The Currency That's Up 200,000%
Bitcoins are the top-performing money in the world -- but what are they?
By JACK HOUGH <javascript:void(0);>
The best performing currency of the past year isn't Brazil's real, up
15% versus the U.S. dollar, or Australia's dollar, up 27%. It's the
Bitcoin. A year ago one was worth half a penny. Thursday morning it hit
$10.50. That's a gain of more than 200,000%.
What's a Bitcoin? It's a peer-to-peer system of electronic money that
allows payments to be sent directly between two parties without the need
for a financial institution. It's related to Bit Torrent, a system for
sharing large files like movies, but in this case the "movie" is a file
with the currency's entire transaction history. And because users
themselves all share that history, "it's more secure than even bank
transactions," says Donald Norman, a spokesman for the Bitcoin
Consultancy, which is seeking to gain wider acceptance for the currency.
As befitting a virtual currency, no one is quite sure who created the
Bitcoin. A white paper and software turned up three years ago listing
Satoshi Nakamoto as the author. That's presumed to be a pseudonym. All
that's known about Nakamoto, based on his paper and message board
comments, is that he's fluent in English and has a deep understanding of
Internet security.
Dotcom crash veterans might recall failed currencies like Flooz and
Beenz, but those were mere means of online payment. Bitcoin is an entire
monetary system. It doesn't require a Treasury Department, because there
are no bills or coins to mint. It doesn't need a Federal Reserve to
create money. An algorithm does that at a rate that slows by half every
four years. There are about six million Bitcoins today. The number will
approach 21 million beginning in the 2030s but never exceed it.
The finite supply of Bitcoins might help explain the frantic demand for
them. Dollars and Euros are created at will by central bankers. Some
economists see that as useful for smoothing out wild swings in the
economy -- making money more plentiful when consumers are hurting and
scarcer when they're flush. Skeptics, and there are many, worry that the
ability to create money from nothing will be abused by governments that
overspend, resulting in gradual debasing of the value of savings. That's
why dollar bears cling to gold, and why a few might now be scrambling
for Bitcoins.
Users get Bitcoins in one of several ways. "Miners" set their computers
to work solving problems in exchange for coins. The more miners there
are, the more difficult the problems become, which keeps the rate of
supply stable. At recent exchange rates, high-end machines can produce
$30 worth of Bitcoins per day, but consume a vast amount of energy in
doing so. Some advanced miners have taken to cooling their machines with
dry ice to improve their results.
The other ways to get Bitcoins involve trading goods, services or cash.
Mt. Gox has emerged as the largest Bitcoin exchange, charging 0.65% per
transaction to match up buyers and sellers. More than $500,000 worth of
the coins changed hands in a recent 24-hour period. Traders can add
funds to their accounts using cash, checks, bank wires or Liberty
Reserve, a private online payment service.
Any fiat currency -- dollars, Euros, Bitcoins -- gets its value from
trust. Dollars can't be cashed in for anything; rather, we accept them
as payment with the belief that others will accept them, too. That's
another reason the price of Bitcoins has rocketed over the past year.
Two years ago, almost no one accepted them for payment. Over the past
year, a handful of early adopters began trading services for them --
mostly programmers offering things like website design and hacking
consultation. In recent months, a handful of pioneers have begun selling
real goods for the start-up money.
Four months ago David Forster, 29, convinced his parents Jim and Nancy,
owners of Green Hill Alpacas in Haydenville, Mass., to accept Bitcoins
for alpaca socks. Technically, the younger Forster buys the socks for
dollars and resells them for Bitcoins. "They said it sounded like a
Ponzi scheme but that as long as I wasn't risking their money for
Internet coins it was fine," says the 29 year-old Forster.
Sock sales have risen to between 75 and 100 since the experiment began
from four dozen during all of last year and orders have come from as far
as Finland and Russia. More remarkable is what has happened to pricing.
Forster began charging 75 Bitcoins for each pair in February and has
since had to lower the price to 5 due to extreme appreciation in the
currency's value. "I wish I had kept all of them," says Forster, who
traded his Bitcoins on the way up for cash and web services.
More than a dozen sites now sell goods for Bitcoins, including T-shirts,
coffee and natural pet food. At least one, The Arms Locker, says it
offers firearms. Another, Silk Road, is a forum for people selling
recreational drugs. How can that be? Bitcoin transactions leave a record
of times and amounts, but not identities, and Silk Road can only be
reached through an identity-cloaking computer network called Tor.
There's no way to determine the identity of its administrators and since
sellers only accept Bitcoins for their wares, they can't be found,
either (so long as packages are mailed discretely).
That's one source of discomfort surrounding Bitcoins. Even a libertarian
who's comfortable with anonymous gun and drug sales would cringe at the
thought that, say, the child pornography trade has a new way to escape
detection.
Amir Taaki, a U.K. citizen and project developer for Bitcoin.org, admits
that Bitcoins can be used for bad things but says the same is true of
cash and that Bitcoins have much potential for good. "Think of all of
the people sending money in third-world countries and getting ripped off
by outrageous transaction fees," he says. "Bitcoins are here to stay and
the world will benefit. The U.S. can ban it but it will still
proliferate."
It's not clear what regulators think of Bitcoin. The Constitution gives
Congress the sole authority over U.S. money. In March, a North Carolina
resident was convicted of minting his own Liberty Dollars to reduce
reliance on and compete with the greenback. He faces up to 15 years in
prison.
Bitcoins aren't U.S. currency, however, and Norman says the Bitcoin
Consultancy doesn't operate in the U.S. And as with file-sharing
software, Bitcoin operates as a peer-to-peer network, raising the
question of how regulators could stop it if they wanted to. The FBI
didn't respond to requests for comment. On a message board, one Bitcoin
miner wrote that agents visited his home. They weren't interested in
currency, though. Huge electricity usage led them to suspect a marijuana
growing operation.
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