In Which We Explain Why Bitcoins Are Suddenly Rising In Value

Senior Contributor
04.03.13 13 Comments

You might have heard recently that Bitcoin, the online currency built on solving cryptography problems, has been exploding in value. And it is — in fact the value of your typical Bitcoin crossed the $100 mark this week. So why is the value rising?

Let me guess: Reddit went on a buying tear?

Nope. The European Union is in the process of having a complete financial meltdown, and people are panicking.

I remember reading something about Cyprus?

Yep: Cyprus is in pretty bad shape economically and very nearly wound up giving everybody with a bank account in the country a 6.75% haircut right off the top of their deposits.

Holy crap! Anybody outside of Cyprus freaking out about this?

You bet. In fact, the Spanish seem to believe they’ll be the next ones on the chopping block, so they’ve been getting the hell out of the Euro and into Bitcoins.

Help me out here: What is Bitcoin?

It’s basically an experiment in building a decentralized, digital money system built on peer-to-peer networks and powerful cryptography. Scarcity is built into the system in that there’s a limited number of bitcoins, and it takes a lot of effort to find them.

And people use this as money?

For now they do. It helps that respectable websites will accept Bitcoins now, where previously they were seen as a method to buy weed over the Internet.

Any reason I shouldn’t get on this elevator?

Quite a few!

Take forgery. While there have never been any reports of forged Bitcoins, that’s a matter of when, not if: There is no such thing as a completely secure cryptographic system. Eventually, somebody’s going to crack the code, and then all hell is going to break loose. Bitcoins are only worth something because people believe they are: Shake that belief and the market will plunge.

Which leads us to the next problem: If you go to a properly insured bank in America and put sixty-five dollars on deposit there, and that sixty-five dollars is stolen or otherwise disappears, the Federal Deposit Insurance Commission will give you your money back, and the police will investigate it. You buy something on a credit card that turns out to be fake, you have multiple layers of consumer protection.

You get your bitcoins stolen, you’re pretty much boned. A Bitcoin heist at an online exchange a year ago cost users $250,000 and the operator of the exchange had to pay out of his own pocket. Similarly, you pay somebody in Bitcoin in a secure, anonymous transaction, and they choose to screw you somehow, your options are limited.

Just to rub it in, Bitcoins are insanely volatile. Values rising high and then plunging is a fairly common theme in Bitcoin history.

It sounds like you’re down on the entire idea.

I’m not. At root, there’s no difference between Bitcoin and, say, Canadian Tire Money or phone minutes or other forms of what amount to private currency. All it is is a group of people agreeing it has value and treating it accordingly. Humanity has been doing this for centuries, why shouldn’t they do it over the Internet?

It’s simply that Bitcoin, while a great piece of engineering, is still an experiment, and it has yet to face serious tests, something its advocates and detractors both tend to forget.

If you want to buy a few and use them to pay for stuff, by all means, do so. Just don’t put your savings into them.

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