Will the idea of bitcoins live up to the hype – or will they crash and burn?
I love the Bitcoin concept. There’s always romanticism in something designed to liberate the masses. In currency’s case, controlling influence comes from banks and governments.
It’s ironic, then, that Bitcoin’s success now depends in significant part on recognition and legitimacy from these very institutions.
For the uninitiated, Bitcoins are e-money, mined around the world by open-source software that picks up and confirms transactions and issues new coins in limited supply to control inflation. The bitcoins you buy from a growing number of exchanges are stored in a digital wallet and used for payment at an equally growing number of businesses. When you transact, you create a crytographic signature that dictates a certain amount of bitcoins goes to a public key, one half of a mathematical pair used to verify digital signatures. Only the holder of the other half – the private key – can spend the coins.
What makes Bitcoins valuable is the same as what makes the globe’s other 180-odd currencies valuable –the extent to which they’re traded and how widely they’re accepted, and as an offshoot, a perception of worth. But what devalues them is also the same – when the currency is also used for illegal means and when worth is in constant flux.
So will this currency live up to hype of proportions similar to that when the internet launched, or will it crash and burn?
One thing going for it is growing credibility in the offshore venture scene. This year Bitcoin service OpenCoin won investment from major US player Andreessen Horowitz, among others. Another platform, Coinbase, says it’s raised US$6 million. In the US 60 investors even joined forces to create BitAngels, a group dedicated to funding Bitcoin ventures.
The Winklevoss twins, famous for a legal battle with Facebook founder Mark Zuckerberg, plan a trust for investors to trade bitcoins.
A growing number of merchants are taking bitcoins as payment, among them WordPress, Reddit, OkCupid and our very own Mega, which uses Kiwi entrepreneur Brian Cartmell’s merchant service for digital currencies, Zipbit.
US political candidates have raised bitcoins to fund campaigns, a UK escort service is even on the bitcoin bandwagon and a US couple bought discounted fertility treatment using the currency. Government reactions have been mixed. Germany recognised bitcoins as a unit of currency that’s subject to its tax law, while the Bank of Thailand forced the Bitcoin Co exchange to shut down because it wasn’t authorised to trade. Bitcoin was ruled a form of currency in a preliminary US court hearing over a pyramid scheme.
Reactions by governments, banks and courts will be crucial because of that tension between the legitimising effect of law and order and the stark contrast of institutional involvement with everything Bitcoin stands for.
At just four years old, bitcoins are a volatile currency without a track record. Exchanges are fertile ground for speculators. A glance at the live graph on the website of Mt Gox, the currency’s oldest and largest exchange based in Japan, showed prices across a month fluctuated between US$139.4 and US$144.4, with traded volumes as low as 100 and as high as 1300.
When the FBI shut down the Silk Road Bitcoin marketplace last year – it was known for the trade of drugs and black market products – values fell sharply across other exchanges.
Bitcoin, like any open source software, paves the way for innovation because barriers to entry have dropped. But with anonymous trade comes a huge crime risk. And with technological complexity comes lack of understanding.
Ultimately bitcoins won’t take the place of other currencies. But a currency that allows businesses to find willing buyers in unexpected places, much the way the internet did, has too much potential to ignore. That’s why adoption, for all the currency’s flaws and experimental nature, will grow at pace.