The dazzling rise and fall of the virtual currency Bitcoin
Last week, it was the currency of the future. Now, its value has dived
Nikhil Kumar is The Independent's New York correspondent. He was formerly assistant editor on the foreign desk and has also done a variety of jobs on the city desk, where he wrote about markets, commodities and other business and economics topics.
Friday 12 April 2013
Proponents call it a new currency for the virtual world. Critics call it a fantasy or, worse, a Ponzi scheme.
For Tyler Winklevoss and his twin brother Cameron, whose legal feud with Mark Zuckerberg over the origins of Facebook was depicted in The Social Network, it could be the next big digital thing – and they’ve dug deep into their pockets to back it, with an investment worth $11m as of Thursday morning.
One thing, though, is for certain: Bitcoin, the virtual currency launched by an anonymous hacker more than four years ago, has rarely attracted as much attention outside the technology world as it did over the past week, when its value gyrated wildly, striking a new peak before slumping precipitously. At one point, a Bitcoin was worth nearly $270. But at the time of writing, it equated to just over $73, according to MtGox, an exchange.
The sudden ups and downs sparked various theories, including the possibility that some investors spooked by the crisis in Cyprus had abandoned not just the country but the whole idea of conventional currencies for a virtual alternative, prompting the spike. The fall, then, might have been down to speculators cashing out as new investors logged on from Nicosia. The limited size of the Bitcoin market might explain the wild swings, as small trades in such markets often prompt big movements.
While the debate over this week’s swings continues among the currency’s supporters and detractors, for the rest of us, it was the first time we heard of Bitcoins. The virtual tender is the brainchild of a hacker using the online pseudonym Satoshi Nakamoto. He first mooted the idea in 2008, before Bitcoins began trading in early 2009.
Unlike dollars or pounds, say, Bitcoins are not issued by any government, nor is the flow of the currency managed by any central bank. They are also finite, in contrast to conventional currencies, which are theoretically limitless. And they don’t come in the form of notes or, despite the name, coins. Instead, the way to get your hands on Bitcoins is by acquiring a virtual wallet, a piece of software that allows you to store and trade in the currency. Wallets can be installed on computers and mobiles – or acquired via websites that specialise in the service.
That’s step one, and it gives you access to the Bitcoin network, which underpins the system. With no central authority, the network acts as a backbone for the currency, with the system working much like a peer-to-peer file sharing service, where users trade music and videos with each other.
The way to get new coins is to either buy them off someone else, or “mine” them by putting your computer to work at cracking a code that, once resolved, releases a preset number of Bitcoins into your virtual wallet. The amounts are automatically adjusted, ensuring that the network isn’t flooded with new currency. And the total inventory of Bitcoins is currently programmed to top out at 21 million by 2040 (currently, there are around 11 million Bitcoins in circulation, with a total value of around $1bn).
Who uses this virtual cash? Nobody knows for certain because the system is set up to ensure anonymity. We know about the people who’ve publicly disclosed their interest – like the Winklevii – but that’s about it.
There are few ways to spend Bitcoins. One is Silk Road, an online marketplace that, allegedly, is a virtual bazaar for drugs. The anonymity within the Bitcoin network, meanwhile, makes it hard to trace stolen currency. Then there are the question marks over the recent volatility. If Bitcoin is a real currency, the wild, unexplained swings certainly don’t bode well for users. Is this anything more than a bubble? To this, the Bitcoin Foundation, a body set up to maintain standards across the Bitcoin community, says not. Instead, the virtual money is “still finding its equilibrium,” Jon Matonis, a director of the foundation, told The Independent.
The Winklevii are also unfazed – for now. “It has been four years, and it has yet to be discredited as a viable alternative to fiat currency,” Tyle Winklevoss told the New York Times. “We could be totally wrong, but we are curious to see this play out a lot more.”
$270 The peak worth of a Bitcoin during its rise over the last week
$73 What one Bitcoin was worth last night
11m Number of Bitcoins currently in circulation
Q&A: How do I get virtual hands on them?
Q. What is a Bitcoin?
A. You will never be able to put one in your purse or wallet, but Bitcoins are a form of currency which some hope could become a virtual equivalent of the pound or the dollar. A principal difference is that they do not exist as real coins, nor indeed banknotes, but merely as millions of unique online registration numbers which each represent one Bitcoin. Another is that they are not issued by a national government and they circumvent traditional banks.
