In the wake of a greed-induced global financial meltdown, and more recently, the Cypriot government’s declaration it would be confiscating money directly from every citizen’s bank account in order to tackle the country’s debt, confidence in traditional banking systems is at an all time low.
Step forward the Bitcoin.
Created in the spirit of subversion by an anonymous developer calling himself Satoshi Nakamoto, Bitcoin is an electronic cash system based on an open source cryptographic protocol, with no central authority.
Dismissed by some economists as a craze akin to the Dutch tulip bubble of the 1600s, Bitcoin is part of a gradual, technological shift in the way we think about money, whether we like it or not.
Among the Bitcoin-believers, Stefan Thomas, is one of the lucky pioneers who has since made a tidy profit on his initial investment. The IT engineer from Zurich explains his reasoning for sticking with the virtual currency: “In the Bitcoin system, we don’t have to trust any particular person or any particular developer. We trust the code. You can see the code for yourself, and hundreds of developers have already seen it and found that it works. In my opinion, this is a form of even greater confidence. Didn’t they say that: ‘confidence is good, but control is better’?”
For Luzius Meisser, a fellow IT developer from Zurich, there are wider, philosophical implications to taking up Bitcoins: “Personally, I like the idea that the flow of payments is free. It’s like freedom of expression, it’s fundamental. Everyone can keep his own possessions, move these possessions freely, and stay clear of state intervention.”
Besides these benefits, inflation is also technically impossible with Bitcoins because unlike cash, are they are finite, capped at 21m coins until 2041.
While complex, supposedly secret algorithms create and release Bitcoins at their own discretion, the Bitcoin network is structured like a guerrilla movement: it is decentralised, controlled by its users rather than governments. All transactions are anonymous, with no regulator and no accountability. And yet Bitcoins can still be converted into the very same currencies they tangibly threatens – from the yen to the peso.
Nakamoto has also devised software enabling people to ‘mine’ their own Bitcoins, should their computers be strong enough to solve a series of labyrinthine calculations. Nakamato also took the time to make sure these calculations will become progressively harder over time.
As Bitcoin bolsters its reputation as a legitimate currency online, users can buy practically anything: from pizzas to Alpha Romeos. Even a crash last month – when it lost 80% of its value in a day – has done nothing to dampen Bitcoin’s repute. This is in part because a crash means it is just like other, perhaps more respectable, currencies.
Described by some as the ‘Harlem Shake of currency’ and the ‘new digital gold’, the Bitcoin clearly poses some kind of challenge to centralised banking and the guardians of fiat money. And while it won’t knock off the dollar any time soon, and the euro can sleep easy (or at least easier), there are still those uncomfortable with its promise of financial freedom. Sergio Rossi, Professor of Monetary Economics at the University of Freiburg in Switzerland, is one of the dissenters: “We don’t know where the purchasing power of currency comes from or who is behind it. There’s no bank, no monetary authority, and so it’s a problem, because the whole stability of the economic system could be undermined.”
There is also another side to the Bitcoin. Its anonymity helps fuel a shadow economy connecting drug dealers, gamblers, dictators and anyone else keen to buy without being traced. And at sites like Silk Road, the amazon.com of illegality, Bitcoins can buy you a gun, a pound of heroin, or a new identity.
But while authorities are keen to accentuate the role Bitcoin plays in furthering digital vice, behind closed doors, the idea of a currency that cannot be debased to political order is likely to be much more of an immediate concern.