As financial crises around the world contribute to a growing uncertainty about the global economy, many investors and ordinary citizens are turning to an online currency, bitcoin, to protect their funds. And with more than $1 billion now in circulation, this esoteric monetary system has exceeded the values of 20 national currencies.
Despite its increasing value, bitcoin is still relatively unknown. Bitcoins do not exist in physical form, and are not created or regulated by any government or central authority.
Rather, a computer code manages the digital currency and then distributes new, limited bitcoins to given servers at a scheduled rate. They can then be bought and sold using regular money, including U.S. dollars.
The online currency was introduced in 2009 by a pseudonymous developer named Satoshi Nakamoto. Nakamoto’s true identity has never been revealed, and “he” is thought to be a group of people. Despite its mysterious creation, bitcoin caught on quickly and has since soared in popularity.
The most recent increase in demand for bitcoins can be attributed to what is happening in Cyprus and other European countries, where authorities are threatening to seize money from private bank accounts to pay off government debt. Many concerned citizens in these counties have responded by pulling their bank account assets and purchasing bitcoins. The online currency has become so popular in Cyprus, there is talk of a bitcoin ATM being introduced.
The coins are also gaining popularity in the United States. With an out of control debt currently approaching $17 trillion, many fear a financial crisis in America is inevitable. The theory is that bitcoins maintain their value and are not at the mercy of currency manipulators such as the Federal Reserve.
Bitcoin’s earliest buyers have watched their initial, small investment balloon in value. In 2010, one bitcoin was worth around $0.89 — today the price for each is more than $100.
One interesting benefit to bitcoin holders is that its peer-to-peer system allows for complete privacy. The coins are an online equivalent of cash, as no payment processor or bank keeps tabs on transactions. There are, of course, justifiable reasons why one may want his or her financial transactions to be untraceable. However, this anonymity attracted many drug and arms dealers during the currency’s early stages.
Critics also point out that bitcoin may be susceptible to cyber attack if its computer program is not truly secure. A skilled hacker could potentially devalue the coins by minting more. Still, the bitcoin system does not rely on just one server, but a network of them. So if the bitcoin site goes down, the currency would, in theory, still work without problems.
The recent increase in bitcoin demand may signal a trend towards digital, unregulated currencies. As countries around the world teeter on bankruptcy, bitcoins should retain their purchasing power. This online monetary system provides a fascinating — albeit potentially risky — alternative to other world currencies.
