It’s always a joy to turn up money you never thought you had, and discover just when you need it most. Last week Norwegian Kristoffer Koch took finding forgotten money to a whole new level when his $27 investment in a virtual currency called Bitcoin turned out to be worth $886,000. It turns out that he had bought up 5,000 Bitcoins in 2009 when researching a thesis on encryption but forgot about his investment until last month when recent media coverage on Bitcoin jogged his memory. So what are Bitcoins, why has their value rocketed and what next for the world’s main digital currency.
The Rise of Bitcoins
Bitcoin is a decentralised peer-to-peer digital currency that functions without the backing and control of centralised banks. Originally Bitcoins were given out to progammers who helped set up the Bitcoin system. After a while Bitcoins were sold directly to people who wanted a safe place to store money or small investors who stored their Bitcoins in a virtual wallet. Because Bitcoins are stateless and their transfer doesn’t attract any transactional fees their advantage as an alternative currency system is clear to see.
Up until fairly recently, Bitcoin was a little known online currency exchange used by tech geeks, drug dealers and cyber criminals to trade outside the established banking system. But lately the currency has witnessed more attention from a varied motley-crue of investors, savers, financial institutions, and even security services.
Back in spring 2013, many savers in Greece and Cyprus, scared by the collapse of their national banks and even the Euro itself, turned to withdrawing their money from banks and buying up Bitcoins as a safer way of depositing their money. National governments and central banks dislike virtual currencies, and Bitcoin in particular, because it challenges their traditional role and power. But in reality some of the recent popularity of Bitcoin has been caused by a loss of confidence in banks and central banks.
Rather than deal with the structural financial faults in modern economies including vast social security costs, low-wages, bungling financiers and tax dodging corporations, central bankers turn instead to the financial crack cocaine that is ‘Quantitative Easing’. Or ‘printing money’ to you and I. Printing money has become the policy of last resort and central banks now act with all the forward planning and false hope of an anxious, drunken pensioner feeding their grand-children’s savings into a Las Vegas slot-machine.
Currencies and Trust
Given the slump in confidence with national currencies it’s not surprising that more people look to other alternatives. Trust lies at the cornerstone of any currency system. In fact the currency system across the globe for thousands of years has been based on Fait money, that is any money declared legal tender and backed by a central government. Fair money equalled trust. Printed money was accepted from Belfast to Beijing because people trusted their government to manage the currency system effectively. But that system is starting to crack because of the inability of central governments to manage their currencies and their addiction to printing money.
Online currencies are still in their infancy, but there is increasing evidence that they are starting to become more mainstream and crucially, to be accepted as a currency. Indeed Bitcoins are even finding their way onto the high street. For example, in some forward parts of London you can order a Pizza online and pay for it with Bitcoins and last week Vancouver witnessed the introduction of the world’s first Bitcoin ATM.
The Future for Bitcoin
The story of Bitcoin is also one mired in intrigue. Given the anonymous nature of trading Bitcoins it’s not surprising that the system quickly attracted the attention of criminals and drug dealers who found the perfect way to trade seemingly undetected online. Bitcoin was the main currency traded on Silk Road, a massive online marketplace for criminal activity. In October the US security services arrested the alleged owner of Silk Road, William Ross Ulbricht and seized $28 million in Bitcoins.
Bitcoins have also attracted huge investment from speculators across the globe and the new currency is how traded as an investment. Bitcoins have witnessed massive peaks and troughs in price fluctuation in recent months as speculators react to negative stories such as the Silk Road arrests and positive signs such as interest in Bitcoin investments from established financial institutions. Some figures have been notably sceptical of Bitcoins and warn that the system is essentially a Ponzi scheme because it encourages hording of money and can’t give any guarantees that it can’t just create massive amounts of new currency.
One of the big questions is – what future will Bitcoins have? Supporters of virtual currencies say that they will change finance in the same way the web changed publishing. I think it’s likely Bitcoin is just the latest in a very long evolution of currency and will be used, in some form, as a dominant currency to replace old traditional fait money. And history may well record that one of the unwitting forces behind the rise of digital currencies were the tired, hapless old central bankers who devalued their currencies and their economies by printing too much money.