The financial world keeps on catching up with the evolving real world. New means of payments emerge and become popular worldwide. As we are living more and more in an online world, online payments are getting more and more popular. Crypto currencies occupy a very special place in the online financial life. Still, most people are still scared away by some shady digital currencies like Bitcoin. Most of them only heard that this is an extremely volatile currency with big ups and downs in exchange rates. At the same time, professional traders make really big bucks by trading such currencies.
Bitcoin
Bitcoin is a crypto currency, which was created as an alternative to conventional paper money and well-known currencies. The major peculiarity of crypto currencies is limited emission. They cannot be mined forever. Yes, the process of generating crypto currencies is called mining. Bitcoin mining is based on the use of PC processing power. There is no single emission center or mint.
Crypto currencies can be bought and sold by anyone since they are actively traded on online exchanges. Those exchanges are not regulated by any country or financial watchdog.
As of today, the overall daily turnover in the 5 biggest online exchanges is equal to 115 million dollars. OkCoin is number one with 84 million dollars. BitCoin is obviously the most popular crypto currency at this point. Its overall market capitalization is $5,14bn.
Market Participants
The list of market participants includes miners and speculators.
Miners generate/produce/mine the crypto currency and exchange it for fiat currencies like dollars, euros etc. They are sellers and liquidity creators.
Speculators trade the crypto currency to make money from changes in exchange rates, like it is done by conventional Forex traders on regular basis. Bitcoin is the major currency traded on those exchanges. Other clones are traded as well. They have different names and sources but the essence and idea remain the same.
The developed market catch up with the trend very quickly. This is confirmed by the popularity of the «Bitcoin» search request in Google:
Market Reaction
In general, crypto currencies are not regulated by any authority. Those exchanges that allow market participants to exchange Bitcoin for other fiat currencies are just online marketplaces with no real responsibility. Any transaction is irreversible and anonymous. So there is no guaranteed safety of funds whatsoever. This is what makes crypto currencies so tempting for hackers and other online thieves.
This drawback was stubbornly ignored until the first wakeup call rang. In particular, on February 10th 2013, MtGox (which used to be the biggest online Bitcoin exchange at that time) announced that 850 000 Bitcoins was stolen from its accounts. This was equivalent to 620 million dollars. Consequently, the exchanged announced bankruptcy with all of tis clients losing their money forever.
Prospects of Crypto Currencies
Despite the default of MtGox and Bitcoin, the online infrastructure dealing with crypto currencies keeps developing and evolving, which may come as a surprise to most people.
New ATMs for exchanging crypto currencies for fiat paper money start emerging. The amount of online exchange services is increasing as well. Even online retailers start accepting Bitcoins as a means of payment for their products and services. You can even borrow or lend Bitcoins through special online services.
This can lead us to believe that the market is growing and developing and there are all conditions for further growth and development. Still, all central banks are skeptical about crypto currencies in general and Bitcoin in particular. All in all, the reaction of the world is ambiguous and controversial.
The People's Bank of China even forced Chinese banks to terminate all Bitcoin-related accounts.
The Fed seems to be neutral at this point. But the USA wants to tax Bitcoins. At the legislators are currently working on it.
The Bottom Line
Firstly, it is too premature to call Bitcoin (or any counterpart) a full-fledged currency. Bitcoin is unregulated and too volatile to be considered a reliable means of payments. Who will save money in a currency which can drop 10% or more a day or even hour.
Secondly, the security system is too imperfect with multiple bugs. There is no financial security when it comes to Bitcoin or any other crypto currency. The situation with MtGox confirms that.
Thirdly, there is no clear attitude of international authorities and central banks towards the currency, which is a negative factor in itself. The currency may become illegal at any moment.
