Money and Virtual Currency Essay

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What will become of bitcoins?

Problems at the Tokyo-based Mt. Gox bitcoin exchange, once the world’s largest, have come to a head, leaving the virtual currency and peer-to-peer payment system in a state of flux and threatening to undermine much of the acceptance bitcoins have garnered over the past year or so. The Mt. Gox Web site has been shut down, and the organization’s Twitter feed has been cleared amid reports that the exchange was hacked, resulting in the theft of hundreds of thousands of bitcoins.
 
Bitcoin value fluctuates, but currency conversion Web sites indicate that the more than 744,000 bitcoins taken could be worth as much as $386 million as of Tuesday. Details are scarce, particularly with Mt. Gox having gone dark, but if that number is correct it means about 6 percent of the 12.4 million bitcoins created since the currency’s inception in January 2009 have been taken out of circulation.
 
Mt. Gox’s fall has been messy, much to the chagrin of the rest of the bitcoin community. The exchange claims that the cybertheft of bitcoins from its computers has taken place over a period of years and is at least in part the result of a flaw in the bitcoin software. Bitcoin developers dispute Mt. Gox’s claims that their software has inherent security flaws. Meanwhile, despite being a founding member of the Bitcoin Foundation that advocates the virtual currency, Mt. Gox on Sunday vacated its position on the board of directors. All of this has helped sink the value of bitcoins on other exchanges.
 
It remains to be seen what repercussions this turmoil will have on a new U.S.-based regulated exchange for bitcoin investors that would operate like a New York Stock Exchange for bitcoin, where only large institutions can join and trade. The idea is for SecondMarket Holdings to entice big banks to trade in bitcoins, something they have mostly avoided to date because of the currency’s volatility.
 
Scientific American asked Jeff Garzik, one of bitcoin's lead developers and a senior software engineer at Bitpay, an electronic payment–processing system for bitcoin, to explain the potential effects of these latest events on the virtual currency.
 
What are bitcoin’s main advantages as a currency? 
Bitcoin is the world's first global, decentralized, digital currency—it is not controlled by any one party, who might be misguided or influenced. For the first time, you may send value (money) between any two parties, anywhere in the world, without a third-party intermediary. This enables, for example, extremely low cost international remittances to anyone with an Internet connection or mobile phone.
 
Bitcoin is also highly predictable. The money supply is controlled by a decentralized software system, releasing new currency into the supply every 10 minutes, until a maximum of 21 million bitcoins is reached. The money supply cannot be inflated or deflated artificially in times of plenty or crisis. This is in contrast with other currencies, whose supply is controlled by humans who may be mistaken, misguided, malfeasant or under duress.
 
And bitcoin is open. Critical to the system's success is the process of peer review and cross-auditing, similar to review processes university chemists use for academic papers. Bitcoin's software source code is publicly available for review, testing and auditing at all times. Bitcoin's transaction ledger, by design, must be public, to guard against double-spending and to ensure system financial integrity.
 
What does a bitcoin exchange do?
There are many bitcoin exchanges , and they serve as marketplaces where users come together to buy and sell bitcoins. The users set the market prices, just like the bid/ask order process for a NASDAQ stock. Some exchange users are simply looking to acquire or sell bitcoins for U.S. dollars or another currency. Other exchange users are active traders, speculators and high-frequency trading robots. Bitcoin's price is discovered through this active, 24/7 process of
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