How many bitcoins in your wallet?

We had mentioned the introduction of alternative mechanisms of trade and specifically bitcoins in a previous blog (Read it here).  They have been in the headlines recently and you should be aware of bitcoins and their impact.  In July 2010, a bitcoin was worth about 1 cent – a few days ago, it was valued as high as $147 and the total value of all bitcoins has exceeded a billion dollars!!  It is now being compared to the historic tulip bubble in Holland.  Remember, this is a virtual currency made up by a mysterious hacker who has never been seen, has a nom de plume and has been missing online for a couple of years.  And you can buy all kinds of services with bitcoins, transact business, buy hard goods, gamble online and the list goes on.  If you are still not convinced, the recent spike is attributed to many people from Cyprus( has already happened in Belarus and Ukraine)  moving their money into bitcoins to manage their risk because they had apparently lost confidence in their government/banking sector.  The Financial Crimes Enforcement Network (FinCEN), the federal agency that enforces laws against money laundering, now requires bitcoin to register as Money Services Businesses (M.S.B.s).  Bitcoin is managed by a foundation(just like LINUS) with staff. 

Now this is not to suggest that we will all be using bitcoins for everything we do but clearly some of us are using it for some of the things that we do and that will continue to grow.  For an excellent analysis, you can read Felix Salomon’s piece from Reuters but the gist is that while bitcoin is flawed and may not survive, it fulfills an essential need that is not being met by current financial institutions and bitcoin is a very important early innovator that will lead to a longer term alternative – Imagine that!  And this is a currency that is not backed by any government, is not controlled by any Central Bank and is all virtual and online and services the entire globe.  You can read another excellent analysis here which reinforces many of the points made above. It is clearly not a mature alternative and has some fatal design flaws(according to Salomon – and I agree).  However, it continues to grow and become more and more legitimate.  It’s organic nature is meant to be able to fix the flaws as they occur but that is yet to be seen.  People are conducting legitimate trade and transactions – they might be small right now but that’s how paypal started also(although a different model).  An open source model like LINUS supporting a global virtual currency is enough to make you pause yet there is no guarantee that it cannot work. 

In any case, phenomenon like bitcoin deserve very careful monitoring because if more and more consumers start utilizing it and the adoption rates increase, they will start impacting how we conduct business on a day to day basis and the future may be here a lot sooner than we thought.