The Currency That's Up 200,000 Percent

Discussion in 'Wall St. News' started by misterno, Jun 4, 2011.


    Bitcoins are the top-performing money in the world — but what are they?

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    The best performing currency of the past year isn't Brazil's real, up 15% versus the U.S. dollar, or Australia's dollar, up 27%. It's the Bitcoin. A year ago one was worth half a penny. Thursday morning it hit $10.50. That's a gain of more than 200,000%.

    What's a Bitcoin? It's a peer-to-peer system of electronic money that allows payments to be sent directly between two parties without the need for a financial institution. It's related to Bit Torrent, a system for sharing large files like movies, but in this case the "movie" is a file with the currency's entire transaction history. And because users themselves all share that history, "it's more secure than even bank transactions," says Donald Norman, a spokesman for the Bitcoin Consultancy, which is seeking to gain wider acceptance for the currency.

    As befitting a virtual currency, no one is quite sure who created the Bitcoin. A white paper and software turned up three years ago listing Satoshi Nakamoto as the author. That's presumed to be a pseudonym. All that's known about Nakamoto, based on his paper and message board comments, is that he's fluent in English and has a deep understanding of Internet security.

    Dotcom crash veterans might recall failed currencies like Flooz and Beenz, but those were mere means of online payment. Bitcoin is an entire monetary system. It doesn't require a Treasury Department, because there are no bills or coins to mint. It doesn't need a Federal Reserve to create money. An algorithm does that at a rate that slows by half every four years. There are about six million Bitcoins today. The number will approach 21 million beginning in the 2030s but never exceed it.

    The finite supply of Bitcoins might help explain the frantic demand for them. Dollars and euros are created at will by central bankers. Some economists see that as useful for smoothing out wild swings in the economy — making money more plentiful when consumers are hurting and scarcer when they're flush. Skeptics, and there are many, worry that the ability to create money from nothing will be abused by governments that overspend, resulting in gradual debasing of the value of savings. That's why dollar bears cling to gold, and why a few might now be scrambling for Bitcoins.

    Users get Bitcoins in one of several ways. "Miners" set their computers to work solving problems in exchange for coins. The more miners there are, the more difficult the problems become, which keeps the rate of supply stable. At recent exchange rates, high-end machines can produce $30 worth of Bitcoins per day, but consume a vast amount of energy in doing so. Some advanced miners have taken to cooling their machines with dry ice to improve their results.

    The other ways to get Bitcoins involve trading goods, services or cash. Mt. Gox has emerged as the largest Bitcoin exchange, charging 0.65% per transaction to match up buyers and sellers. More than $500,000 worth of the coins changed hands in a recent 24-hour period. Traders can add funds to their accounts using cash, checks, bank wires or Liberty Reserve, a private online payment service.

    Any fiat currency — dollars, euros, Bitcoins — gets its value from trust. Dollars can't be cashed in for anything; rather, we accept them as payment with the belief that others will accept them, too. That's another reason the price of Bitcoins has rocketed over the past year. Two years ago, almost no one accepted them for payment. Over the past year, a handful of early adopters began trading services for them — mostly programmers offering things like website design and hacking consultation. In recent months, a handful of pioneers have begun selling real goods for the start-up money.

    Four months ago David Forster, 29, convinced his parents Jim and Nancy, owners of Green Hill Alpacas in Haydenville, Mass., to accept Bitcoins for alpaca socks. Technically, the younger Forster buys the socks for dollars and resells them for Bitcoins. "They said it sounded like a Ponzi scheme but that as long as I wasn't risking their money for Internet coins it was fine," he says.

    Sock sales have risen to between 75 and 100 since the experiment began from four dozen during all of last year and orders have come from as far as Finland and Russia. More remarkable is what has happened to pricing. Forster began charging 75 Bitcoins for each pair in February and has since had to lower the price to 5 due to extreme appreciation in the currency's value. "I wish I had kept all of them," says Forster, who traded his Bitcoins on the way up for cash and web services.

