoin in 2009.
Bitcoins are created or “mined” by computers that run complex mathematical calculations. As you can imagine, people are spending a lot of money (fiat currency like dollars or euros) buying computers that can run faster and mint more Bitcoins.
Only 21 million Bitcoins can be made. That’s it – no more.
Huh? People Can Just Create Currency Out of Thin Air?!
Sure. And I bet you’ve done it. Have you ever had a poker game and wanted to bet more than you had, so you wrote an IOU on a piece of paper? (That’s how I got through college…) If you did, you created currency.
The trick to creating a widely accepted and widely used currency is to get a lot of people to trust that they will be able to take that currency and use it to buy stuff. The local Taco Bell isn’t going to take your IOU in exchange for that tasty Burrito Supreme – but they will take that rectangular piece of paper with the face of a long-dead president on it that’s wadded up in your pocket right now.
So, Who Will Take Bitcoin? Can I Get My Burrito Supreme with One?
Not yet. And maybe not ever. However, more and more online entities are accepting Bitcoin for their goods and services. Whether Bitcoin becomes as easy to use as a U.S. Dollar will depend, in time, on how many folks agree to use it. Would you sell your car in exchange for Bitcoin today?
What Do People Like About Bitcoin?
People like that it’s a currency that can’t be manipulated by governments. They like that nobody can just print new Bitcoin (like the U.S. government can just print new U.S. Dollars anytime it pleases). They like that it’s not traceable and they like that it’s easy to use on the Internet.
What Do People Not Like About Bitcoin?
People don’t like that Bitcoin is still mostly a concept. You can’t buy most things with Bitcoin. Bitcoins have proven to be too easy for hackers to steal. People worry that Bitcoins could be counterfeited.
Is Bitcoin Pricing a Bubble?
Ah yes – this is the big question. Should you cash in your 401k and go big with Bitcoin? (Quick answer: HELL NO.)
Time will tell. I thought Bitcoin was showing bubble tendencies back in the spring when it was at $170. And now it’s at $1,000. But when you look at how fast the value is skyrocketing, it’s reminiscent of other charts. This is the NASDAQ from 1993 through 2004. What went up really fast came down really fast.
It will be really interesting to see what becomes of Bitcoin in the coming years. I wouldn’t be at all surprised if it became something that lasted for a long time. But I also wouldn’t be surprised if the value drops significantly sometime soon.
At the very least, you now can talk intelligently about Bitcoin next time someone brings it up.