There is a new gold rush out there in the form of a digital currency based on the mathematics of cryptography called Bitcoin. Enthusiasts like Michael Williams, of Westminster, can "mine" Bitcoins worth thousands of dollars just by running special software on their computers and hoping these digital coins gain value over time just like real gold.
Real gold however, is almost universally accepted as valuable, according to Georgetown University Professor of Finance James Angel, and while Bitcoins are considered valuable by some, there are major hurdles to its broader acceptance. For one thing, Angel said, Bitcoin fails to provide a unique solution to any existing financial problem.
"To me, the most promising thing about Bitcoin is the ability to move money around instantaneously, but moving electrons around the world is basically free right now," he said. "Let's say I send money to a friend in Uganda. I can send him Bitcoins, but he must either convert them into Ugandan shillings or find local merchants that accept Bitcoin ... this is the last mile problem."
The last mile problem for the hypothetical Ugandan is also reflected in the U.S. While there are some merchants that accept Bitcoin as payment - mostly online retailers such as
- it is difficult for most Americans to use Bitcoin for their daily expenses: Mike McMullin, president of the Carroll County Chamber of Commerce, said that as far as he knows, no members of the chamber are considering taking Bitcoin as payment.
Another option, according to Angel, is exchanging Bitcoins for dollars at a number of Bitcoin exchanges, companies that will sell Bitcoins for dollars or vice versa. These carry their own risks however: Mt. Gox, a Bitcoin exchange based in Japan, which claimed to have experienced a security breach in February, has lost some $450 million worth of its customers' Bitcoins and is in bankruptcy proceedings.
"The payment system is undergoing massive revolutions right now and Bitcoin is only one thing people are trying," Angel said. "Whatever the next generation payment system is, it has to look better than what we have. It must be safer and more convenient than the current one."
McDaniel College Professor of Economics Kevin McIntyre is more optimistic than Angel, if cautiously so. While not convinced Bitcoin itself is the future of money, he said that the current difficulties facing digital currencies in general might simply have growing pains and sees them as potentially useful tools for helping citizens of repressive regimes, such as Syria, to hold stores of money safe from their governments.
"What I can say with pretty serious confidence is that there is a future for cyber currencies in our society. If not Bitcoin, then maybe the next incarnation or the incarnation after that," McIntyre said. "As we move to an increasingly cashless society, and given that money has been of the fiat variety for 40 years now ... I don't see any a priori reason why a private currency can't make a serious go at things, if enough people are willing to adopt it."
And when it comes to adoption, Bitcoin may receive a boost due to a recent nod of recognition, and the attendant air of legitimacy, from the Internal Revenue Service. On March 25, the IRS declared that it would treat Bitcoin as a capital asset, like a stock, rather than a currency.
Angel said that this announcement may increase confidence in Bitcoin investors because it clarifies what was previously a big gray area, specifically, how Bitcoin will be taxed. On the other hand, he said, the way Bitcoin transactions will now be taxed will make using Bitcoin, for everyday transactions much more difficult.
"Every time you have a transaction you will have a capital gain and loss, and [therefore] every transaction is a taxable event," Angel said. "Let's suppose you buy some Bitcoin today for whatever price and next week you buy some stuff on overstock.com, but Bitcoin has risen in value during that time. You're taxed on that. You are going to have a capital gain or loss when you buy something with Bitcoin so if you want to be compliant with the tax code you will have a lot of record keeping to do."
In the end, whether or not Bitcoin or any of its competitors such as Litecoin or Dogecoin make it as a global currency to rival the dollar may not matter to enthusiasts like Williams. Recognizing that Bitcoin is not perfect, Williams is currently working as a public relations agent for a new digital currency called Continuum Coin that he believes offers faster payments and greater potential as an everyday payment system.
Ultimately, Williams said, the technology behind Bitcoin might wind up being applied in entirely new problems. Already there have been specialized digital coins dedicated to registering Internet domain names and new coins could be dedicated to making micropayments to artists and journalists, donating to charity or schools or any special fundraising project.
"In the future, 50 years or more from now, I honestly feel we're going to have hundreds [of digital currencies] like we do now, only with new gimmicks, and functions, features and purposes," Williams said. "It's a new frontier honestly. The coins are a network; they can carry data, be a service platform, even a counter for voting. The possibilities are endless because it's digital and not stuck with physical barriers - if it doesn't do something, we can all get together or huddle up and solve another means to do it."