You may not be familiar with the term "cryptocurrency," but you've undoubtedly heard of bitcoin, a new form of currency created at the intersection of technology, game theory, and cryptography.
Bitcoin isn't only the world's largest cryptocurrency, it's the most notorious. It's the largest because it was the first cryptocurrency to solve the "Byzantine Generals' Problem," meaning it discovered a way to prevent cryptocurrency from being spent more than once. And it's the most notorious because it was the payment vehicle of choice for the now-defunct Silk Road, an online black market used for nefarious activities. And because fraudulent bitcoin exchanges have cost cryptocurrency holders billions in value, most notably the Mt. Gox exchange, which in 2014 "lost" bitcoins that would now be worth more than $5 billion.
Assuming you weren't named in the Silk Road indictments or didn't lose your bitcoins in the Mt. Gox or other bitcoin exchange failures, your perception of the cryptocurrency may be shaped by if or when you bought it.
WHY DIDN'T YOU BUY BITCOIN IN 2011?
If you were prescient enough to buy $100 worth of bitcoin on January 1, 2011, about the time it hit public consciousness, you'd be a multi-millionaire now--with a gain of more than $2 million, based on bitcoin value as of June 22, 2018.
You'd be even richer--by about $6.7 million--if you identified the top of the bitcoin market and liquidated in December 2017. Even if you bought $100 of bitcoin two years ago, you'd be sitting on $1,000 in value today.
But if you exchanged $100 for bitcoin at the beginning of 2018, you'd be poorer for it. Your $100 bitcoin purchase today would be worth less than $50.
IS BITCOIN A CURRENCY OR AN INVESTMENT?
If these results make bitcoin seem more speculative investment than currency, you're right. Bitcoin's creator, the illusive and perhaps fictitious Satoshi Nakamoto, envisioned bitcoin as a universal currency operating outside the control of sovereign nations or central banks. Rather than relying on those institutions to create the universal trust to support a fiat currency, he sought to create a cryptocurrency that derived trust from technology, the inviolability of mathematics, and peer-to-peer networks of computer nodes acting as the bookkeepers and unspoken regulators of bitcoin.
But, along the way, bitcoin got sidetracked as a currency, evolving primarily as an alternative investment rather than as a way to pay for goods and services. How did this happen? First, there was an irrational expectation that the value of bitcoin would only increase, and second, bitcoin has relative illiquidity. Why risk using bitcoins to pay the electric bill when holding them might mean you'll become a bitcoin millionaire?
But even if you wanted to spend bitcoin, where would you? Today, still fewer than 100 merchants accept bitcoin as payment. Some are big names, like Microsoft and Overstock, but many are niche or local retailers. Although the number of bitcoin merchants is growing, bitcoin acceptance is far from...