Skip to main content

Don't get bitten by Bitcoins

By James J. Angel, Special to CNN
April 12, 2013 -- Updated 1056 GMT (1856 HKT)
STORY HIGHLIGHTS
  • Bitcoins have enjoyed a media buzz as the value of one Bitcoin jumped as high as $200
  • James Angel: Bitcoins are an attempt to create an electronic currency
  • He says even if the system is not one big scam, it can be hacked like any technology
  • Angel: The currency is ideal for drug smugglers, terrorists and money launderers

Editor's note: James J. Angel is associate professor of finance at the McDonough School of Business, Georgetown University. For 2013, he is a visiting associate professor at the Wharton School, University of Pennsylvania.

(CNN) -- In recent days, Bitcoins have enjoyed a media buzz as the value of one Bitcoin jumped on several Bitcoin exchanges to more than $200 per Bitcoin. But by Wednesday, it fell to $105.

Bitcoins are an attempt at creating an electronic currency that is beyond the control of any government. They are created through a digital mining system, in which digital "miners" are granted Bitcoins by using their computers to do computations that verify Bitcoin transactions. Pretty clever.

With allegedly strict rules on the creation of Bitcoins, the money supply is limited. Theoretically, no government can water down the Bitcoin with any type of quantitative easing. As a result, Bitcoins seem to present the best of all possible worlds -- the convenience of modern digital payment technology and the stability of a fixed money supply.

James J. Angel
James J. Angel
Become a fan of CNNOpinion
Stay up to date on the latest opinion, analysis and conversations through social media. Join us at Facebook/CNNOpinion and follow us @CNNOpinion on Twitter. We welcome your ideas and comments.



Fearmongers point out that banks are no longer safe as government authorities in the European Union have signaled their willingness to confiscate funds from even insured depositors. Those fearing the collapse of their local currency or their local banking system won't have to lug around hunks of metal as a way to store their wealth. Why not turn to Bitcoins?

The near anonymity built into the Bitcoin system keeps funds away from the prying eyes of tax collectors, who are getting ever better at shutting down tax havens. This potential for anonymity makes the currency ideal for drug smugglers, terrorists and money launderers, as well as the merely paranoid.

So are Bitcoins the currency of the future? I think not.

No one really knows who is really behind Bitcoins, as the creator is just a pseudonym Satoshi Nakamoto. That in itself should be a huge red flag. I would certainly not trust my life savings to some mysterious computer algorithm created by shadowy anonymous characters in a system that attracts underworld types.

One of the self-proclaimed largest Bitcoin exchanges is Mt. Gox. The name originally stood for Magic: The Gathering Exchange, an online site designed to trade cards used in playing the card game popular with the younger set. An exchange based on trading kiddy cards does not seem like a sound foundation for a monetary system.

There is no government regulating participants in the system to prevent fraud and abuse. I would not be surprised if the Bitcoin mining software becomes a magnet for computer viruses. After all, the tax evaders, drug dealers and terrorists attracted to Bitcoin would not be likely to cooperate with authorities when they have been hacked and robbed.

It would be close to the perfect crime to create a pseudomonetary system that rips off other evildoers. Just be careful when the bad guys find out where you live.

Even if the system is not one big scam designed to enrich its shadowy creators, it can be hacked and can break like any technology. The authorities won't be too eager to help out Bitcoin-based financial enterprises when they get in trouble, just as they were all too eager to punish the depositors of the Cyprus banks storing questionable funds from Russian oligarchs.

Rather than being a safe place to keep money, the exchange rate of Bitcoins relative to other global currencies has fluctuated wildly. The recent jumps on price give all of the impression of being a bubble that could soon pop. If Bitcoin ever could establish itself as a legitimate payment scheme, which I doubt, it's hard to tell what the appropriate exchange rates should be with respect to other currencies.

Bitcoins are not the first attempt to create digital money. Other ventures, such as Cybercash, have come and gone, as well as various attempts to create local currencies. Governments don't like the competition. Managing a currency is a very profitable activity for governments, and they depend on seignorage -- the profit stemming from printing money -- in various degrees to cover budget deficits.

Indeed, one can always pay the troops by printing more almost worthless money, as the U.S. did in the American Revolution and Robert Mugabe did in Zimbabwe. One can expect governments to throw up legal roadblocks to prevent such competition from cutting into the lucrative business of printing money.

Moreover, it would not be good for the global economic system to have a totally fixed money supply. A growing economy needs a money supply that grows at the same rate to keep prices stable. Much as we love to criticize the governmental entities that control the monetary system, it does help to have some human judgment (armed with a checkbook) involved to deal with crises.

Our banking system is as safe as it is because there are lenders of last resort who can create more money in a crisis to protect the entire system from collapsing in a liquidity crisis. Iceland and Cyprus have discovered how painful it is to have a banking system without such a deep pocket lender of last resort.

