Abubble even madder than Tulip Fever
Its value has shot up 1,000% this year. But experts fear Bitcoin, the online currency loved by crooks but now being bought up by normal investors, is . . .
WHEN a pernicious internet virus swept through 150 countries in May this year, it claimed at least 200,000 victims by infecting computers across the world.
Those targeted by the so- called ‘ransomware’ virus included French car plants, Chinese universities, Australian railways and, most worryingly for those in Britain, the NHS.
The targets of the biggest- ever hacking attack of its kind had one thing in common: the ransom they were asked to hand over in order to regain access to their computer systems had to be paid in a little-known form of electronic money called Bitcoin.
Each $300 payment had to be sent to a Bitcoin ‘address’ online. The hackers even included advice on the ‘best time’ to check if a payment had gone through — their chatty tone completely at odds with the cynicism of a cyber-gang prepared to risk the lives of thousands of hospital patients.
The ransom demand coincided with Disney’s chief executive Bob Iger revealing that hackers had also recently demanded his film studio pay a ransom in Bitcoins.
In this case, it was to prevent one of its forthcoming movies, believed to be the latest in the Pirates Of The Caribbean series, from being illegally released online.
Weeks earlier, hackers also leaked upcoming episodes of the popular TV series Orange Is The New Black after the online broadcaster Netflix refused to pay a ransom — again in Bitcoin.
So, what is this mysterious cyber-currency, which seems to provide an almost perfect means for organised criminals to collect and keep hold of their illicit gains?
Put simply, Bitcoins are a currency that can be bought and sold using regular cash. They exist only in cyberspace, in the form of a numerical code. Once purchased, they can be exchanged for some goods and services, like normal money.
Unlike other currencies, issued by banks and heavily regulated by governments, Bitcoins — which were invented in 2009 — are untraceable and can be exchanged anonymously, with anyone in the world, at the click of a mouse. That means they occupy a medium far beyond the reach of either the taxman or the normal rules of law.
They started life in 2010, with an official value of just five cents in the U.S. for each Bitcoin, and stayed below a dollar all year.
THEfirst notable transaction saw an American pay 10,000 Bitcoins to another computer coder in London — who arranged for two pepperoni pizzas to be delivered back in the States in May 2010 (equating to about $40 or £30, far less than the supposed value of the Bitcoins).
The price rose to $100 for each Bitcoin by 2013 and reached $1,000 over the ensuing 12 months. It then fell to $200 in 2015, before beginning a vigorous surge. This week, the price of a Bitcoin topped an astonishing $10,000 (last night, it had dropped to $9,783 or just under £8,000).
But that means it has increased by 200,000-fold since its launch.
Fuelling this rise have been private investors, currency speculators and celebrities who believe that, despite its reputation as a means for crooks and computer geeks to exchange cash, Bitcoin could become a common currency for middle-class consumers.
Supporters see it (and some online imitators) as the future of money, allowing people to bypass banks and credit card companies.
To this end, underwear tycoon Michelle Mone, a British peer, announced in September a venture to sell property in Dubai that would be paid for in Bitcoins.
Football manager Harry Redknapp (who once claimed in court to be almost financially illiterate) has used Twitter to endorse a rival currency called Electroneum.
But is the Bitcoin gold rush the next big financial bubble about to spectacularly burst?
Such a warning was made in blunt terms this year by one of the world’s most powerful bankers. Jamie Dimon, boss of JP Morgan Chase, America’s biggest bank, declared Bitcoin was a ‘fraud’ that will eventually ‘blow up’.
It was, he said, ‘worse than tulip bulbs’ — a reference to the infamous 17th-century bubble when investors manically piled into buying Dutch tulips. ‘It won’t end well. Someone is going to get killed.’
He added that he would ‘fire in a second’ any of his investment bankers who traded in Bitcoin.
Using Bitcoin only made sense, he said, if ‘you were a drug dealer’ or ‘a murderer’. But it had little effect. When Dimon spoke, Bitcoin was worth $2,600.
