Most of us know the Winklevoss twins and their involvement in Facebook, whether it’s from their media presence or their role in the Social Network. After suing Facebook, claiming they played a much bigger role in its origin, the twins have been involved in a number of different business ventures. Hukkster, one of my favorite new startups, is just one of many companies that they have invested in. Just this week, the Winklevoss’ have received even more attention from the media, labeled the “most high profile Bitcoin millionaires out there.” According to this short video by Bloomberg TV, the Winklevoss twins are the biggest Bitcoin millionaires, worth $11 million dollars. Virtual dollars, that is.
Bitcoin, an online digital currency that uses cryptography to control its creation and transactions rather than relying on central authorities, is just another example of how technology is changing the way we live. Unlike a conventional banking system, transactions are authenticated cryptographically and cannot be reversed. The system is not managed by any government or central authority, and Bitcoins are transferred through a smartphone or computer either locally or internationally. Currently, Bitcoins are accepted by only a handful of merchants and services around the world; however, it is traded on exchanges such as Mt. Gox. The core of the Bitcoin network is known as the blockchain. Roughly every 10 minutes, a new block is generated containing a record of all previous Bitcoin transactions that have occurred. Bitcoin participants, known as miners, race to decode the next block by solving a cryptographic puzzle. The person who discovers the puzzle announces the new block to the other miners, who must agree that it meets all of the Bitcoin standards. Once the winner has been agreed upon, this block is accepted as the next entry into the block chain starting the race again.
Bitcoin Logo (Taken from Wikipedia)
Clearly, this is a complicated platform and I’ve provided only a simplified version of what’s really taking place. According to a recent Forbes article, right now it’s only nerds who are playing around with Bitcoin. There are Bitcoin-based banks, casinos, drug emporia, derivatives markets, and more. Although right now the market is limited to “computer nerds”, there is potential for growth and increased participation. Kent Liu, a Bitcoin trader, explains why he is so bullish on Bitcoins. Liu believes that Bitcoins will go up in value because they operate on superior “fundamental properties” and recent media attention will increase demand, driving up Bitcoin prices. Despite a high degree of volatility in the past, Bitcoins have traded at a high of $266 and if trends go the way Liu predicts, traders have the potential to earn a high rate of return.
(Taken from TechCrunch.com)
But technology, as we know, is a double-edged sword. One of the biggest issues I see with Bitcoins is the lack of regulation and instability behind an online digital currency. Even Liu, who speaks highly of Bitcoin trading, noted that in 2012 the system was plagued with scams, hackers, and thefts. As Professor Ransbotham mentioned in last week’s class, the Internet presents multiple opportunities for online hackers, and unfortunately Bitcoin provides “bad guys” with even more possibilities for online exploitation.
This past week, one Bitcoin trader was robbed in a forum offering a forged Adobe updater and prompting him to update his Java plugin. On the traders’ forum was a link connecting individuals to an imposter site, which used stolen code and style to imitate the legitimate MT.Gox site. Once the trader agreed to the updates and his computer was infected with malware, the attackers stole credentials from his MT.Gox account as well as other passwords. While I should have taken safer precautions, notes the user, “this attack is rather basic and should not be possible on a site at the level of MT.Gox. I can only imagine how people with larger amounts would feel if clicking on a link emptied their account $10k+.” Right now, I personally think it’s too early to predict Bitcoin’s future. However, technological changes, such as Bitcoins, are inevitable and despite possible positive outcomes we must be wary of the pitfalls as well.