    More than a dozen sites now sell goods for Bitcoins, including T-shirts, coffee and natural pet food. At least one, The Arms Locker, says it offers firearms. Another, Silk Road, is a forum for people selling recreational drugs. How can that be? Bitcoin transactions leave a record of times and amounts, but not identities, and Silk Road can only be reached through an identity-cloaking computer network called Tor. There's no way to determine the identity of its administrators and since sellers only accept Bitcoins for their wares, they can't be found, either (so long as packages are mailed discretely).

    That's one source of discomfort surrounding Bitcoins. Even a libertarian who's comfortable with anonymous gun and drug sales would cringe at the thought that, say, the child pornography trade has a new way to escape detection.

    Amir Taaki, a U.K. citizen and project developer for, admits that Bitcoins can be used for bad things but says the same is true of cash and that Bitcoins have much potential for good. "Think of all of the people sending money in third-world countries and getting ripped off by outrageous transaction fees," he says. "Bitcoins are here to stay and the world will benefit. The U.S. can ban it but it will still proliferate."

    It's not clear what regulators think of Bitcoin. The Constitution gives Congress the sole authority over U.S. money. In March, a North Carolina resident was convicted of minting his own Liberty Dollars to reduce reliance on and compete with the greenback. He faces up to 15 years in prison.

    Bitcoins aren't U.S. currency, however, and Norman says the Bitcoin Consultancy doesn't operate in the U.S. And as with file-sharing software, Bitcoin operates as a peer-to-peer network, raising the question of how regulators could stop it if they wanted to. The FBI didn't respond to requests for comment. On a message board, one Bitcoin miner wrote that agents visited his home. They weren't interested in currency, though. Huge electricity usage led them to suspect a marijuana growing operation.
  2. i'm surprised there's no discussion. silence.
  3. LeeD


    The liquidity in these is abysmal. If you look at market depth on the "exchange" Web-site you will see that the whole orderbook (over 50 price levels) is worth $30,000 or so...

    Also operating using Bitcoins is not illegal. In terms of their status they are close to Linden Dollars and other currency that exists in computer games.

    The problem with considering it a serious financial investment (besides huge volatility and low liquidity) is what Bitcoins are used for. Because paying with Bitcoins provides anonymity to both buyer and seller, the main market for these is shady transactions such as selling illicit drugs online...

    So, because Bitcoins are not a currency per say and because parties in any transaction are usually anonymous, transactions using them should be deemed providing very little legal protection.
  4. gotta love an underdog, with a senator against, the silk road association, etc

    the real question in my mind, will the current 100M-ish in USD/BTC liquidity find a commercial home outside the silk road story?

    i kind of lean that it probably will. it's a nudge bigger than a fad. granted, the founders were brilliant imo in the embedded transparency and early adopter advantage.

    either way, it will be a show.. with the USD franchise just beginning to side against a global, decentralized p2p currency.
  5. LeeD


    With $500,000 worth of transactions per day (and till it received a lot of publicity on the last few weeks) Bitcoin has remained under the radar.

    If it gains popularity, it may start to be considered an object of money laundering regulation.
  6. fusionz


    wow I'm surprised this hasn't been discussed earlier considering this is a trading forum. ET is behind the times.
  7. i guess the question is, how is BTC different from the anonymity of paper USD? schumer has already called it a laundering vehicle.
  8. I love this kind of thing... it gives you a glimpse of the direction the world is heading in. People setting up secret networks and starting new currencies behind curtains are, IMO, the people who drive innovation and change in the world.

    This almost seems like a page out of the book "The Singularity is Near" by Ray Kurzweil. Despite the doomsday-ish title it's an incredibly scientific look into the development of humanity by somebody who is no less than one of the top geniuses of our age. If you're into the type of subjects mentioned in this article I strongly recommend you check out this book!
  9. the bottom line is that someone will step up.

    take a huge position, start accumulating the entire float and pump it to the price of gold.

    the entire market is worth maybe 250million right now. for the most secure, efficient, and sound digital currency in the world.. 250million is nothing compared to the 6billion potential internet users.

    if you want to bet that bitcoins will be the worlds single currency, where fractional denominations are valuable. $25 per unit is NOTHING.

    this could be the Louisiana purchase of the 21st century!!
  10. LeeD


    In case no one realises, this is the dream scenario of a technologically-advanced thief.

    Stealing Bitcoins is as easy as copying a file from a computer. That would be the golden age of spyware.
    #10     Jun 7, 2011