Why Bitcoin (virtual digital peer-to-peer currency) is not a bubble

A recent crackdown at Liberty Reserve by the NYC Attorney’s Office regarding an over $6 bn money laundering case once again puts the limelight onto  virtual digital peer-to-peer currencies and their legitimacy! Before this, bit coins were in news, with a highly inflated price and then steep reduction in valuation, from $288 to $168 within a week. Due to the high volatility of digital currencies and doubts as to their legitimacy, many pundits predict the current surge in these kinds of currencies is an accident waiting to happen (i.e. a bubble is about to bust)! In addition to this, experts add virtual currencies to a long list of alternative currencies that disappeared quickly over the several thousand years of human history!

On the other hand, these digital currencies, especially bit coins, are attracting big investors like Goldman Sachs, Morgan Stanley, UBS, Citigroup, and BlackRock as an investment option. VCs are also heavily investing in bit coin start-ups i.e. the believers in this type of currency are not bowing to the current market view and are considering virtual currency as a viable option for consumers, suppliers and investors.

Despite all apprehensions about legitimacy and anonymity of virtual digital currency, the concept has legs, and I strongly believe, for the following reasons that digital currency will prevail for far longer than experts suggest!

1. Bit mining has logic and not FREE

Bitcoin is a crypto-currency; a decentralized, open source, peer-to-peer network based medium of exchange that for years has enabled online transactions to be made more simply and securely therefore the concept of money mining is not new, and digital currency enables consumers to mine their own currency. For example, bit coin clients enable users to become part of a pool and earn some their own coins in exchange for computing resources such as hardware i.e. Bitcoins are mined in a computing resource-intensive process that validates transitions by solving a series of cryptographic puzzles.

2. Anonymity is by choice, not mandatory i.e. every bit is traceable

The very foundation of Bitcoin is laid on computer resources that can be tracked and traced by their digital signature and blockchains that link Bitcoins to each other and “to date, there haven’t been attacks on blockchains that led to stolen money, heists from exploiting the protocol or thefts due to holes with the original Bitcoins client.” In other words, the recent accusations that, due to the anonymity of this currency, it is widely used by arms, drugs and other notorious dealers for transactions are sheer myths.

3. P2P means transactions are instant with no conversion and commission fees

Virtual and digital currency enable peer-to-peer instant transfer of money, which means unlike banks or credit card companies, the transactions don’t take days and no money is lost to payment processors in currency conversions, commission or transaction fees.

4. Digital and Virtual means not controlled by regulatory bodies

The best side of open source virtual currency, which is recognised by the US Financial Crimes Enforcement Network (FinCEN) is that their values cannot be manipulated by governments to give undue aid to their economies i.e. the game is fair for everyone who participates in this.

Overall, virtual digital P2P currency can be a real alternative, and works especially well in digital space i.e. to produce and consume content over a digital platform, as this has potential to monetise and buy digital products at real values, rather than rely on various currencies, financial institutions and the bureaucracy around those.

However in order to get more credibility, legitimacy and, above all, acceptability,  there is still huge room to improve Bitcoin’s mining and exchange logics such as:

1. Bitcoin mining logic must be aligned to digital content produced and resource consumed, in order to produce the content;

2. Bitcoin exchange rate, even though it relies on supply and demand, but must be proportionate to gross digital production so that price volatility can be controlled i.e. a transparent currency mining formula is needed to make sure no one is unduly able to mint the money.