What if people could use the Internet to create a new kind of money, one that didn’t involve governments and central banks and could be used anonymously, like cash? That is the idea behind Bitcoin, a virtual currency that has caught the attention of computer geeks, financial speculators, and drug dealers. For the first time, you can buy anything online without giving your credit-card number or bank-account information—leaving no trace at all.
Hundreds of merchants accept Bitcoins for things like books, computers, and professional services. The currency trades on a handful of Bitcoin exchanges, where the price of a Bitcoin fluctuates based on demand. Not long ago a single Bitcoin sold for less than a dollar, but in recent months the price climbed to $8, then to $20, then above $30, before falling back to $18, the current level.
What exactly are you buying? A Bitcoin is basically just a little bit of encrypted code that can be zipped over the Internet and stored in a digital wallet. The concept was proposed by a mysterious hacker named Satoshi Nakamoto (no one knows who he is, and the name is believed to be a pseudonym), who published a white paper describing a way in which computers connected over the Internet could be used to create an unregulated “cryptocurrency.”
New York Sen. Charles Schumer recently called Bitcoin “an online form of money laundering,” after learning about an online warehouse called Silk Road where sellers advertise an astounding array of illegal wares—marijuana, hashish, LSD, ecstasy, cocaine, heroin—and where the only currency accepted is the Bitcoin. (Silk Road is currently shut down, though its anonymous manager claims he intends to start back up soon.)
Right now there are about 6.5 million Bitcoins in circulation. The money supply is controlled by software algorithms and the total supply will max out at 21 million coins. You can crank out Bitcoins on a PC, but it’s an incredibly computer-intensive task, and it will keep getting harder as the number of Bitcoins in existence increases. Some people have pooled together hundreds of machines to “mine” Bitcoins. Most folks, however, just buy them on an exchange.
Some already are hoarding Bitcoins, expecting a Bitcoin bubble will drive the value up to hundreds, maybe even thousands of dollars per coin. The biggest holder, whose identity is not known, is sitting on about 300,000 coins, currently worth about $6 million, says Donald Norman, who runs the London-based Bitcoin Consultancy, which advises companies that want to get in on the action.
Norman says the power of Bitcoins is that they can free people from the tyranny of middlemen: banks; credit-card companies; and money shippers like Western Union, which charge exorbitant fees for performing a rather simple task.
But for a lot of people the appeal lies in the chance to get rich quick by getting in early on the next Internet craze. Still, investing in Bitcoins is extremely risky. You don’t know who’s running the exchanges, and you can’t be sure these guys won’t just take your money and run.
Adding to the risk, authorities might take action. But even if Bitcoin goes away, others like it will spring up. “Now that we have the technology to create decentralized currencies,” Norman says, “they are definitely here to stay.”