The phrase “cash is king” is quickly becoming out of date. Most money isn’t money at all – not in a bills, coins, cows, or even gold bullion kind of way, at least. It’s information on a computer. When we’re talking about dollars, or the other 100+ traditional currencies in the world, this information on computers is still moved from one place to another using banks and other financial institutions according to a set of rules to which we all agree.
We’re all okay with this because, more and more steadily, we’re all doing our shopping online or using debit or credit cards to make purchases in three-dimensional stores. We rarely dole out cash for our commodities anymore.
But the future of money is here, and it isn’t governed by any central authority. The most popular invisible non-money not managed by invisible non-banks is called bitcoin.
Bitcoin is a decentralized payment network. That means the network doesn’t belong to any government of any country. On this network, bitcoins go directly from one person to another (“peer-to-peer” or “P2P”) with no middle man or exchange rate. A person in Chicago can use bitcoins to buy something from another someone in Cairo with little to no transaction fee, as long as everyone involved has the Internet.
The Bitcoin network has as few rules as possible and its own vocabulary. To make newbies more comfortable, bitcoins are stored and managed through a “digital wallet.” A “block chain” keeps a record of your transactions, and “bitcoin mining” is used to confirm transactions and provide security for the whole community and prevent “double spending” fraud.
If you want some bitcoins, you have to buy them with your traditional money. The day this article was written, one bitcoin (BTN) costs $224.76. Some progressive online-based businesses offer to pay remote employees with it, and some contests also offer the option to collect winnings in bitcoins.
Not all retailers accept it, though the list is growing slowly (including Dell, WordPress, Sears, and CVS), but many Bitcoin users consider it an investment because it also goes through its own fluctuating value cycle depending on how it’s being used and perceived. Because of this, the IRS treats it like a stock or bond subject to capital gains tax.
Bitcoins aren’t the only virtual currency out there. There are also several “altcoins” circulating in worldwide. Litecoin, Peercoin, Primecoin, Ripple, Quark, and Mastercoin are just some examples of cryptocurrencies claiming to be better than each other.
It’s a cool idea – you won’t find many people who aren’t interested in cutting out the middle man and managing the value of their money on their own terms – but will it last? Many users call it the most important invention since the Internet, while others call it a security nightmare. Is this really the future of money? Whether it lasts or not, it’s inevitable that the way we make and spend money won’t rely on paper and metal forever, so it’s not to be ignored.