Q. So who is responsible?
A. The project was started by Satoshi Nakamoto - at least that is his online pseudonym. There is much mystery over who he is. Now, the currency is promoted by the Bitcoin Foundation, which says it “standardises, protects and promotes the use of Bitcoin cryptographic money for the benefit of users worldwide”.
Q. Why would I want one of these things?
A. They can be exchanged for real goods – though there are very few conventional retailers, even online, that currently accept them – and their value in exchange for traditional money has spiked greatly recently. People who use Bitcoins are attracted by the fact it is outside government control and transfers of the online money are far harder to track or trace than normal currency. But that has led to accusations that they are perfect for criminals and drug dealers.
Q. So how can I get my virtual hands on some Bitcoins?
A. You can buy some in an online exchange, or you can “mint” your own. Essentially, the large numbers that make every Bitcoin unique are still being created, so if you can add to the vast computing effort required to create these numbers, you can claim part of their value.
Q. Are there any risks?
A. Plenty. There have been several large thefts of Bitcoins, and unlike traditional currency they are not protected by insurance. Being pretty much impossible to trace, the police cannot help track down the hackers either. Without being backed by years of trust or tradition or hard assets like standard currencies they also look potentially extremely vulnerable to investors losing confidence, which could leave the things worthless.
Q. Are there other online currencies to rival the Bitcoin?
A. There are several, Litecoin and Peer to Peer Coin among them. Even if online currencies become more accepted and reliable, it is yet to be seen if Bitcoin becomes the world’s virtual money of choice.
- 1 I've been called an abusive and dangerous parent, when all I did was listen to my transgender child
- 2 Migrant crisis: Greek soldier saved 20 people singlehandedly off Rhodes beach
- 3 Sofyen Belamouadden murder: The inside story of a crime that horrified Britain
- 4 Company breaks open Apple Watch to discover what it says is 'planned obsolescence'
- 5 UK weather: Britain braced for snow to replace sun as arctic air mass moves in
General Election 2015: Chuka Umunna on the benefits of immigration, humility – and his leader Ed Miliband
The sickening truth about food banks that the Tories don't want you to know
Migrant boat disaster: Ukip candidate mocks victims in sickening Twitter post
Nigel Farage wants the BBC to stop making programmes like Doctor Who, Strictly Come Dancing, and Top Gear
Global warming: Scientists say temperatures could rise by 6C by 2100 and call for action ahead of UN meeting in Paris
General Election 2015: Britain would become a 'communist dictatorship' under Ed Miliband and Nicola Sturgeon, claims wife of Michael Gove
iJobs Money & Business
£24000 - £26000 per annum + benefits : Ashdown Group: A highly successful, glo...
£50000 - £55000 per annum: Ashdown Group: Business Analyst - Financial Service...
£18000 - £23000 per annum + OTE £45K: SThree: At SThree, we like to be differe...
£20000 - £25000 per annum + competitive: SThree: Did you know? SThree is the o...
Day In a Page
Surrounded by the Western fells, this five-bedroom Georgian home retains many original features including panel-plastered ceilings, sash windows and fireplaces.
This six-bedroom home is set amongst three acres of grounds. Currently a large family home, Clift Hill has potential to make a B&B, subject to change of use permissions.
A former period coach house, Glebe Farm Stable is now a three-bedroom cottage with a double car barn, office, kennels and an outbuilding that's currently used as a gym.
Set sail for this four-bedroom farmhouse in Cowes. With five acres of land and an indoor pool, this home oozes character. There is even potential to let a one-bedroom annexe.
Surrounded by woodland, this five-bedroom manor house has plenty of outdoor storage space in the form of three converted loose boxes, two smaller outhouses and a woodstore.
This four-bedroom detached home comes with a double carport, useful workshop, garden and two walkways that offer views of the adjacent countryside.
With space for an equestrian business, a greenhouse for growing your own veg, a wine store and a gym; this five-bedroom home has all the ingredients for a country retreat.
This four-bedroom home has exposed brick chimneys and a vaulted ceiling in a breakfast room that's ideal for summer entertaining - the doors open to the patio and garden.
The decked roof terrace of this two-bedroom flat is perfect for summer drinks while large windows and ample storage space make for a light and spacious interior.
