What do BBQ ribs, spare car parts and a bust of Benjamin Franklin have in common? They're all products or services that can be bought online with bitcoins.
While this virtual currency is by no means the internet norm, it is growing rapidly. Its shrewd cryptographic configuration has made it more robust than expected, meaning it is no longer simply a hobby horse for extreme internet libertarians. Bitcoins are so mainstream.
Created in 2009 by one Satoshi Nakamoto (no one is sure of the true identity of this person or group) the bitcoin could be described as a commodity- based currency in the sense that the number of coins in circulation is finite – not unlike gold–- but there is no one regulating their purchase or sale and all transactions are carried out anonymously.
Bitcoins can be “mined” but your pickaxe or pan are no good here. The system is designed to be difficult and resource intensive, so that only the most savvy of techies know how to get at them.
They have also been described as a “decentralised, open-source digital currency” that one day will amount to a fixed number of units: 21 million to be exact. One must wait until 2140 before that threshold is reached. But the unregulated currency frees 25 more bitcoins every 10 minutes.
Because of its finite nature, its value can fluctuate depending on demand. It is not beholden to government balance sheets and it is for this reason it has become increasingly popular among those looking for a safe place to invest their spare sheckels.
The value of the bitcoin rose dramatically in recent weeks thanks in part to the economic crisis in Cyprus. A single bitcoin has risen from $13.50 per unit in January, to approximately $30 a month ago, to $140 today (although the price is fluctuating rapidly).
"Events in Cyprus have had a direct impact on the value of virtual money schemes," explains Jon Legorboru from Byrne Wallace. "We have seen a collapse in confidence in the currency in Cyprus and the rising value of bitcoins has a correlation with this as investors look to place their money in more secure places.
“But this is the curious thing about it. Bitcoins may not be affected by global market uncertainty. But they're not immune to hacking and they have been targeted before.”
In 2012, the largest bitcoin exchange company in the US, Bitfloor, was hacked and $250,000 worth of the currency were stolen. Last week, Instawallet, a bitcoin depository, announced it was shutting down after being hacked. Were all 21 million bitcoins to be in circulation today, the value of the currency would exceed $3 billion. So it has its own security issues.
Dr Tom Cooney of the DIT School of Marketing has concerns over its long-term legitimacy. "There's at least some guarantee of security when putting your money into a bank even now, but you really have no idea what will happen with bitcoins," he states.
“It’s true that the encryption security behind all of this is to military operational standards. But as has already been shown, every system is hackable to some extent.
“I’ve heard of houses being bought and sold through bitcoin transactions. Who is paying taxes on all of this?
“Once we get to that level of transaction you know you’re dealing with a major currency. In fact, it has already been valued greater than 18 national currencies.”
Illicit sales
The anonymity of bitcoin transactions has resulted in its usage in a variety of illicit activities. Anonymity is also the money launderers' best friend and so it has and is being used for this purpose too.
“The use of the currency is unregulated which naturally gives rise to issues like money laundering or illicit sales,” says Legorboru. “But the real problem is the creation of value out of nothing (even Fiat money is backed by the balance sheets of governments). In any event this process accounts for much of the speculative growth of the currency.
“Legitimisation is inevitable but it concerns me that it is unregulated. And it will concern governments and legitimate businesses. If it becomes popular we’ll end up with a tainted black market currency within the legitimate economy.
“This is not a reason for not having bitcoins. Some form of virtual currency is necessary and helpful. But it must be regulated.”
Just how does one go about regulating a virtual money scheme where all the transactions are anonymous?
“There are two possible routes to dealing with this,” says Legorboru. “One is to create a regulatory burden on anyone trading bitcoins. But this would be close to impossible to police.
“Alternatively, you could create a provision making it illegal to transact virtual money without having a license to do so. Financial institutions need regulatory approval, so why not virtual financial institutions? Virtual traders would need a trading license from the central bank.
“But again this has its own problems. How do you practically regulate a system that’s already in place, where you and I can buy and sell from our personal computers? Other than a heavy fine to act as a disincentive, I don't have an answer.”
Secure brand
The future of virtual currency does not depend on the success or otherwise of bitcoins, however. It is a necessary tool for exchange online, so if Satoshi Nakamoto and Bitcoin Inc aren't prepared to peacefully coexist within the existing financial infrastructure, someone else will eventually come along and take their place.
“It’s inevitable that virtual currency was going to become a reality,” says Mooney. “I’m just surprised that a trusted, secure brand – like Visa for example – hasn’t already gotten into it. The current lack of regulation will inevitably lead to problems, but also the lack of faces or identities. Who is the governor of the bitcoin central bank?”
