When the Cyprus banking crisis intensified in mid-March, currency trading took an unusual turn. Sure, the dollar rose in value, along with the British pound. These surges surprised no one. The more peculiar occurrence was a cascading rise in Bitcoin – the world’s most valuable crypto-currency – which has seen its value rise nearly 700% over the last six weeks. On Wednesday, however, it appeared to be heading for an epic crash.
Bitcoin was designed in 2008 by an anonymous person (or group) known by the pseudonym Satoshi Nakamoto. Investigations into the real identify of Nakamoto have yielded little results, and more questions.
Bitcoin has no central bank or administrator but runs, rather, on an internet based peer-to-peer network. “Bitcoin miners,” working on rogue servers, perform the role of treasury department, and generate 25 new coins every 10 minutes based on Bitcoin’s software code.
Because Bitcoin “wallets” have specific encrypted addresses – usually 33 characters in length – and are stored only online, the owners of these wallets intends to be anonymous. Bitcoins are anonymized further when used on onion-routing browsers like Tor.
Beyond the coding jargon, Bitcoin is traded like any currency, while remaining devoid of sovereign governments interests or political turmoil. It has been consolidated further by a fixed inflation rate and a theoretically finite supply. As Western currencies become more volatile, it seems that the crypto-currency, and others like it, will only maintain their rise in value.
Currently, MtGox dominates the Bitcoin exchange, thought to be responsible for over 80% of all Bitcoin transactions. With its increase in popularity, however, this monopoly will likely dissolve. Plans have been introduced for Bitcoin ATM’s, and online vendors have shown an increasing willingness to accept them as payment.
Despite all these hoorays, Bitcoin has no inherent value. Its value is determined only by speculation. Many of these speculators have little knowledge of crypto-currency or Bitcoin’s underpinnings. In fact, no one really knows the in-and-outs of Bitcoin, especially when its creators are still unknown. Like any currency, it is subject to theft. Most concerning, is the potential of rogue hacking that would be able to operate under the radar, absent a central administrator.
Once upon a time, Bitcoin traded for a mere $1. Today, they have sold for a high of $266. Bitcoin owners like myself, who purchased them a year ago at less than $20 have also seen enormous investment gains. A promising venture? Perhaps. For now however, amateur investors should avoid Bitcoin until the media does too. No currency can avoid the power of the news.