When will Bitcoin Bubble Scam Burst?
Bitcoin rises above
$1000
The virtual currency
bitcoin Wednesday broke above $1,000 per unit, quintupling in a month,
according to Mt. Gox, which manages trading in bitcoin.
Launched in 2009 as the
invention of a mysterious computer guru who goes by the pseudonym Satoshi
Nakamoto, bitcoins can be exchanged online for real money or used to buy goods
and services on the Internet. The currency is not regulated by any government.
Bitcoin reached $1,073 at
1640 GMT. At 1746 GMT, the currency was trading at $1,055, according to Mt. Gox.
The currency traded at
just $205 on October 28 and is known for its volatility.
Still, bitcoin has gotten
momentum in recent weeks after US regulators, including Federal Reserve
Chairman Ben Bernanke, took a more positive view of the currency than many
analysts had expected at a congressional hearing earlier this month.
Regulators have also
discussed stepping up oversight in light of concerns that it could be used for
money laundering and other illicit purposes.
Bitcoins recently made
headlines when the US Federal Bureau of Investigation closed the Silk Road website where illegal drugs, forged documents,
hacker tools and even the services of hitmen were hawked. The FBI seized 26,000
bitcoins worth $3.6 million at the time
The other side of the bitcoin: Virtual currency’s reach is
still very limited
Advocates
claim the fast-rising digital currency has the potential to liberate the global
economy. In the week it topped $1,000 on one exchange, Ben Chu examines whether
the bitcoin really has the clout to shape our financial future
Brick Lane on a Saturday night normally echoes
to the shouts of revellers as they stumble in and out of the scores of
Bangladeshi curry houses and hipster bars that line the street.
But on Saturday the din on the east London thoroughfare will
be punctured by hosannas from believers in a future of digital and financial
liberation.
Investors, academics, political
radicals and, of course, internet geeks will gather in Shoreditch for a
“bitcoin expo”. The audience will hear from a host of speakers how the digital
medium of exchange is growing in scale and scope. Some will even present the
bitcoin as the future of finance, pointing out that it is quicker and more
“independent” than other, conventional, forms of payment.
The timing is good. On Wednesday the
value of a bitcoin breached $1,000 on an exchange in Japan. The cyber money, created
five years ago by a mysterious programmer (or programmers) using the pseudonym
“Satoshi Nakamoto” has been on quite a run. Earlier this month each “coin” (in
reality they are a stream of digital data held on an individual’s computer hard
drive) was worth just $215. Bitcoin aficionados have the bit, so to speak,
clamped tightly in their teeth and they are driving up the value of their
favourite money.
The authorities are beginning to
notice. At a Washington Senate Committee hearing earlier this month the FBI
conceded that online, stateless currencies such as the bitcoin are a
“legitimate financial service”. The outgoing chief American central banker, Ben
Bernanke, has said that such forms of cyber payment “may hold long-term promise”.
But can this internet money truly
become a new global currency, as some of its more zealous supporters claim? Is
the bitcoin really the shape of our financial future?
It helps to go back to the economics
textbooks. They describe three traditional defining features of a viable
currency. First, it has to be a practical unit of account. Second, it must be a
reliable medium of exchange. Finally, it must be able to serve as a store of
value. So how does a bitcoin measure up?
Assets and services can certainly be
priced in Bitcoins. But it’s not simple since the value of a bitcoin varies
from exchange to exchange. This is because it is still difficult to swap the
currency for ordinary cash. The process involves using banks in different
countries, which charge varying fees.
Is the bitcoin a medium of exchange?
Up to a point. They are accepted by a growing number of internet vendors. They
are encroaching on the offline world too. One can pay for pizza in the Netherlands
with them. In America,
hundreds of vendors joined a “bitcoin Friday” yesterday, selling items from
plane tickets to Christmas trees in exchange for the cyber cash. A bitcoin cash
machine was installed in Vancouver,
Canada, last
month. Richard Branson’s Virgin Galactic says it will accept them as payment
from people booking its forthcoming space flights.
But, as of yet, one cannot pay for a
copy of The Independent in Bitcoins. You can’t pay your
taxes in Bitcoins, or use them to buy groceries. For now, at least, the
currency’s reach is still very limited.
Finally, is the bitcoin a store of
value? This is the biggest, and perhaps insurmountable, barrier. Devotees of
the currency, particularly those on the libertarian right, cherish the fact
that there is (or rather will be) a fixed stock of Bitcoins in circulation. The
total number is set to top out at around 21 million, thanks to the Nakamoto
algorithm that created them. This, we are told, means the bitcoin cannot be
“debased” by corrupted central banks or greedy governments intent on creating
ever more cash to finance their own excessive spending. But the currency has,
nevertheless, been subject to large fluctuations. In April the value plummeted
from $260 to $130 in a matter of hours. This raises the question of how many
people will be happy to store their wealth in a currency that can lose half its
worth so rapidly.
The fixed supply of Bitcoins is also
likely to make them unattractive to mainstream finance. What most investors
crave is liquidity. Governments and central banks provide that liquidity in times
of financial-sector stress. The fact that there is no central bank for the
Bitcoin, capable of being a “lender of last resort”, is likely to put a ceiling
on its growth possibilities.
Another threat is the dubiousness of
some bitcoin users. The traceless cyber currency is, understandably, popular
with people who want to evade oversight from the authorities. Bitcoins were
used on the Silk Road website, which acted as
an anonymous clearing house for guns and drugs, until it was shut down by the
authorities.
The currency is also said to be
popular on the so-called “dark net”, which, among other things, facilitates the
trade of child-abuse imagery.
Bitcoin users sometimes claim they
are self-sufficient and have bypassed the need for governments. But that self-sufficiency
is an exaggeration.
The physical computer servers and the
telecoms infrastructure that makes the online currency system possible could be
relatively easily targeted by states if they were ever to perceive the bitcoin
as a facilitator of large-scale money laundering or other crime. That’s another
reason to be wary about tying up your wealth in them.
The irreversibility of transactions
is another danger. Once a bitcoin is spent it cannot be retrieved, even if it
has been stolen. A British man who accidentally sent his hard drive to the
landfill site lost £4m worth of Bitcoins. People who fail to back up their
computers sometimes discover they have lost their money for good. There’s no
way of getting it back, no monetary authority to which to appeal. All of that,
arguably, makes the bitcoin a rather precarious store of value.
Throughout history, economists
noticed that when new coins were introduced whose face value was higher than
the value of the metal from which they were made, the public tended to stash
away the older, more valuable money and to use the new coins for exchange. The
bad money tended to drive out the good. This became known as Gresham’s Law, after the Tudor financier Sir
Thomas Gresham. But in the case of the Bitcoin, Gresham’s axiom could be reversed. The “bad”
elements of this money might end up confining it to the margins. Don’t expect
that to dampen the enthusiasm on Brick
Lane though.
