Bitcoin isn’t ready for popular consumption, and it may never be.
It doesn’t fit into a neat product category. Often called a virtual currency, it’s not legal tender anywhere on the planet. It’s not an income-generating asset class suitable for most investors. Its value, in dollars, fluctuates wildly from one minute to the next. And while it can be a cheap way of transferring money, there are too many glitches in its emerging network for bitcoin to be entirely reliable.
Even its advocates have been raising red flags. As Patrick Murck, general counsel for the Bitcoin Foundation, a nonprofit devoted to “fostering the bitcoin ecosystem,” acknowledged in a Senate hearing last week, “It’s very much still an experimental currency and it should be considered a high-risk environment for consumers and investors at the moment.”
Yet bitcoin has been receiving plenty of attention, and not just because well-publicized speculators have been making money on it.
High-risk experiment though it may be, bitcoin embodies an elegant and disruptive technology. It uses file-sharing, the peer-to-peer computer innovation that spawned early music services like Napster, Kazaa and LimeWire. In their early days, they sometimes walked on the wild side, but their experiences led to a wholesale digital transformation of the music business.
Bitcoin gives file-sharing a brilliant twist. In essence, it has created “a decentralized virtual currency that uses a peer-to-peer consensus system to confirm and verify transactions,” two researchers at the Federal Reserve Bank of St. Louis concluded in a recent study. And François R. Velde, a senior economist at the Federal Reserve Bank of Chicago, made this assessment in a new report on bitcoin: “It represents a remarkable conceptual and technical achievement, which may well be used by existing financial institutions (which could issue their own bitcoins) or even by governments themselves.”
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