28 Mar 2013

Bitcoin: has the internet currency’s day come?

As banks in Cyprus battened down the hatches because their customers were trying to take all their money out before it got taken off them, a particular word kept on being mentioned. Bitcoin.

Bitcoin has seen its value jump from $40 to $72 in the last two weeks (Getty)

The digital currency with no form and little regulation has seen its value jump from $40 USD to $72 in the last two weeks, and among certain circles, is being presented as a panacea for economic crises around the world.

Referring to the people in Cyprus at risk of losing their savings amid fears of a raid on banks, Jeff Berwick, a blogger who set up The Dollar Vigilante, said: “If these people had simply bought bitcoins with their savings, not only would they currently have 100 per cent access to their funds, but also they would have enjoyed a parabolic move to the upside over the past months.”

So why isn’t everyone trading in bitcoins? Channel 4 News answers a few questions on the currency gaining currency.

What is Bitcoin and where is it from?

Bitcoin, or BTC, is a form of currency, but one which is online, or virtual. Digital, decentralised, crypto-currency and simulated. But certainly not fake.

It was said to have been devised back in 2009 by a programmer who used the pseudonym “Satoshi Nakamoto” and had the same principle as paper money.

Though there are some physical forms, its main form is in data, not in pounds or pence. It bears no resemblance to any existing currency, and it is traded online, or peer-to-peer. In short, it is an alternative means of exchange for transactions which bypasses the banking system entirely.

It has no government controls, no financial regulation and it is only used by the network of users who create and exchange it for goods and services:a parallel universe banking system.

Will it unlock a supermarket trolley?

Certainly not. And neither will it work inside the supermarket. There is no pound or pence, or dollar, yen or rial, for that matter, although bitcoin has value.

What users do is sign up to an online wallet service, and all transactions are carried out using it. Transactions are secured using encryption, as is normal for online activity.

So because bitcoins are controlled by mathematical formula, there are a limited number in existence. While you can’t shop with bitcoins at the supermarket, you can on websites such as WordPress and Reddit. The most famous Bitcoins store is the Silk Road (online, of course).

In the US, Pizzaforcoins.com lets bitcoin savers pay for pizza deliveries.

Earlier this year, Taylor More, 22, became the first known person to pay for a house – a two-bed bungalow – in Alberta, Canada, using the equivalent of $405,000 in bitcoin.

More from Channel 4 News: Criminal underworld exposed on 'hidden internet'

How much are they worth?

They’re said to be among the fastest growing currencies in the world. Their value has nearly doubled in the past couple of weeks as people begin to seek alternative currencies which are not controlled by conventional banks, institutions or governments.

The total value of all the world’s bitcoins is said to be more than around £500m. There are about 10m in circulation, and the maths behind them ensure that there can only ever be 21 million of them.

As more and more investors begin to look for a safe haven, the way that gold became the thing panicked people flocked to in historic times of economic gloom, the value of bitcoin is likely to increase. And it is now possible to download bitcoin apps to mobiles and Jeff Berwick plans to install the first ever bitcoin ATM – in Cyprus.

So we’re on the brink of a bitcoin boom?

It might be more of a bubble. It is not the first time we have become excited about bitcoin. Although it was devised in 2009, it was 2011 when it really started emerging, as a preferred weapon of the Occupy movement.

It works on the same principles as any other currency – it is essentially conceptual and fluctuates with demand and supply.

So in June 2011, it peaked at nearly $30 per “coin” on one of its main exchanges, Mt.Gox, having started the year at 30c each.

The problem, as with any other market, was that people began to hoard it, which caused its appreciation in value. Which is not to say that the parallel universe started taking off – it crashed at $2 in November of that year.

Now it has gone up again massively in value, and there have been 52,017 transactions over the last 24 hours, with an average of 2,167 transactions per hour.

That is big, but obviously nowhere near the conventional exchange rates. As with most technological advances those who are good at technology use it to advance their latest invention.

So it is getting bigger on the blogosphere, or in the twittersphere – but there is a long way to go before it overtakes conventional currency.

Likewise, bitcoin is minted – known as “mining” – by solving extremely difficult mathematical problems. So if you don’t have a powerful computer, let alone a computer at all, you can’t get bitcoin.

If it’s not regulated, then doesn’t that mean it’s even easier to steal?

Well, users say no, for a couple of reasons.

One is that it is based on mathematical formulas and encryption, which makes it hard to use someone else’s. The principle is this: two mathematically related keys are released. The encrypting key cannot be used to decrypt a message, and the decrypt key can’t be used to encrypt.

A private key is kept by a single individual. The other key is made public. When it comes to transactions, the person receiving the bitcoins uses their public key to encode payments. The payments can only be accepted with the help of the private keyholder associated with that transaction.

Likewise, the person paying uses their own private key to approve any transfers to a recipient’s account.

It does mean that there is security against theft, but you can get the digital equivalent of counterfeiting as it is possible to spend a bitcoin twice.

Bitcoin exchanges, being favoured by techy types, are also vulnerable to hacking, as with online credit card details and so on. Bitcoins have been stolen from users’ online vaults. Last September, hackers raided $250,000 worth of bitcoins from Bitfloor, an American exchange.

And of course, there is no guarantee over what bitcoin is used to pay for. Now the US has applied money-laundering rules to virtual currencies, fearing that new forms of cash are being used to fund illicit activities.

A Bitcoin savings and loan bank has been investigated accused of being a fraudulent Ponzi scheme.

Though it is worth remembering that given the price fluctuations associated with the currency, hardened money-launderers might be more likely to take on a safer bet. Earlier this month, there was a technical glitch in the core Bitcoin software, and that sparked a sharp sell-off as developers called for a temporary halt to transactions.

Are they affected by inflation?

Yes, but only up to a certain degree. Because there’s a limit to how many can exist, thanks to the complicated mathematical formula, there will be a limit to how badly they are affected by inflation.

So, for example, in Weimar Germany, there was hyper-inflation, where people were going around with wheelbarrows stuffed with banknotes. Not because they were rich, but because so many had been printed that they became more and more worthless.

In this case, that can’t happen.

But the currency is still a currency, and has a value. Which means that once it reaches its 21 million limit, it could still suffer the kind of inflation most currencies experience – rising prices.