Virtual Currencies Create New Rich

Bitcoin is undoubtedly a risky investment, and it’s uncertain whether it’ll succeed or fail. However the “decentralized” digital currency it represents has revolutionized monetary system, and cryptocurrency is here to stay.

You may feel strange talking about Bitcoin, Litecoin, Linden dollars, or Ripple. The truth is, we are immersed in these internet currencies without knowing it.

Now, when you want to read a good book, you can log into Amazon website and buy Kindle books with Amazon Coins. If you fancy a ZARA shirt, you can buy one through Bitfash.com that supports bitcoin payment. And when you need to send money to family or friends in another country, Ripple is a good choice compared to traditional bank.

We have seen how the internet changed the financial world, as it transforms news, music and retail industry. Right now, the internet technology has stream lined the transaction process and made it more efficient, convenient. Services such as mobile payments, P2P lending etc. have led us into a new era.

Will internet money drastically change how currency is issued? And who will be the winner? How will the fate of internet currency be as governments respond with tighter regulations?

We might not have all the answers now, but in foreseeable future internet currencies will continue to thrive, supported by improved internet technology. Our way of communication, payment methods will be greatly affected as well.

Bitcoin’s Alternatives
Following Bitcoin’s sizzling, fast development there are various versions of internet currencies on the market now. A close competitor is Litecoin, there are also MasterCoin, Primecoin, BioCoin, Novacoin and hundred others competing for market share.
Almost all of these internet currencies have a complex set of rules, combined with different computer languages. One without professional computer background, or deep understanding of their originator Bitcoin will have a hard time understand and accept these new currencies.

In fact, in recent years, the internet has long been flooded with innovative currencies as its popularity increases.

For instance, when we buy airline tickets, in addition to cash or credit card payments, customers can choose mileage redemption. They can simply log into their airline website account, fill in the information and select mileage redemption, the purchase is completed. What customers have done in this case is: they are in fact using internet currency.

Daily data exchange and communication that happen on the internet depend on its stability. Therefore the internet network has formed a unique market mechanism whose manufactured goods are data and other derivatives such as payment systems, data exchange.etc.

There are 4 aspects in the definition of internet currency. First, it creates an online community where money is not regulated or only small amount of money is regulated. Second, it’s a pure digital form of money. Third, the network system must have an internal payment system. And fourth, widespread access and use of the currency by the members is promoted.

The European Central Bank has issued a report of “Virtual Currency Schemes” in 2012. The report has detailed the functions of money. Whatever form money takes, it should have three major functions: as an exchange medium, unit of account, and store of value.

“Money is a social institution: a tool created and marked by society’s evolution, which has exhibited a great capacity to evolve and adapt to the character of the times. It is not surprising that money has been affected by recent technological developments and especially by the widespread use of the internet.” (Virtual Currency Schemes, 2012)
If national currency is legal tender, then the credit comes from the government. Then there’s internet based business credit currency such as airline mileage points, Amazon coins etc. Ripple is based on personal credit while Bitcoin and gold are not backed by any credit.
The development of internet has spurred an expansion of non-statutory currency markets. These currencies can be backed by diverse forms of internet age credit, or they might not rely on credit at all.

Speculative bubbles
All Bitcoin’s alternatives basically developed based on Bitcoin, and many aim at bigger success than Bitcoin. Litecoin, for example, is similar to Bitcoin in algorithm, but the total amount is 4 times bigger than Bitcoin.

Over the past year, Bitcoin’s popularity has gathered a group of internet currency fans. Its skyrocketing prices have promoted other similar currencies as well. While Bitcoin has created the new rich, the potential risks from speculation are gradually exposed.

One of the rising stars is PPCoin(Peer-to-Peer Coin). Its creator Sunny King had officially released PPCoin on August 19,2012. PPCoin’s biggest innovation is it combines the Proof-of-Work mining design and Proof-of-Stake feature. Computer clients are able to process transactions and maintain network security, achieve energy saving and maintain security at the same time.

As of January 5, 2014, PPCoin market has capitalization of about $150 million, right after Bitcoin and Litecoin, ranked third in the world. The ambitious founder Sunny King aims for bigger success than Bitcoin,

Since last October, PPCoin is 20 times its starting value. Litecoin has also achieved over 300% rise in value in less than 10 days last November. In fact, vast majority of the digital currencies have experienced or will experience a similar surge before the market decides the real winner.

“It’s too speculative, too risky.” One experienced Bitcoin investor Jason said. In October last year, when Bitcoin’s prices soured and promoted many virtual currencies, many currencies’ values rose hundredfold in just one month. Given the irrational activities going on, he sold all his bitcoins in November last year.

China has been a major player in cryptocurrency market too. Just last September, China has 30% of the world Bitcoin market share. By the end of last October, this proportion had risen to 50%. A lot of wealthy women are joining the race too, and makes Bitcoin a giant speculative bubble.

With hundreds of virtual currencies all dreaming to be Bitcoin, investors will have a hard time deciding which one to invest in. While speculation is an inescapable fate for crypto currencies, governmental regulations will cause investors to evacuate in a split second. People’s confidence in such virtual money is actually vulnerable.

In fact, the concern of the Bitcoin bubble has been verified.
On December 5, 2013, China’s central bank had released “Report on the Risks of Bitcoin” and declared bitcoin as “network virtual good”. It restricts financial and payment institutions from conducting any business associated with bitcoins. Within the next five trading days, bitcoin’s value fell more than 23%.

Other cryptocurrencies have since experienced the similar roller coaster ups and downs in price change. After China issued restriction on bitcoin, within 24 hours, Litecoin’s value suddenly fell from $32 to $6. Then in the next 24 hours, its price rebounded to more than $23.
Currently there’s no effective ways to assess the valuation process of internet money. As most monetary investment come from individual investors, they are more sensitive to any negative news and will sell their digital currencies in panic. This leads to sharp fluctuations in the currency prices.

Industrial chain investment
Despite the mixed reviews on Bitcoin, Litecoin, MasterCoin and other cryptocurrencies, the era of booming internet finance has arrived and is deemed bullish in the long term. Its industrial chain development and core technology are favored by professional investors.

Atlanta based company BitPay is aspired to be the Bitcoin PayPal. Founded in 2011, the company has received a total of $2.7 million in funding in January, March and May last year. Investors even support the company in bitcoins.

Investing in bitcoin payment instead of bitcoin itself might not be a bad idea too.

Since bitcoin is a risky investment, it’s uncertain whether it’ll succeed or fail. However, the decentralized digital currency it represents is here to stay. So the risk in investing in entrepreneurial organization will be smaller.

Although many governments have restricted financial institutions from conducting bitcoin payment business, they have recognized bitcoin as a digital currency and allowed public to trade such virtual currency. This is tantamount to admitting the legitimacy of cryptocurrency trading platforms.