Bitcoin gains legitimacy with US government, companies

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Bitcoin, a virtual currency, was recognized by the US Department of Justice as a “legal means of exchange” last week, and the number of companies accepting it in payment continues to grow. The most recent additions to the Bitcoin club include Virgin Galactic and Europe’s University of Nicosia.

A number of smaller companies also accept Bitcoins for products and services, as does Etsy, GadgetsDirect, WordPress, Reddit and NameCheap.

And, just in time for the holidays, Bitcoin Black Friday is a site that gathers together holiday deals and discounts for people who shop using Bitcoin.

Read more about the Department of Justice report here and here.

Read the Virgin Galactic’s announcement.

Read the University of Nicosia announcement.

Pros and Cons

The value of Bitcoins lies completely within its network of users. The more business accept Bitcoin, and the more people trade it, the more value the currency has.

If the network of users grows faster than the supply of BitCoins — which is constrained by the mathematical algorithm used to generate them — then the value of the Bitcoins increases.

It is completely independent of government fiscal policy, national debt loads, and other traditional measures of the value of a currency.

But this independence from governments and dependence on the user network is both a strength of Bitcoin and its major weakness.

As MySpace and Friendster have learned, social networks are fragile. A new, cool platform comes along and everyone just switches over. Just think of the kids fleeing Facebook now because their grandparents are on it.

A Bitcoin network is just as fragile. Without a government mandating that people have to use this currency, there is no penalties or costs for businesses and customers who decide to switch to something else.

If a newer and cooler virtual currency comes along — I’m going to call it BieberCoin for the sake of this argument — businesses who have already figured out the logistics of accepting Bitcoin can easily add BieberCoin to their payment platforms. Teenage girls will flock to BieberCoins in droves, driving up its price, and investors hungry for the next bit thing will sell their mature Bitcoins and buy the young, growing BieberCoins. But as the Bitcoins get sold, their value will start to drop, inspiring others to liquidate their Bitcoins before they drop further. As prices drop, businesses will become reluctant to accept Bitcoins so as to avoid getting stuck with a virtual currency that’s losing value. Media attention on the rise of BieberCoins and the fall of Bitcoins will speed up this process, until the people still holding Bitcoins are left with nothing except a string of numbers in a digital wallet.

My advice? Don’t keep more money in any virtual currency — whether Bitcoin, Litecoin, Feathercoin, Ripple, or Linden Dollars — than you can afford to lose.

And if BieberCoin does come out, be sure to buy it early. And maybe you can be the next guy who accidentally turned a $27 Bitcoin investment into $1 million.

Maria Korolov
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