Keeping the faith:
MANY saw it coming, but that didn’t stop the Bitcoin bubble from bursting: after rising to dizzying heights, the digital currency suffered its first true crash last week.
The price of the virtual “geek” currency had soared through the stratosphere in recent weeks, trading for a high of $266 on Wednesday — only to come hurtling back to earth in just three days.
By Friday, a single Bitcoin was worth just $54, according to the Mt Gox platform, which manages 80% of the Bitcoin transactions and which had to briefly shut down trading on Thursday. “There was a lot of short-term speculation happening” from people who wanted to earn a buck from the soaring prices and cash out before the fall, Bitcoin Foundation chief scientist Gavin Andresen said. “Wild price swings are not good for Bitcoin.” However, Mr Andresen predicted the crash would not spell the end of the internet-era currency, which was created in 2009 after the global financial crisis by an anonymous programmer who wanted a currency independent of any central bank or financial institution.
“We believe that as the value of Bitcoin grows, and the infrastructure around it grows and matures, the price relative to other currencies will get more stable,” he said. “That will take a few years.” He expected “continued chaos and drama in the meantime”.
Some analysts have said the volatility of Bitcoin might have been fuelled by Cypriots and Russians seeking to invest their euros elsewhere during Cyprus’s banking crisis. But economics professor Steve Hanke of Johns Hopkins University said the Bitcoin bubble burst under pressure from investors, mostly in the US. Either way, he said, Bitcoin remains “a very uncertain, speculative venture” because it is not backed by a commodity.
In August 2011, James Surowiecki was pointing to the risks of investing in Bitcoin, in a Massachusetts Institute of Technology review. “With ordinary currencies, there is a limit to how far down the spiral can go, since people still need to eat and pay their bills,”, Mr Surowiecki said. He said that with Bitcoins, “you can get along perfectly well without ever spending them”.
Bitcoin is made of strings of dazzlingly complex code created by raw computing power — a process called “mining” that can in theory be carried out by anyone with a computer.
The software makes it increasingly difficult to generate new Bitcoins, with the number in circulation designed to eventually top out at 21-million. Once mined, Bitcoins are stored on a user’s hard drive in a virtual wallet.
The European Central Bank, in a report published in October, warned that the “high degree of anonymity” could lead Bitcoin to become a “monetary alternative for drug dealing and money laundering”. It also highlighted the risk of a Ponzi scheme, in which early investors earn returns paid by the later investors. Bitcoin users can only cash out their mon- ey if other people want to buy their Bitcoins. The bank also noted the currency has been vulnerable to cyber attacks, including in June 2011, when hackers wiped some virtual wallets clean. However, that risk has failed to sway many. “If private money starts to become a threat for governments, they come up with many reasons why this is a bad idea,” Mr Hanke said.
And the currency appeared to have at least two high-level champions: the Winklevoss brothers, known in part for accusing Facebook founder Mark Zuckerberg of having stolen the idea for the social network from them.
On Thursday, they told The New York Times they had bought Bitcoins worth $11m — the value assessed before the crash — praising it as a system “free of politics and human error”. Sapa-AFP
PLAY-play money has been around for as long as I can remember. The aim of the game in Monopoly is to buy as many properties as you can, so that at some point you can exchange these amongst one another, get a colour set and build hotels.
My favourites were the greens — Bond, Regent Street and Oxford Streets. Once you had built hotels, you could charge those who landed on your property, amass as much play-play money as you can and bankrupt all of the other players, usually your friends.
Of course you can get fined or even go to jail nowadays for creating a monopoly, so we prefer our kids not to pick up such bad habits. Instead we give them video games where they can master the skill of beheading their opponent and then blow up his army in a delicious orgy of exploding body bits.
Video game skills, as it turns out, could prove most valuable.
Some things have not changed though. It is still not a great idea to go to jail but, if you can afford it, you can get a “get out of jail free card” or, in our own special rules, develop an immediate life threatening disease, which recovers on release.
Another enduring lesson from the game is that investing in utilities never made anyone rich and the only useful thing to do with a utility property was to mortgage it to the bank and build another hotel on Bond Street.
Substitute money is one better than Monopoly money inasmuch as you can buy goods and services with it. Whenever you go to the school fete they do not allow you to buy a hot dog with “real” money, you have to buy coupons.
The kids do not know the relative purchasing power of money (who does?), the person at the Tombola store does not have change, and the school makes a tidy profit out of unredeemed coupons. But it is for the kids, so it is ok.
Casinos issue you with betting chips to help blur the losses you will inevitably incur. We psychologically value chips at lower than the cash required to buy them (count out R1,000 as you split two’s in Blackjack and see if you still want to double up). All of this is simple to understand. I must admit however, that Bitcoins have got me a little foxed! There are rumoured to be at least $1,5bn worth of bitcoins in “circulation”. Apparently invented by some mystical computer guru who goes by the name of Satoshiti Nakamoto (one bitcoin can be divided into 1-million satoshiti’s), bitcoins are a virtual currency.
You can create your own by becoming a bitcoin miner. It seems to me that bitcoin mining is a bit like playing a video game which rewards the achievement of increasingly difficult mathematical tasks with bitcoins to be won at each level (told you those computer gaming skills would come in handy).
Nothing new about that, but here is the trick: you can use these bitcoins to buy real things from one another on the internet — pretty cool, huh?
Bitcoins are legal tender in the ether! Bitcoins have gone from a unit value of $0,05 in July 2011 to around $140 earlier this month.
Sell gold, buy bitcoins — who would have thought?
How could this happen? Like all things that work, it filled a need.
Central banks do not regulate bitcoins, politicians cannot order their printing (but maybe Mr Nakamoto can), you can cash them in for any currency at any number of bitcoin exchanges around the world (Mt Gox is the biggest), you can make them yourself and you can buy things with them in that totally unregulated world, the big bad internet.
You do not have to carry them around in your wallet, or look for an autobank after hours. You will not get held up and asked to hand over your bitcoins! Still, I do not trust them. What if some genius kid hacks into the system and beats it — making herself a gazillion bitcoins and obliterating the unit value for the rest of us?
What if I want to store some under my mattress? Who do we turn to if its just a big con? What if it is just another bubble? Why do I not earn interest?
Well, you could ask the same questions about most currencies nowadays. There is no gold to back up the dollar, there is no interest to be earned on the euro, there is no telling how many yen the Bank of Japan wants to print?
So, what is the difference? Nothing really. I am going down to the video arcade. I am going to invent Eishbucks.