The Rise of Virtual Currencies

Chances are, the last time you made a purchase, you didn’t hand over a stack of bills or a handful of coins.  The widespread use of credit cards, debit cards, checks, and other substitutes  for physical cash means that there’s less need to keep a large wad of bills in your wallet, in turn making it much easier to buy whatever you want (for better or for worse).  However, while this technology removed you from the actual currency, you were still probably making your purchases using government-backed currency, be it Dollars, Euros, Pounds, or other national currencies.

‘But why do you need a government to back your currency?’, you may ask.  You wouldn’t be the only one; there are more than a few people who are trying to have currencies with no government involvement at all.  Welcome to the rise of virtual currencies.

A Virtual Currency Primer

So what is a virtual currency?  Well, basically it’s exactly what it sounds like:  a currency that exists only as bit and bytes online, with no physical form.  The most popular one at the moment (and the one that brought the whole concept to my attention) is Bitcoins, although there are plenty of similar currencies, ranging from those like Ven and Ripple that are meant for use in the real world to those like World of Warcraft Gold that are meant to be used only in virtual worlds (but end up being sold and traded for ‘real’ money just the same).

Even fictional currency needs to be shiny

But back to Bitcoins and other currencies that are designed to be used in the real world (rather than being brought there by obsessive gamers).  They are designed to directly traded between users, without the need of a Paypal like intermediary as you would need for exchanging most ‘real’ currencies.  This provides the opportunity to save a great deal of money, both in trading fees and in taxes, as you are able to operate ‘under the radar’, so to speak (more on that in a moment).  As long as someone is willing to accept them, you can trade them for just about anything.

There’s quite a few other advantages to such currencies, which is why they seem to be growing in prominence.  They provide for anonymity in your online transactions (definitely a plus for certain transactions).  They also present an interesting growth opportunity; since its introduction last year, the value of Bitcoins, as expressed in US Dollars, has grown from $0.005 to $10.50, over 200,000% growth.  At least in the case of Bitcoins, there’s also the possibility of acquiring the currency by ‘mining’, devoting your hardware to solving the algorithm that controls the creation of new Bitcoins, offering interesting (and quite literal) money-making opportunities.

The Problems with Virtual Currencies

All of that said, though, there’s still quite a few problems with these virtual currencies.  It’s not just that, without a central authority to regulate their production and spread, that the possibility for illicit manipulation of Bitcoins exists; while there is much made about how the creation of new Bitcoins is regulated by the algorithm that your computer (or a block of computers, if you are in a mining group) has to solve, the lack of a central authority means that it’s tough to know for certain how valuable your Bitcoins will be upon creation (remember the 200,000% growth in value noted above), as well as whether there are Bitcoins being created illicitly.

There’s also the difficulty in getting the police involved if your Bitcoins are stolen or you are defrauded in a purchase.  While there are plenty of claims that such theft is impossible, I have to go on the theory that if something is valuable, there WILL be attempts to steal it, and some of those attempts will eventually be successful.  Fraud is already an issue when it comes to Bitcoins; the Bitcoin FAQ itself cautions against using Paypal to exchange your dollars for Bitcoins, noting that some Bitcoin purchasers have fraudulently claimed that the Bitcoin sellers defrauded them, leading Paypal to take the money back and leaving the purchasers with both the Bitcoins and their original money.  Good luck getting the police to help you handle that situation.

Speaking of police, there’s also the possible assumption by the police that as a Bitcoin user, you must be engaged in an illicit activity.  After all, a completely anonymous*, entirely online currency lends itself to illegal endeavors, one reason why the only currency accepted at the online drug marketplace Silk Road is Bitcoins.  That’s why Bitcoin is being berated by politicians already, while most of the world has never even heard of it.

(*While we’re on the subject of anonymity and the reasons why law enforcement might want to hunt down Bitcoin users, consider the response of Jeff Garzik to that report on Silk Road (near the bottom of the linked article), noting that, essentially, the analytical methods used by police officers are more than capable of tracking the users of Bitcoins if they really want to.  So, a completely anonymous, untraceable currency…that can also be easily tracked if law enforcement wants to put their minds to it.  Just something to consider if you are plotting to use your Bitcoins for any illicit activities.)

My View

Bitcoins and other virtual currencies sound like a rather interesting concept.  That said, I’m pretty sure they will be end up being either highly regulated by governmental bodies (as most ‘real’ currencies are right now) or simply outlawed.  Whether that is a good thing or a bad thing to you depends, I guess, on whether you prefer your currency to be generated by a central authority or anonymous strangers.  In any event, I’m definitely going to keep an eye on Bitcoins and other artificial currencies, and see what happens with them in the coming months (and years, if they make it that long).

What do you think of virtual currencies?  How do you think the governments of the world will end up handling them?  Would you prefer to deal in virtual currencies or ‘real’ money for your online transactions?

4 Responses to The Rise of Virtual Currencies

  1. I love coming across articles that discuss things I have heard nothing about before. I mean, I had heard of people selling their World of Warcraft characters in real-life for thousands of dollars, but I had no idea there were virtual currencies.
    It makes sense though, with the amount of transactions that occur in the virtual world every day, as well as the anonymity that goes along with the internet.
    My thought is that the Dollar, and other established, physical forms of currency, aren’t going to go anywhere, but maybe they’ll one day only exist in virtual form. Think about how so many companies already don’t even offer their customers a paper statement anymore, because it saves the company money. I wonder how much it would save the U.S. to not have to print anymore money? Would we be able to eliminate the U.S. Mint?
    Ross @ Go Be Rich´s last blog post ..Perspective on the National Debt

  2. @Ross: Yes, it caught me off-guard the first time I heard about virtual currencies, but I suppose it’s not that surprising; between those who don’t want to support the government to those that don’t want to be seen by the government to those that just think it’s kind of interesting, there’s certainly plenty of people who’d be interested out there in the world.

    As for the dollar only existing in virtual form, that’s possible, although I think it might meet with some resistance from the ‘a global currency is a side of the apocalypse’ crowd. Of course, not being quite my scene, I might be completely off on that point. It would be quite a savings if they managed to make it work, though.

  3. I just learned about bitcoins last week and am still having a problem understanding exactly what they are. But i think there is some potential to make money, as most people have never heard of them. If you are an early adopter of a new currency that takes off, you could make some good money.

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