Since then, it’s almost quadrupled in value. The UK regulator, the Financial Conduct Authority, has also warned against a speculative frenzy in internet ventures funded by investors using Bitcoin and other ‘ cryptocurrencies’ (crypto means ‘secret’ or ‘hidden’).
The FCA said anyone investing in them should be prepared to lose everything. In China, where this trading has been most frenetic, authorities say they intend to ban trading of Bitcoin and other virtual currencies on its domestic stock exchanges. Bitcoin has already been banned from Chinese banks and financial institutions.
Bitcoin’s attraction to criminals is obvious. It, and other online currencies, are highly encrypted, making transactions incredibly difficult to spot or track. A Bitcoin alternative called Monero has so far proved anonymous and pretty much impossible to trace.
While conventional online payment methods such as bank transfers and PayPal go through banks, which insist on customers disclosing their identity, Bitcoins can be bought for cash with no questions asked from a string of exchanges around the world.
Instead of a bank, a loosely linked network of computers globally tracks Bitcoin transactions. Each Bitcoin is essentially a piece of computer code, assigned its own number, and sent instantly to a recipient’s ‘ virtual wallet’, an online address identified only by an anonymous number.
Anyone with internet access can anonymously create a Bitcoin address.
For Bitcoins to be worth anything they need — like gold — to have a rarity value.
Bitcoin’s inventor, who calls himself Satoshi Nakamoto, but whose identity is a mystery, has allowed other geeks around the world to create, or ‘mine’, new Bitcoins by solving complex mathematical puzzles that take up vast amounts of computer power and time.
New Bitcoins are released at a rate of about 25 new coins every ten minutes, but eventually, the ‘mine’ will dry up, for they have been designed in such a way as to ensure that no more than 21 million will ever exist. Today, around 16 million are in use, with their cash value determined by the laws of supply and demand.
The total value of all Bitcoins in existence is about $ 160 billion (£ 119 billion), more than the combined values of Lloyds, RBS and Barclays. If policing this financial Wild West sounds like a nightmare, every week also brings new evidence of criminals’ love of Bitcoins, for everything from drug- dealing, extortion and tax evasion to money-laundering.
Until the FBI shut it down in 2013, a notorious website called Silk Road traded more than £1million in illegal drugs each month, all paid for with Bitcoin.
A recent study estimated that ‘ransomware’ attacks — where Bitcoins are demanded in return for unlocking computers attacked with viruses — are now so rife that nearly 54 per cent of British businesses have been targeted.
MEAN WHILE,Bitcoin exchanges in the U.S. and UK have been repeatedly hacked, losing hundreds of thousands of Bitcoins.
Other hazards make it an inherently risky form of investment — if a Bitcoin owner forgets his password, he can’t get a new one.
But none of this has deterred some 100,000 organisations — including Microsoft, Dell, Greenpeace and Barclays — from accepting Bitcoins. As the bubble has grown, around six million people have begun using Bitcoin to buy not only guns and drugs, but also theatre tickets and beer.
In London, you will find financial seminars with titles such as ‘Bitcoin for Beginners’ and ‘Bitcoin and how to make money trading crypto-currencies’.
But that doesn’t stop governments, and the Bank of England, being suspicious about Bitcoin.
How can they assess people’s income tax dues for example, if they cannot see what they earn?
Blue- chip investment houses remain cautious, pointing out that, while a cryptocurrency may end up part of our everyday lives, there is no guarantee it will be Bitcoin. Google was not the first search engine, and investors in most of its predecessors lost almost everything.
If, or when, this financial bubble does eventually burst, it would, of course, be ruinous for many Bitcoin owners. With no government or central bank to prop up the system, nobody will be riding to their rescue — and they would end up losing everything.
So, rather than jumping onto this speculative bandwagon, cautious investors should perhaps content themselves with sitting back, enjoying the show and thanking their lucky stars they aren’t the punter who, a few years back, decided to give away Bitcoins with a value today of almost £73 million — just because he had a hankering for pizza.