A financial system based on Bitcoins would have no possibility of there being such a backstop. In short, Bitcoins look like quite a bit of trouble.

Follow us on Twitter @CNNOpinion

Join us on Facebook/CNNOpinion

The opinions expressed in this commentary are solely those of John J. Donohue.

ADVERTISEMENT
Part of complete coverage on
December 27, 2014 -- Updated 0127 GMT (0927 HKT)
The ability to manipulate media and technology has increasingly become a critical strategic resource, says Jeff Yang.
December 26, 2014 -- Updated 1617 GMT (0017 HKT)
Today's politicians should follow Ronald Reagan's advice and invest in science, research and development, Fareed Zakaria says.
December 26, 2014 -- Updated 1319 GMT (2119 HKT)
Artificial intelligence does not need to be malevolent to be catastrophically dangerous to humanity, writes Greg Scoblete.
December 26, 2014 -- Updated 1505 GMT (2305 HKT)
Historian Douglas Brinkley says a showing of Sony's film in Austin helped keep the city weird -- and spotlighted the heroes who stood up for free expression
December 26, 2014 -- Updated 1303 GMT (2103 HKT)
Tanya Odom that by calling only on women at his press conference, the President made clear why women and people of color should be more visible in boardrooms and conferences
December 27, 2014 -- Updated 2327 GMT (0727 HKT)
When oil spills happen, researchers are faced with the difficult choice of whether to use chemical dispersants, authors say
December 25, 2014 -- Updated 0633 GMT (1433 HKT)
Danny Cevallos says the legislature didn't have to get involved in regulating how people greet each other
December 23, 2014 -- Updated 2312 GMT (0712 HKT)
Marc Harrold suggests a way to move forward after the deaths of NYPD officers Wenjian Liu and Rafael Ramos.
December 24, 2014 -- Updated 1336 GMT (2136 HKT)
Simon Moya-Smith says Mah-hi-vist Goodblanket, who was killed by law enforcement officers, deserves justice.
December 24, 2014 -- Updated 1914 GMT (0314 HKT)
Val Lauder says that for 1,700 years, people have been debating when, and how, to celebrate Christmas
December 23, 2014 -- Updated 2027 GMT (0427 HKT)
Raphael Sperry says architects should change their ethics code to ban involvement in designing torture chambers
December 24, 2014 -- Updated 0335 GMT (1135 HKT)
Paul Callan says Sony is right to call for blocking the tweeting of private emails stolen by hackers
December 23, 2014 -- Updated 1257 GMT (2057 HKT)
As Christmas arrives, eyes turn naturally toward Bethlehem. But have we got our history of Christmas right? Jay Parini explores.
December 23, 2014 -- Updated 0429 GMT (1229 HKT)
The late Joe Cocker somehow found himself among the rock 'n' roll aristocracy who showed up in Woodstock to help administer a collective blessing upon a generation.
December 23, 2014 -- Updated 2115 GMT (0515 HKT)
History may not judge Obama kindly on Syria or even Iraq. But for a lame duck president, he seems to have quacking left to do, says Aaron Miller.
December 23, 2014 -- Updated 1811 GMT (0211 HKT)
Terrorism and WMD -- it's easy to understand why these consistently make the headlines. But small arms can be devastating too, says Rachel Stohl.
December 22, 2014 -- Updated 1808 GMT (0208 HKT)
Ever since "Bridge-gate" threatened to derail Chris Christie's chances for 2016, Jeb Bush has been hinting he might run. Julian Zelizer looks at why he could win.
December 20, 2014 -- Updated 1853 GMT (0253 HKT)
New York's decision to ban hydraulic fracturing was more about politics than good environmental policy, argues Jeremy Carl.
December 20, 2014 -- Updated 2019 GMT (0419 HKT)
On perhaps this year's most compelling drama, the credits have yet to roll. But we still need to learn some cyber lessons to protect America, suggest John McCain.
December 22, 2014 -- Updated 2239 GMT (0639 HKT)
Conservatives know easing the trade embargo with Cuba is good for America. They should just admit it, says Fareed Zakaria.
December 20, 2014 -- Updated 0112 GMT (0912 HKT)
We're a world away from Pakistan in geography, but not in sentiment, writes Donna Brazile.
December 19, 2014 -- Updated 1709 GMT (0109 HKT)
How about a world where we have murderers but no murders? The police still chase down criminals who commit murder, we have trials and justice is handed out...but no one dies.
December 18, 2014 -- Updated 2345 GMT (0745 HKT)
The U.S. must respond to North Korea's alleged hacking of Sony, says Christian Whiton. Failing to do so will only embolden it.
December 19, 2014 -- Updated 2134 GMT (0534 HKT)
President Obama has been flexing his executive muscles lately despite Democrat's losses, writes Gloria Borger
ADVERTISEMENT