There has been an explosion of interest in the enigmatic ‘bitcoin’ these past four years, a technology perceived by some in the mainstream as a medium for illegal or illicit activity, but a technology that now seems to be going mainstream in a big way.
What is bitcoin and why is it interesting?
Bitcoins are a virtual digital currency introduced in Feb 2009 by ‘Satoshi Nakamoto’ to serve as a near-perfect transnational medium of exchange: global in nature, completely decentralized, anonymous, secure, and invisible to national taxing authorities.
Bitcoin value is driven by its limited supply. Like gold, bitcoins are “mined” by harnessing networks of individual computers to solve cryptographic puzzles related to bitcoin transactions. By 2010 there were approximately 3 million bitcoins that had been ‘mined’, growing to about 11 million bitcoins today, with a defined upper limit of 21 million bitcoins that will ever be circulated. At that point, bitcoin production will end permanently. Given this well-known cap on production, bitcoin value has roared in 2013 from $13 in January to more than $1,200 in December.
Overlay the dizzying growth in value with the fact that bitcoins are merely digital artifacts with no intrinsic value in the ‘real world’, and you have what has been described by leading economists as conditions for “the perfect bubble”, one likely to pop at any moment.
Despite these concerns, there is ample evidence that bitcoins are going mainstream. The ecommerce site BitcoinShop.us established a presence on Amazon, eBay and other retailers this year, offering a wide variety of commercial goods for purchase with bitcoin currency. A Tesla Model S was recently been purchased from Lamborghini Newport Beach with bitcoin, and the University of Nicosia apparently now accepts bitcoin for student admission and tuition. The rate of adoption of bitcoin as a medium for payment has skyrocketed to an estimated $2B in transaction volume this year.
National governments have for the most part ignored the bitcoin economy, much as they have largely ignored barter communities, but it’s far from clear whether it is legal. The FBI is on record saying, “It is a violation of federal law for individuals… to create private coin or currency systems that compete with official coinage and currency of the United States.” New rules from China’s central bank now prohibit financial institutions from dealing in bitcoins as well.
National currencies are the glue that hold societies together, so it is entirely possible that a threatened government will at some point issue tough new laws restricting, or even outlawing, virtual currencies for commercial use, and in so doing, destroy bitcoin value overnight.
Could bitcoin become a future currency for M&A? While it is a fascinating movement in the near-term, its long-term future as an international currency is anything but assured.