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Thursday, May 26 News

Living with Technology / Digital currencies: Inevitable but risky

Digital currencies, in particular Bitcoin, are becoming popular -- at least in the press.

But what are digital currencies, and why should I care?

Currencies -- today we have the dollar, euro, yen, pound, peso and numerous others around the globe -- are a way to buy and sell things that do not require a precise exchange of goods and services. Before currencies, if you wanted, say a dozen eggs, you would have to offer the seller something he or she wanted, such as some cloth. This worked out well as long as the traders each had something the other wanted in the quantities that they wanted. When people started needing a way to buy and sell things that they could not directly exchange, they needed a way to store that value in a way that everyone could agree to. Enter currencies.

Second, when currencies started coming of age, there were multiple issuers of currencies, typically banks. The value of the currency was supported by the perceived strength of the issuing organization. To make a long story short, most currencies now are backed by the government of the country where they are issued.

Digital currencies typically have no backing of any government or bank. Much like a stock that is traded, the value exists simply because the people who use the currency agree upon its value.

Bitcoins are "mined" by running complex computer programs that, when completed, create a Bitcoin that enters the Bitcoin economy. And there are a finite number of Bitcoins that can be mined.

In my opinion, there are two fundamental issues being discussed about Bitcoins -- and any other digital currencies:

First, they are not backed by any reputable institution, such as a government. If a particular digital currency were to encounter any substantial problems -- which I believe is inevitable -- the value of the currency could fluctuate wildly and/or go to zero. While some may believe this is OK, it does pose a huge risk for people who use this currency.

Second, governments are nervous about not having visibility to transactions using currencies not controlled by them. Understandable from a government's perspective, but certainly not always desired or required by all people making transactions.

Right now, the typical consumer will not have any substantial need for digital currencies. I personally don't anticipate people taking any substantial steps toward using digital currencies until some of the risks associated with these digital currencies are addressed.

That being said, there are going to be "early adopters" who will help pave the way for digital currencies, and I do believe it is inevitable that there will be a handful of digital currencies that will exist in the next 10 years or so. also see a strong continuation of currencies like the U.S. Dollar, Euro, Japanese Yen and more.

But it will be interesting to watch the emergence of these new currencies starting to emerge and challenge the way we think about money.

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Mark Mathias is a Westport resident and has worked in information technology for more than 30 years. His "Living With Technology" appears every other Friday. He can be contacted at: livingwithtechnology@mathias.org