Pletnty of news outlets are talking about Bitcoin, the virtual currency whose value has been screaming upward lately and now stands at roughly $1.5 billion. There's talk of a bubble, and even Treasury officials are watching with interest.
Which raises the obvious question... er, what exactly is Bitcoin, anyway? Here's a brief, 60-second primer for those who are confused:
And here's a five-sentence summary: Bitcoins are a virtual currency in which new coins are created by a slow, complex computer process known as "mining." Once a person acquires a Bitcoin, he or she can trade it online to anyone who will accept it as payment for goods or services. Right now, a single Bitcoin is worth about $140 in U.S. dollars, though that value fluctuates. There are 11 million Bitcoins now in existence, and once 22 million have been created, all mining will effectively cease. The currency isn't regulated by any central bank.
There's a longer FAQ here, and if this all sounds intriguing, then here are a few more recent Bitcoin-related links that have been making the rounds:
1) Felix Salmon has a nice analytic essay about the rise of Bitcoins and what they say about the future of currency. Here are two key passages:
Bitcoins were designed to be – and, in many ways, are – the perfect digital currency: they’re frictionless, anonymous, and cryptographically astonishingly secure. For anybody who’s ever suffered the incompetence of a bank, or bristled at the fees involved in just spending money, either domestically or abroad – that is to say, for all of us – the promise of bitcoin is the holy grail of payments. Especially since, to all intents and purposes, bitcoins are invisible to law enforcement and the taxman.
Volatility is a serious problem, if you’re trying to put together a currency, rather than a vehicle for financial speculation. If the currency of a country ever fluctuated as much as bitcoins did, it would never be taken seriously as a medium of exchange: how are you meant to do business in a place where an item costing one unit of currency is worth $10 one day and $20 the next?
2) Izabella Kaminska has another thoughtful essay on the subject over at FT Alphaville. One key passage:
Bitcoin thus represents in many ways the ultimate fiat of all fiat currencies, since the system is entirely trust-based. What’s more, if the system collapses or fails to create enough coins to prevent deflation, or fails to regulate supply causing inflation — there is no third party obligated to intervene to hold up the currency’s value.
3) The value of Bitcoins has been soaring of late, which is why some investors have been buying them up, betting that their price will keep rising. Over at Forbes, Timothy Lee offers four reasons why the value of Bitcoins could crash at some point. For instance, there's regulatory risk:
Bitcoin is extremely resistant to government regulation, a factor boosters cite as an argument in its favor. For this reason, Bitcoin has gained a loyal following among those who engage in legally dubious activities such as drug dealing and gambling. As the technology matures and becomes more widely known, more and more people who want to avoid government scrutiny are likely to adopt it. At some point, federal law enforcement agencies may conclude that Bitcoin is a giant money-laundering machine and look for ways to shut it down.
4) Meanwhile, New York's Kevin Roose went on a quest to buy a single Bitcoin, and explained that it's not as easy as it sounds:
The first thing to know about buying a Bitcoin is that you can't just whip out your credit card. Because Bitcoin transactions are completely anonymous, none of the big exchanges accept credit cards, owing to the risk of fraudulent chargebacks.
Have any good links to add? Send them along in comments.