Your Bitcoin isn't worth what you think it is.

Drawbacks of Bitcoin

But it's not all golden for the world's premier crypto-currency. The main criticism levelled at Bitcoin is that the anonymity it grants — an anonymity that is perhaps overstated — has attracted some less than savoury businesses. Bitcoin has quickly found favour with online gambling, tax cheats and pornographers. Although that should be no bar to success in itself — after all, that spread just reflects the majority of the internet — it does mean the currency could attract unwelcome attention from legislators and regulators.

In fact, Bitcoin has already run into trouble in California where the Bitcoin Foundation received a cease and desist notice for illegally engaging in the business of money transmission, something the foundation immediately denied — the entire purpose of Bitcoin is that it is peer-to-peer, therefore no one is engaged in the business of money transmission. The state quickly back-pedalled, but it could be a first sign of trouble. It's not hard to imagine a scenario where governments decide that non-government issued money is a threat and take steps to outlaw it. They may not be able to shut it down, but they can make its use illegal.

It may well be that the only reason Bitcoin hasn't seen more turbulence is that it is yet to gain the tangible real-world acceptance it needs to break into the mainstream. Although some notable tech companies such as Wordpress now accept Bitcoins, and they can be traded for Amazon vouchers, the number of bricks-and-mortar businesses that accept the currency is still decidedly small.

Perhaps most worrying of all is that competitors are already in the works. Litecoin and PPCoin seem more interested in a future of multiple crypto-currencies — Litecoin's Charles Lee has been quoted as saying: “Litecoin was designed to be silver to Bitcoin's gold, it gives people an alternative cypto-currency in case anything happens to Bitcoin.” But there is a distinct possibility that Bitcoin could become the quintessential proof-of-concept crypto-currency. The myspace to Litecoin's Facebook.

Reading the signs

However, mainstream interest is forthcoming. The Winklevoss twins are setting up their own Bitcoin currency exchange, declaring the next step is for Bitcoin to become a national currency.

Meanwhile, Opencoin, which has developed Ripple – an open source payment transfer network that allows borderless, free payment from any currency to any currency, including Bitcoins – has attracted investment from the likes of Google Ventures and IDG Capital.

The development of the Bitcoin infrastructure is key to the currency's success, as is mainstream endorsement of the concept, with Bitcoin the current lord of the digital currency manor. These are early signs that crypto-currency is decoupling itself from the hackers, conspiracy theorists and cryptographers that typified its early adopters.

Of course, the whole thing could be a bubble. And that's a risk any investor has to take. However, people can get rich from bubbles, they just have to get out at the right time.

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About the Author
Tom Williams

Tom Williams is an account manager at GO Markets, a provider of online foreign exchange (Forex) trading services. 

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