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Bitcoin: The Good, the Bad and the Ugly

Bitcoin: The Good, the Bad and the Ugly
Image credit: antanacoins on Flickr

Bank of America recently said in a report that Bitcoin could become 'a major means of payment for e-commerce,' and as an avid observer of digital currencies, I believe this to be a major step toward globalized finance. The recent controversy surrounding Bitcoin, however, lies within the fact that 90 percent of Bitcoin buyers are market speculators, according to Nicholas Colas of the ConvergEx group.

While Bitcoin is an ideal proof of concept for what digital currencies might look like in the future, I think entrepreneurs should be thinking big picture. The explosive popularity -- and price -- of Bitcoin is temporary, but understanding the brass tacks value behind Bitcoin and its upstart competitors are where you'll find the next-level thinking that will shape the future.

The Good: Digital currency needs a champion. The most exciting element of Bitcoin -- and most dangerous for speculators -- is that technology is iterative and Bitcoin is only the first wave. While there is a hard cap of 21 million Bitcoins available to be mined, the number of routes digital currency can take are infinite. Alternative cryptocurrencies such as Litecoin, Peercoin and Namecoin have been gaining traction by offering users separate systems of economic growth and even simulating inflation. A mainstream competitor is already in the works, and the Let's Talk Bitcoin blog recently uncovered a patent filed by JPMorgan Chase to develop a solution to the primary issue of international online money transfers that independently produced digital currencies could potentially solve.

Related: Why Bitcoin Is Better Than Other Currencies

Bitcoin, crypto capitalist or not, revealed a gaping hole in the online marketplace. While supporting Bitcoin may be a hassle for most mom and pop retailers, a stable digital currency could make buying stuff online easier as well as providing an alternative to Western Union fees to transfer money by simply sending their recipient a 'Chase Coin.'

The Bad: After you've bought your Bitcoin, there isn't much that you can do with it. Bitcoin is a great idea. Publicizing it to people who may or may not fully understand the concept, however, is a big reason for its explosive success. Instead of a separate form of currency, Bitcoin has become a sort of volatile gold for would-be investors. Bitcoin has managed to pick itself up from supposed 'crashes,' but that's not because of the inherent usefulness of the currency. In a Quora post, Facebook co-founder Dustin Moskovitz said that while digital currency is a ripe pasture for experimentation, the Bitcoin craze is 'overhyped.'

He goes on to cite a UC San Diego and George Mason University study that found that 60 percent of spent Bitcoins were exchanged through a Bitcoin-supported gambling service, Satoshi Dice. Digital currency is neat. It's only natural to want to buy some after hearing about it online, but the global demand for Bitcoin currently far outweighs its intended purpose. Just as curious newbies make their first stop at Mount Gox to buy their coins, they notice the upward trajectory of the price graph and are enticed into the volatile world of Bitcoin speculation.

Related: Coinbase Nets $25 Million in Largest Ever Bitcoin Fundraise

The Ugly: With legitimacy comes oversight. The initial interest in Bitcoin was driven by crypto libertarians willing to invest their money and computer processing power into a decentralized, self-limiting system of currency. The price of Bitcoin has, ironically, grown as the currency moves further away from its fringe roots and into the public eye. The harbinger of Bitcoin's arrival into the mainstream was a senate hearing that bumped the price of Bitcoin up to $750 on Nov. 16.

After creeping up to a peak of about $1,300, the People's Bank of China denounced Bitcoin, plummeting its price on Mount Gox to $700 the next day. The Chinese government cited both the volatility of the currency and the possibility for illiquidity for buyers in its statement. For the same reason, a finance professor at The Boston University School of Management has even claimed that Bitcoin could fall as far as 99 percent by June in a Washington Post interview. The anarchistic glee that attracted early Bitcoin adopters missed the intrinsic inevitability of any digital currency: widespread use.

Is the current price of Bitcoin the result of a bubble? Yes, but the bubble was formed around a hole in the market that digital currencies will soon fill. While I wouldn't suggest exchanging your money for Bitcoin, I'd definitely urge any entrepreneur to make the time investment and research cryptocurrencies over the coming months. The next big tech disruption could rethink how we buy stuff online, who knows about it and whether a bank will need to keep track of your finances.

Related: SecondMarket CEO: Wall Street Will Put 'Hundreds of Millions' Into Bitcoin

The author is an Entrepreneur contributor. The opinions expressed are those of the writer.

Matthew Toren is a serial entrepreneur, mentor, investor and co-founder of YoungEntrepreneur.com. He is co-author, with his brother Adam, of Kidpreneurs and Small Business, BIG Vision: Lessons on How to Dominate Your Market from Self-Made Entrepreneurs Who Did it Right (Wiley). He's based in Vancouver, B.C.

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