Tuesday, July 15, 2014

PhysOrg: Are Cryptocurrencies the Future of Money?

We all know how to make money: get a job, make things and sell them, maybe play the stock markets. But what about creating a whole new kind of money?

This is just what the digital cash known as bitcoin has done. Bitcoin—the U.S. Treasury calls it a "decentralized virtual currency"—can be used to buy products and services. The largest reported bitcoin purchase was a $500,000 villa on the Indonesian island of Bali, but it is also used for smaller items such as sandwiches and candy bars. More than 9,000 online retailers worldwide now accept bitcoins, including Amazon, Target, CVS and Subway.

So what exactly is a bitcoin?

"The electronic transactions you and I engage in with our banks and our credit cards are measured through currencies that are all backed by the central bank of a given country," says Bhaskar Chakravorti, the senior associate dean for international business and finance at the Fletcher School and executive director of Fletcher's Institute for Business in the Global Context.

"Bitcoin is a parallel system because it is not backed by any central bank," he says. "It is a new form of currency that is expanding the supply of money substitutes without the authority or backing of any central bank or country."

If that sounds like risky business, it can be, especially because it is difficult to understand what gives bitcoins their value. "As a colleague who participated in a recent NPR show on bitcoin that I spoke on commented, bitcoins are like Kim Kardashian—they have value because people believe they have value," says Chakravorti. The value of bitcoins fluctuates based on supply and demand; a bitcoin you bought for $900 may only be worth $9 when you go to use it, he says.


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