With the serial crises in the Euro zone, one has to wonder if the currency will survive. If it doesn’t, one assumes that individual countries will return to their national currencies: the drachma, lira, peseta, etc. But do they have to? Who says that a currency has to be sponsored by a national government?
That’s part of the theory behind Bitcoin, the most successful virtual currency in history. Bitcoins exist as highly encrypted computer transactions. The currency was created in 2009 by an extremely talented programmer (or programmers) using the pseudonym Satoshi Nakamoto. Roughly 31,000 lines of very tightly written code generate 2½ bitcoins per minute. (The rate will vary over time until 21 million bitcoins are produced). Bitcoin enthusiasts use high-powered servers to “mine” the bitcoins; they usually sell them on exchanges like Mt. Gox. The system uses the same servers to track transactions and ensure that no one person can spend the same bitcoin twice.
The bitcoin system uses peer-to-peer networking, meaning that there’s no central office or person or committee responsible for managing operations. That also means there’s no one to arrest if national authorities decide that the operation is illegal (which, so far, they haven’t). As Nakamoto pointed out in an early manifesto, today’s fiat currencies require us to trust national governments and central banks, which seem to regularly abuse that trust. The bitcoin, on the other hand, is based on “crypto proof instead of trust.” If you trust cryptography more than you trust central banks, the bitcoin is for you.
Bitcoins have all the advantages of cash, including anonymity. They also remove most of the disadvantages of cash: you can’t lose them, they (apparently) can’t be stolen, and they’re not bulky and hard to transfer. Because there’s no middle man, transaction costs are also very low. Anonymity and ease-of-use appeal to three significant demographics: libertarians, criminals, and those who predict the collapse of national currencies.
The never-ending euro crisis has driven bitcoins to new heights of popularity. There are now roughly 10.5 million bitcoins in circulation. Like a commodity, their price is governed by supply-and-demand. Since the Cyprus crisis erupted, their value has nearly tripled and they recently sold for about $105 each — meaning that the total value of bitcoins in circulation is now over $1 billion.
Their popularity has expanded in other ways as well. Search for “bitcoin” on Amazon and you’ll find 54 different publications. There’s also a magazine, which has a good overview article (complete with common misconceptions). Canada is even experimenting with a virtual currency called the MintChip which may have many of the features of Bitcoin but with the backing of a national government. The hype is accelerating and, as Andrew Leonard points out in Salon, that may be the beginning the end. Because of its growing popularity, the Feds are now starting to pay attention.
The best introduction to bitcoins is probably Joshua Davis’ article in The New Yorker in October 2011. Davis provides a very good layman’s summary of bitcoin operations and also attempts to track down Satoshi Nakamoto. In an article in Fast Company, Adam Penenberg, also tries to identify Nakamoto and comes up with a trio of possibilities — not the same suspects that Davis identifies.
It’s fun to speculate where all this might lead. So far, I haven’t bought any bitcoins. The value has gone up so much in recent months that it seems like a bubble. I am curious, however, if any of my readers have bought and spent bitcoins. If so, be sure to let us know about your experiences.