The rise of the bitcoin: Virtual gold or cyber-bubble?

By Anthony Faiola and T.W. Farnam,April 04, 2013
  • Amir Taaki and Jonathan James Harrison hold a copy of Bitcoin magazine outside the squat where subjects working with Bitcoin operate and live, in Waterloo, London.
Amir Taaki and Jonathan James Harrison hold a copy of Bitcoin magazine outside… (Mike Kemp/For The Washington…)

LONDON — A currency surging in value at a breathtaking rate this week belongs to no nation and is issued by no central bank. It can be used to buy gold in California, a hamburger in Berlin or a house in Alberta. When desired, it can offer largely untraceable transactions.

The coin in question now has a global circulation worth more than $1.4 billion on paper. Yet almost no one, it seems, knows the true identity of its creator. In the United States, this mysterious money has become the darling of antigovernment libertarians and computer wizards prospecting in the virtual mines of cyberspace. In Europe, meanwhile, it has found its niche as the coinage of anarchic youth.

The currency is bitcoin, a kind of cyber-money initially traded among hackers and cryptologists, and increasingly traded on Web sites and exchanged for goods and services. Two years ago, one bitcoin was worth less than $1. Two months ago, the price for one unit surged above $20 on a proliferation of cyber-exchanges from Tokyo to Moscow. A sudden burst of new interest sent its value soaring to a record $147 on Wednesday.

It has since fallen back after a series of hacker attacks. Yet, as of Thursday, bitcoin was still trading above $130.

Will all that crash and burn in a cyber-version of a financial bubble? Critics say it quite possibly will. Will authorities — already concerned about the use of bitcoins to buy drugs and launder money online — step in to regulate it? There are signs that may already be happening. But for now, its diverse group of users ranging from the Free State Project and WikiLeaks to environmentalists and professional gamblers, call its surge a revolution in “financial free speech.”

For Jonathan Harrison — a former gold trader who ditched his London flat to join a group of virtual currency obsessives living in a dilapidated commune on the wrong side of Waterloo Station — what matters most is a sense that bitcoin is making him a fortune.

Some call it the purest form of capitalism: a version totally unfettered by monetary policy and politically driven economics. On a recent afternoon, Harrison constantly checked the value of his holdings in bitcoins and other cyber-currencies such as litecoin on his glowing smartphone. In less than 20 minutes, his portfolio’s value had surged by about 7 percent.

“Some people say it’s anticapitalist, but it’s more nonconformist,” Harrison said. “It can’t be manipulated by governments, changed by monetary policy. I call it digital gold.”

Mysterious origins

In January 2009, Satoshi Nakamoto unveiled bitcoin to a mailing list of computer super-geniuses. He (or she, or them — Nakamoto is a pseudonym for a programming whiz or whizzes whose identity remains one of the great mysteries of hackerdom) effectively put a free software program on the Internet and invited the group to form a network of bitcoin “miners.” They could excavate bitcoins by using computers to solve complex mathematical puzzles, with units of the cyber-currency seen as a reward for the electricity spent on the algorithms.

Nakamoto seemingly emerged from nowhere a year earlier, uploading a white paper on bitcoin to an obscure e-mail discussion group. The writings suggested political motivations — a response to a global financial crisis in which Western governments reached into the banking sector as never before. But Nakamoto also showed little interest in promoting bitcoin beyond an inner circle of global geekdom.

In the 1990s and 2000s, various visionaries attempted to launch cyber-currencies with little success. Yet Nakamoto succeeded where others failed through the elegance of bitcoin’s design. More bitcoins are created all the time. But over time, fewer and fewer will be generated. The finite number — bitcoins will max out at 21 million by 2140, compared to the roughly 11 million in circulation today — makes them a commodity that increases in value as more and more users fuel demand.

To avoid counterfeiting, bitcoins are accounted for on public ledgers. Holders of bitcoins — which are stored using electronic “wallet” software downloaded from the Internet — are kept anonymous unless they choose to disclose their identities. Yet there is no centralized authority that regulators could home in on to shut the system down. Though government- and bank-free, the users pay a certain price for that freedom. U.S. bank deposits, for instance, are insured up to $250,000 by the FDIC. But this week, when hackers struck bitcoin wallet provider Instawallet, the company issued a statement saying it would refund clients holding more than 50 units only on a “case-by-case and best-effort basis.”

Nakamoto seemed to vanish more than a year ago, leaving other developers to advance the technology. A year later, initial waves of publicity and word of mouth created a surge in value that sent the price of one bitcoin soaring from less than $5 to almost $30.