Surrounded by approximately 15 acres of grounds, this six-bedroom grade II-listed home has been extensively refurbished yet retains many period features.
This four-bedroom home comes with a two-bedroom cottage and commercial office, with planning to extend, in a stunning courtyard setting.
In a pretty Norfolk village, this four-bedroom family home is surrounded by landscaped gardens, with even a self-contained annex for guests.
A few miles from the seaside at Perranporth, this four-bedroom farmhouse sits amongst nine acres of idyllic grounds - including a lake and two barns used as holiday lets.
This five-bedroom home is arranged over three floors of a converted Victorian hospital, offering spectacular views of the Pentland Hills - only three miles from the city centre.
This four-bedroom detached home comes with grounds that span to approximately 2.5 acres, as well as two large patio areas and a double garage.
This four-bedroom cottage is a Grade II-listed town house, well-located for the thriving market town of Nailsworth.
A four-bedroom apartment on the ground floor of a stunning period property in North Yorkshire, with two kitchens and a large south-west facing garden.
This high-spec two-bedroom home is part of a smart collection of new flats at Beaufort Park and has a large decked balcony that's perfect for summer drinks.
Capitalise on the fabulous views of Trevone Bay by taking two homes and creating one spacious boutique B&B. Just a cliff-top walk from Padstow.
Overlooking a golf course, this six-bedroom Edwardian detached home spans four storeys and retains many period features including the original, operational servants' bells...
On the edge of the city, this six-bedroom home comes with an outdoor swimming pool and a large garage block that has annexe potential.
In a Grade II-listed manor just outside of Bath, this three-bedroom home is arranged on two floors with a skylight in a vaulted roof line.
Open the living room's bi-fold wooden doors to reveal a retro-style kitchen, and a conservatory leading to a paved garden at this three-bedroom home.
A Grade II-listed, four-bedroom home, in a charming Somerset village, with a two-storey studio that could be converted into a holiday cottage
A modern four-bedroom Victorian home, within walking distance to the high street
A luxury apartment in the Gothic mansion of Wyfold Court in Kingwood, offers six bedrooms spread over three floors and a turret
This school conversion, near Stockwell Tube, oozes New York loft style. The one-bedroom flat features double height ceilings and exposed brick work
This six-bedroom Georgian home is on three floors with open fireplaces, a two-oven Aga, an annexe, and cottage gardens with outbuildings and a car barn
High Crest House covers an impressive 9384sq ft, with almost three acres of grounds including a tennis court and summer house enclosed by electric gates
A six-bedroom farmhouse with separate accommodation in converted stables. Situated in the village of Church Aston, within walking distance to the market town
A two-bedroom flat with under-heated walnut floors and bespoke built-in storage. The Tube and Clapham Common are a short stroll away
A refurbished seven-bedroom townhouse with staff quarters, cinema room, superb gym, steam room and plunge pool
A minimnalist four-bedroom home designed to the highest spec, featuring glass walls and a kitchen space lit by a glass roof
Hibernate during winter and make your living during the summer at this busy guesthouse with panoramic sea views, in the village of Lynton
A four-bedroom penthouse next to the Tate with direct views of St Paul's from two floors of luxurious living space
A four-bedroom detached home surrounded by spacious gardens and woodland, close to New Pudsey
An 18th-century, three-bedroom home near Langstone Harbour built from ships beams with vaulted ceilings and wood burning stoves
A five-bedroom semi-detached home with a mix of period and modern features in a popular and convenient location
This five-bedroom red-brick beauty overlooks the village green and sits in just under two acres of land
A three-bedroom villa with self-contained flat, minutes from Lake Windermere
A five-bedroom Victorian home with four receptions, superb gardens and paddock in Pembury
An eight-bedroom house on the south side of the The Green with cinema, wine cellars and summer house
This 17th century beauty is full of rustic cosiness, while the detached home office means you can also run a business
Four exclusive apartments in a Grade II-listed former medical school with 2,275 sq ft of living space and 18ft ceilings
A five-bedroom terraced house on the popular Peterborough Estate, ideally located for both Eel Brook Common and South Park
A state-of-the-art farm-building conversion on the former Cliveden Estate, with 11,420sq ft of internal space, cinema and wine cellar
Windsor Castle overlooks this three-bedroom Victorian cottage located on one of Windsor's smartest roads
A boutique mews house, set around a central courtyard, with three bedrooms and a private roof terrace