Will Bitcoin Go the Same Way as Liberty Reserve?

Virtual currencies were hailed as revolutions. They were the way forward, the way to overhaul the system and the way to replace the Dollar, Sterling, the Euro and the rest of them.  But, just last week Liberty Reserve was closed down for illicit transactions and money-laundering activities that could have nothing more than repercussions for the rest of the companies living quietly in the auspices of cyberspace doing more or less the same sort of activity.

Now, it’s Bitcoin that has its knees knocking. Bitcoin is in the same sort of business as Liberty Reserve. It’s a cryptocurrency (digital currency, with no inflation). It has been around for a few years now (since 2009) and it’s now trying to get its act together and prepare the rocky road ahead just in case it goes the same way as Liberty Reserve and gets bumped out of the market by being busted. How? It has just announced that it will ask for all account holders to prove their identities.

Liberty Reserve and Bitcoin are not twin brothers. There are indeed similarities but they are not exactly the same. Bitcoin is not managed by a central authority, as was the case with Liberty Reserve. Bitcoins are exchanged and traded on networks that are peer-to-peer.

Liberty Reserve Effect

Liberty Reserve’s forced closing came as a welcome moment for Bitcoin. Trading increased as news broke. The value of a traded Bitcoin increased significantly. They had already seen a rise in their value when there was a swing from January to April 2013, with an increase from $13 to $190. This was in the face of the rising European sovereign-debt crisis and the Cypriot financial crisis, in particular. Bitcoin currently has a total market value of almost $1 billion. People were wary of banks and Bitcoin saw a massive surge in the value of its exchange rate. Bitcoin became the darling of the economic experts and businesspeople around the world as their confidence and trust in the banking sector drip-dried. Being the star of the moment, however temporary it might be, is like having your name up there in red lights, and flashing to boot.

Bitcoin Solution

It’s doubtful that Bitcoin will suffer from the Liberty Reserve scandal and it’s doubtful that they will go the same way. But, running checks on customers is just what people hate the most, isn’t it? Aren’t we always wary of companies that want to know too much information about us and that need to know who, when, why and what? Isn’t that like Big Brother of Orwellian fame?

Will it work?

One thing is for sure, if Birtcoin’s aim is to save their demise and stop the criminal activity that may or may not be going through their exchange doors, then the criminals will pull the plugs and move on somewhere else? If the customers are bona fide ones, they too might be dead set against having too much information shared over the tanoid? Whatever happens, perhaps the end is nigh, anyhow, for Bitcoin.

Bitcoin: Right Choice?

Maybe their only attraction for the moment is that they are still a good hedge against inflationary pressure. The digital currency is a limited one (22 million bitcoins, of which half are in circulation) and so inflation can’t bring Bitcoin holders down as other currencies might. At least, that’s the way things stand right now. Things are never set in stone though, are they? Their value is really non-existent and depends very much on whether people actually want to use them or not. Pull out, the price will drop. A downside might be that like any currency Bitcoins can be stolen as they can be sold on to someone else and exchanged for real currencies. On April 3rd 2013, Instawallet was hacked and 35, 000 of the things were swiped (worth $4.6 million).

Bitcoin is a stateless currency and that should be telling us something about how we are prepared to use money in exchange transactions today. It makes for interesting analysis of how currencies are driven by confidence and that goes for stateless or non-stateless currencies, wherever they are. What’s happening to Bitcoin is no different to what’s happening to the Greenback or the Euro these days. Lose confidence and people pull out.

About The Author

tothetick

Professional team of writers/analysts analyzing the financial markets.

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