California has legalized the use of BitCoins and other digital currencies in the state by removing certain text in California’s Corporations Code which prohibited the use of “anything but lawful money of the United States.”
The move represents a growing trend among states to clarify digital currencies and their legality as use for purchasing goods. Some noted that before signing this bill (AB 129) many other currency forms were technically illegal, such as “Amazon Coins” or “Starbucks Stars”.
The last few weeks have seen other strides towards digital currency adoption, with commercial juggernauts like NewEgg.com, 1-800-Flowers.com and Expedia joining the BitCoin bandwagon by accepting the e-currency for payments. BitCoin has become so widely accepted, that a family has taken to the road on a BitCoin-oriented attempt at living off the currency as exclusively as possible. So far they have been quite successful, being able to pay for gas, food and hotel all with BitCoin.
At this point I realize that only a small portion of the reading audience actually knows what BitCoin is. Sure it’s a trending term that many have heard often, but most have little idea as to the specifics.
Put simply, BitCoin is a peer-to-peer currency which holds no tangible value (for instance, the gold standard). Instead the value of BitCoin is rooted entirely in the value that the market places on it. Currently, a single BitCoin is worth just under $650. It’s for this reason that generally transactions are carried out in fractions of a BitCoin, the most popular denomination being the “millicoin” (or rather, one 1/1000 of a BitCoin, about $0.64 at the time of writing this).
Many people are left scratching their heads at the point of such a system, or why someone would invest in it when there are plenty of viable options out there for tangible investments. It’s a legitimate concern, and to answer the question it’s the potential for huge gains.
The advantages of BitCoin are that each transaction is fairly anonymous, that you can send money from one side of the world to the other with no accrued fees, and instantly. The currency transcends international borders, being used and traded in just about every country of the world. It has no central system that can manipulate it (i.e. the Fed), instead the system is as strong as each user.
Sounds great huh? Well for all the advantages, there are also disadvantages. Without regulation the system is hugely volatile. There are currently 13,000,000 BitCoins in circulation. The most there will ever be is 21,000,000. This number is fixed. Unlike the amount of dollars in our system, there cannot ever, by design be more than 21,000,000 BitCoins produced. But consider that this number will be even lower given that BitCoins can be quite easily lost, never to be recovered. Of course, US Dollars can as well, but the difference is a new one can be printed, and everyone moves on with their life.
So, with that in mind, if BitCoins are to gain mainstream popularity their value will skyrocket. Good for those holding them, bad for those not. An additional problem with this is that there will be inherently a group of people whom have been with BitCoin since the beginning (back before the value was less than a dollar). These people hold thousands of them, and at anytime can flood the trading system and cause the value to plummet. This is something that has happened, when from December 5 to December 7 the value of a BitCoin dropped from a high of $1,140.00 per coin, to a low of $585.00.
The legitimization of virtual currencies in California and elsewhere is an exciting thing. How we will be conducting financial transactions five or ten years from now is yet to be seen, but there is a good chance that the laws we see addressing the issue now are a strong indication for things to come. Investors who take the time to learn about the systems now, will find themselves at a great advantage if digital currencies ever become the law of the land.
Attorney John Rosenbaum is a practicing Orange County Workers Compensation and Personal Injury lawyer of over 35 years. His 99.8% success rate speaks to his proficiency in the field, having collected clients over $50,000,000.