Virtual Bitcoins are appealing but probably doomed
By Robert Cyran
The author is a Reuters Breakingviews columnist. The opinions expressed are his own.
In the currency wars, the nerds are winning. The value of a Bitcoin — a digital currency trading over peer-to-peer networks — has rocketed more than nine-fold in two months to $8.74. The preordained supply and decentralization of Bitcoins have intrigued geeks and paranoid inflationistas alike. But this abstract gold may not survive what looks like a bubble.
Bitcoins are actually strings of unique digits, tracked and traded via an online network. People earn new coins by solving network security problems. These coins can then be traded for real currencies on exchanges, or for goods from certain businesses that accept them.
The Bitcoins in a user’s virtual wallet are tracked by the secure system and can only be transferred by that user. Unless the system is hacked, this kind of money can’t be forged. Moreover — and here’s the hook for the inflation worriers — it can’t be printed willy-nilly. The supply of Bitcoins is on a predefined path and will be capped at 21 million. And because there’s no central point in the system, there’s no equivalent of the Federal Reserve or another central bank to rewrite that policy.
The concept of the Bitcoin is no less real than regular paper money or coins. All such currencies only have the value their users accept that they have. Bitcoins do, though, have a couple of disadvantages — they don’t generate income, and since they exist in the digital cloud they’d be less use than paper money in any scenario involving power cuts or lost connectivity.
Still, it’s easy, quick and essentially free to transfer Bitcoins. Moreover, transactions are anonymous and the system knows no national borders. That’s helpful for some legitimate users but also makes them perfect for stuffing virtual brown envelopes and other nefarious activities — a potential worry for law enforcers.
The finite supply means the value of Bitcoins should rise as demand increases. But the latest run-up looks decidedly frothy. One concern is they aren’t easy to spend. A flush user can buy Web design help or alpaca socks. But there aren’t many businesses that accept them. So it seems likely enthusiasts and speculators are hoarding them without regard to the value they really represent. A bubble that bursts when the abstract intellectual appeal fades would probably doom the otherwise creative idea.