The so-called cryptocurrency known as bitcoin is soaring in value.
At the start of the year, one bitcoin was worth about $1,000. As of Wednesday, they were changing hands for more than $13,300.
And next week, the Chicago Futures Exchange will begin trading bitcoin futures, adding further legitimacy to a currency that was initially favored by people looking to skirt the law.
The “crypto” in cryptocurrency refers to the encryption technology that makes all bitcoin transactions secure and also anonymous.
So how has a currency notoriously favored by fraudsters and drug dealers gone mainstream?
Sarit Markovich is a professor at Northwestern University’s Kellogg School of Management and has expertise in both computer science and economics and recently wrote a column on bitcoin for Fortune magazine.
For many people who backed bitcoin early, “the main idea behind it was democratization of financial markets,” Markovich said. “Democratization of payment. When you are thinking about cryptocurrency and bitcoin, it is global. That means I can send money to whoever I want, wherever they are, and the fees are going to be exactly the same as if I were sending money to someone within my own bank network.”
Markovich added that it also cuts out the banks and other financial intermediaries so the fees for transactions are much lower.
Behind bitcoin and other cryptocurrencies is something called “block-chain technology” which is a very secure way of tracking every transaction made with a cryptocurrency and which also verifies the legitimacy of any new transaction.
But one big difference between the dollar and bitcoin is that the dollar is backed by the U.S. government, which has huge reserves of gold and has never defaulted on its debt. But no central bank backs bitcoin and so the risk is all owned by the investor.
“There is no central authority and that means there is risk involved,” said Markovich. “That means that yes, you might lose all of your money.”
Despite that very real downside, Markovich believes that cryptocurrencies are here to stay, although perhaps not bitcoin.
“I don’t see bitcoin becoming the currency of the future. I think it has too many disadvantages in terms of scalability and other more technical issues. I think that overall we are moving toward digital currency … the block-chain technology that is behind these cryptocurrencies have a lot of advantages in terms of payments and clearing and so on, and I think this is definitely something that is here to stay.”
Markovich joins host Phil Ponce to explain what bitcoin is and why more and more investors are giving it a hard look.
July 29, 2014: With the debut of the city's first Bitcoin ATM, and a Bitcoin demo taking place on Capitol Hill, many are wondering if virtual currency is making its way to becoming mainstream, and whether it has the potential to replace paper currency.
Aug. 28, 2013: What is a Bitcoin? Where do they come from and how are they used? And why are more and more governments taking a careful look at this first-ever cyber currency?