In an incredibly short amount of time, bitcoin has gone from a little known, oddly-named niche curiosity to the hot topic that has dominated financial news feeds. With so much popularity, it's only natural that companies like JPMorgan Chase (NYSE:JPM) and Fortress Investment Group (NYSE:FIG) are looking to capitalize on this with their own branded flavors of bitcoin. Two big questions remain, however: is the crypto-currency fad for real, and is there room for more than one?
Money out of Nothing
Bitcoin is created or 'mined' by solving a very complicated algorithm, using vast CPU power usually through a network. Creating a bitcoin is called mining. Anyone can download the free software and start the process of solving a complicated mathematical problem that gives a unique digital signature. Each time a bitcoin is used, the transaction is then recorded in a public ledger as a 'blockchain'.
The 'blockchain' is a proof of each bitcoin's unique life. What makes this powerful is that it's impossible to counterfeit, as one will have to replicate the record of every transaction by a particular bitcoin since its creation. This chain is built into the each exchange, making each bitcoin unique, autonomous and accountable. For two Bitcoins to be identical they would have to share the same history, which is computationally impossible.
Crypto-currency could change the future of digital money. As a value based system of exchange, bitcoin as a virtual currency has proven itself. Unfortunately, its future may depend upon the politics surrounding it rather than the mathematics or the genius of it.
Room for more?
JP Morgan has filed for a patent for its own crypto-currency as it opens up the opportunity to simplify complicated accounting procedures. Fortress, on the other hand, recently invested in Pantera bitcoin, one of the largest exchanges, with the idea that bitcoin and other virtual currencies can become the new payment norm.
Marc Andreessen of Andreessen Horowitz, calls it fake mathematical currency. But his Venture Capital firm has invested $50 million in bitcoin. To him, it offers a solution, as it could become a convenient type of currency through avoiding the costs of using a credit card or a banking system to pay your bills.
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Bitcoin is a quick and secure way of exchanging value between two parties. I think it could survive long into the future because it is providing a solution to a problem in the financial system. It is secure by itself, but it is currently unregulated -- and thus worrying to the investor. I believe the service a bitcoin provides is far greater than the problems surrounding it. As virtual cash, it is a useful and secure system and hopefully in the future it can garner the attention of financial institutions and governments to make it more reliable and safe for every user.
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Your credit card may soon be completely worthless
The writer does not own any stocks whatsoever.