Maryland Bar Bulletin
Publications : Bar Bulletin: March 2014

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This may be counterintuitive. I am rarely an early adopter in anything, even if it is technology. I bought my first Smartphone, an HTC, while iPhone was in its third generation. Instead of investing a lot of money in an iPad, I bought a Nook e-reader. I don’t invest much beyond my goals for a gadget. I am rarely running the most recent operating systems on my computers, even though yes, I have multiple. If anything, it’s because I am aware of the tendency of grass on the other side of the fence to appear brighter than it is in reality.

Often with new technology there comes an extra burden along with the price tag of being on the forefront. Instead of being the first to troubleshoot early glitches, I tend to wait and see.  I have approached financial investments similarly, so when I heard about Bitcoin years ago, I did not jump, even if it was something that should have grabbed my interest – and maybe a small fraction of my investments. Right now, I’m feeling pretty satisfied with my “wait and see” technique. But hey, I’m no financial analyst, so this is no suggestion of what anyone should do with their money. This is about how technology is changing our world. Even though Bitcoin seems to be headed towards a negative reputation, virtual currency such as this has been around for the better part of a decade.

Some investors were quick to catch on and cash in on Bitcoin – and now hackers have cashed out and the largest “exchange,” MtGox, has shuttered doors, along with another big Bitcoin bank, Flexcoin. The currency is unregulated, leaving investors with no recourse and the operators with little liability. Bitcoin isn’t the only virtual currency – but perhaps the one most well known for inspiring legal teams to take action as it was being used to pay for transactions anonymously and for illicit purchases. The way Bitcoin has changed the technology scene in terms of finances is swiftly changing, amidst new concerns regarding volatility, security, fraudulent and potentially illegal activity.

So, What is Bitcoin?

Bitcoin is a virtual currency that is considered a “cryptocurrency.” A Bitcoin can be found using a computer with software that can perform “Bitcoin Mining,” which dedicates computing power to the largest network of computers, with the reward being Bitcoins. No more than 21,000,000 Bitcoins will ever be created in the mining process, which will be at a rate of about 25 Bitcoins every 10 minutes until 2140. The value of the Bitcoins will go up rather than staying static and increasing the amount of currency, which is called a deflationary currency. For a great starter reference, visit www.thegenesisblock.com/bitcoin-101.  To purchase and use Bitcoins, a user creates a digital wallet at www.coinbase.org,  where there is also some more information. Securing Bitcoin is a bit like exchanging your U.S. Dollars for say, Japenese Yen, except this currency is totally unrelated to a government entity.  At the time of this article, there are nearly 3000 transactions per hour using Bitcoin, and the average value of a Bitcoin is around $650USD according to the market exchange rate.

What are the Benefits?

Using a phone app, you can pay for goods or services free of credit card fees. This has inspired a handful of businesses to accept this form of currency. The currency is growing more in acceptance, with some small retailers beginning to accept the form of payment both in person and online. Transactions can be anonymous to some degree, as only the Bitcoin address is recorded, rather than a name. This currency has the potential to be volatile and unpredictable – which could lead to payoff but also disappointment. Interestingly, while the media has touted security concerns, the value of Bitcoin has not crashed. Instead it seems to have evened out over the long term, after a large positive value spike in December. But again, I’m no financial analyst. The only certain thing is that people that bought a Bitcoin a year ago have seen a significant increase in their value since then. Payments also don’t face as many difficulties when it comes to international funds transfer, one of the many reasons governments have taken notice to take a closer look and are discussing regulation and taxation.

What are the Drawbacks?

This list will likely grow by the time this article is published, as Bitcoin has grabbed the attention of governments in both the U.S. and Japan, particularly in respect to taxes and other legalities. With the MtGox closure, it’s shown that the system is not foolproof or secure, and you may invest some real guaranteed currency for one that will evaporate. But if you have some cash you don’t need and would like to give it a shot, it’s certainly a buyer beware market.  If the fact that I have had to rewrite this article multiple times is any indication – this market has the potential to be volatile. So perhaps Bitcoin is for the financial adrenaline seekers.

Soon enough Bitcoin and virtual currency will face regulation and new laws so it’s hard to say what that could mean for the future of this variety of virtual currency. But where there is Bitcoin – there are others that have a different value in comparison. You might also want to investigate litecoin, peercoin, and ripple. www.Ripple.com is especially interesting because it is working to become a protocol for sending money via the Internet – and is a payment system, currency and exchange in one service.

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Publications : Bar Bulletin : March 2014

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