Bitcoin bubble may have burst, but virtual money will rule

As faith in fiat currency diminishes, the Internet is sure to offer greater access to a growing number of currencies in one form or another that are beyond national control.

Uttara Choudhury April 13, 2013 06:16:58 IST
Bitcoin bubble may have burst, but virtual money will rule

New York: It first appeared back in 2009, and has been slowly gaining steam since. As of this month, more than $1 billion worth of a digital currency known as "bitcoins" circulates on the web, and interest in the currency is skyrocketing.

In many ways, bitcoins function like any other currency. You can buy anything from any company, both online and in the real world, that accepts bitcoins as currency. Bitcoin's founder is Satoshi Nakamoto, which is a pseudonym. Nakamoto's purported profile on P2P Foundation claims that he is a 38-year-old male living in Japan.

"In 2008, Satoshi Nakamoto, the founder of Bitcoin, whose real identity is not known, cleverly combined existing peer-to-peer network technologies, cryptographic techniques, digital signatures, and the potential power of network effects to design and develop the Bitcoin system. Nakamoto was very clearly motivated in this effort by the fallout from the 2008 financial crisis," reported The New Yorker.

Bitcoin bubble may have burst but virtual money will rule

The bitcoin bubble has burst - or has it? AP

Rather than trusting in governments or central banks to secure the value of the currency and guarantee transactions, the founder ensured the bitcoin places its trust in mathematics.

At the start of the year, a bitcoin was worth $13.51; the price of a single bitcoin then blasted through the $100 barrier last week, according to Mt Gox, a site where users can swap bitcoins for more traditional currencies. On Wednesday, it traded as high as $266. But on Thursday, it plummeted to less than $100, as one of the exchanges where bitcoins are traded closed temporarily.

PandoDaily, which has been reporting on the virtual currency phenomenon, offers an awesome video (here) explaining how the bitcoin works through classic Super Mario Bros clips.

The rebel Internet currency has been in red-hot demand because of world events that have shaken confidence in government-issued currencies.

"Because of what's going on in Cyprus and Europe, people are trying to pull their money out of banks there," Tony Gallippi, the CEO of "BitPay.com," which enables businesses to easily accept bitcoins as payment, told FoxNews.com.

According to Bloomberg Businessweek, it appears that Spaniards may have been particularly active buyers of bitcoins in March, having taken the debacle in Cyprus as the likely sign of a forthcoming governmental plunder of their own savings.

"That a number of panicked Europeans appear to have reckoned the wildly volatile, vulnerable, and tiny bitcoin market a preferable alternative to their own banking system, even temporarily, signals a serious widening of the cracks between the northern and southern EU countries in the wake of the euro-zone debt crisis. It also illustrates the broader collapse of trust that is threatening the world of global banking and fiat money," said The New Yorker.

At the P2P Foundation, Nakamoto wrote an astute blog post describing the difference between bitcoin and fiat currency:

"[Bitcoin is] completely decentralized, with no central server or trusted parties, because everything is based on crypto proof instead of trust. The root problem with conventional currency is all the trust that's required to make it work. The central bank must be trusted not to debase the currency, but the history of fiat currencies is full of breaches of that trust. Banks must be trusted to hold our money and transfer it electronically, but they lend it out in waves of credit bubbles with barely a fraction in reserve. We have to trust them with our privacy, trust them not to let identity thieves drain our accounts... With e-currency based on cryptographic proof, without the need to trust a third party middleman, money can be secure and transactions effortless."

Do bitcoins make is easier to pay for dubious purchases?

Virtually untraceable bitcoin currency can be swapped anonymously online for almost anything. It is in a sense the digital equivalent of using hard cash and so some have criticised it for facilitating online drug markets.

"The online, anonymous, bitcoin-backed marketplace that's been getting a lot of heat lately is called the Silk Road. Accessing this anonymous drug market isn't as easy as Googling it, but once you're in, users are greeted with a drug-buying experience that is unmatched, and surprisingly simple," said Motherboard, an online magazine.

Despite two US senators trying to shut down the Silk Road it is still running, and a recent study estimates that $23 million of illicit items are sold for bitcoins on the site every year.

Some financial experts also say that bitcoins can help people evade taxes in the same way you could use cash to avoid taxes.

Still, the bitcoin is a very well-designed online virtual currency and, as Time magazine has noted, the Internet will almost certainly offer access to a growing number of currencies in one form or another that are beyond national control.

"If a future Fed Chairman tries to repeat Ben Bernanke's policy of Quantitative Easing (effectively printing money), worried investors could start pulling their savings out of the dollar and send it streaming into the Cloud so fast that the Fed would be forced to change course. Governments will fight back, no doubt. But virtual currencies will be no easier to control than Facebook," said Time.

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