Dollar, euro fall sharply against bitcoin

The cyber-currency has skyrocketed in value, but is it a sign of a new paradigm or speculative bubble? The Post’s Anthony Faiola fills us in from London. (The Fold/The Washington Post)

Bitcoin, the digital currency maintained by no national government or corporation but only by an online community that envisions it as the international, democratic future of money, has increased sharply in value over the past few weeks:

In the United States, this mysterious money has become the darling of antigovernment libertarians and computer wizards prospecting in the virtual mines of cyberspace. In Europe, meanwhile, it has found its niche as the coinage of anarchic youth. . .

Two years ago, one bitcoin was worth less than $1. Two months ago, the price for one unit surged above $20 on a proliferation of cyber-exchanges from Tokyo to Moscow. A sudden burst of new interest sent its value soaring to a record $147 on Wednesday. . .

Some call it the purest form of capitalism: a version totally unfettered by monetary policy and politically driven economics. (Read the full story here.)

Brad Plumer explains how bitcoins are acquired and traded:

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. . . The currency isn’t regulated by any central bank.

The most recent fluctuation in the currency’s value began during the financial crisis in Cyprus, when depositors began looking for other ways of saving money than in the country’s troubled banks:

Bitcoin has become a new safe haven for investors similar to the way gold has historically been the favorite refuge of panicked investors during a financial crisis. Bitcoin has become so mainstream that worried Spaniards (many of whom see themselves as potentially the next victims in a financial contagion scenario) are downloading Bitcoin apps to their mobile devices at a rapid pace. There’s even a plan to install the first-ever Bitcoin ATM in Cyprus so individual investors can exchange their “real” currency for Bitcoins without the need for suddenly unreliable bank intermediaries. (Read the rest of the story here.)

Despite all the excitement around the currency, Emi Kolawole warns that buying bitcoins is risky:

Before you rush out and convert every dollar in your possession into Bitcoins, stop. Seriously, don’t do it...

Bitcoin is an in­cred­ibly risky place to put your hard-earned cash. Just Wednesday, the largest Bitcoin trading market, Mt. Gox, crashed. And the “crypto-currency,” the legality of which is still murky, is accepted by a very limited pool of vendors. That means, if you have Bitcoins, there are very few places to spend them. And, yes, the Bitcoin market is still susceptible to disruption by a smarter-than-the-average-bear hacker and attractive to those looking for a way to launder money. (Read her article here.)

Max Ehrenfreund is a blogger on the Financial desk and writes for Know More and Wonkblog.
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