Can Cybercurrency Change the World?

AMA12-6-13v2Digital currency keeps on making news – and making financial experts worry. In what appears to be the perfect marketing move, the Bitcoin – an electronic currency – was recently used to buy the Tesla, an electric car. And while many hail the move as another step toward the Bitcoin’s eventual dominance of world money markets, others fear that the coin’s vulnerabilities could destroy those very markets.

News stories about the Tesla transaction have evaded the issue of who exactly bought the car, which sells for around $85,000 in traditional money. And it’s important to note that it’s the independent Lamborghini dealership n Newport Beach, CA that accepted Bitcoins, not the manufacturer, which does not. But as the Bitcoin continues to trade at around $1,000 per coin, the Tesla purchase represents yet another demonstration that Bitcoins are going mainstream in a big way

We’ve written numerous pieces on the Bitcoin’s evolution from a tech lover’s toy into a global force fueling optimism about a truly democratic currency as well as fears of one world monetary dominance. But the story of the little algorithm that could has captivated the attention not just of financial experts but of consumers worldwide, as reports continue to surface about people who travel the world on the Bitcoin, buy cars, finance fertility treatments and purchase homes.

Digital money may be more of a novelty in countries with strong currencies, such as the US and UK. But it takes on a far different meaning in less stable countries whose traditional currencies are vulnerable to political upheaval and natural disaster. For those places, a digital currency that exists independent of those issues opens as many doors as the Internet itself did a few years ago, creating new opportunities far beyond local borders.

But with those opportunities come new risks. Alongside news about the Tesla and other successful Bitcoin transactions come reports of theft, hacking and cybercrime. as the very features that allow the Bitcoin to threaten traditional monetary systems worldwide make it vulnerable to attack and misuse.

Digital currencies don’t typically exist in physical form; all transactions are done anonymously and quickly via computer. That’s how coins are made, too, by computers working the complex algorithms that, when solved, produce a new piece. That means that in theory anyone with enough computing power could generate digital coins, create a whole new system – or destroy existing ones. The original Bitcoin algorithm has been hacked numerous times, creating harmless images of Federal Reserve Chairman Ben Bernanke and small furry animals, among other things, but so far it has remained functional. But as usage becomes more widespread, that could change.

The potential for financial chaos in the event that the Bitcoin or another kind of digital currency comes to dominate the global money market and then crashes is the major worry dogging market watchers and investors worldwide. Since cybercurrency isn’t backed by a traditional issuer or by physical reserves such as gold, there’s nothing to fall back on if it’s compromised on a large scale.

For now, though, as an electronic coin goes mainstream to buy an electronic vehicle, the Bitcoin and its digital cousins are raising hard questions about the function of money in a digital age- questions worth answering for investors following Jason Hartman’s advice for building wealth through income property. (Top image: Flickr/SqueakyMarmot)

The American Monetary Association is the source for financial and monetary policy you can use. Read more from our archives:

Bitcoins + Seasteading = A Brave New World

Fake Financial Advising Targets Older Investors

The American Monetary Association Team

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