The virtual currency has been making waves since 2009, but the financial crisis in Cyprus has seen people rushing to invest. Are these encrypted files really the future of cash? Chris Beanland reports.
Last Tuesday, at the Cleveland Arms pub in a genteel side street near Paddington Station, a dozen people met to talk revolution. It wasn't the first – and it certainly won't be the last – revolution plotted over pints of beer and bags of crisps.
But this gathering of the London Bitcoiners Group marked the point at which something changed. The point at which one hacker's dream – to create a new type of virtual currency to replace sterling, dollars and euros and lay waste to existing financial structures – began to come spectacularly true.
Trader and Bitcoin enthusiast Jonathan Harrison was there. "Cryptocurrencies will create a global revolution in finance," he enthuses. "Governments will lose control of the money supply and the power that comes with it."
The Bitcoin story is packed with delicious twists of subterfuge and intrigue. It began in 2009 when pseudonymous hacker "Satoshi Nakamoto" developed the idea. Other digital currencies have been tried, such as e-gold, Litecoin, Ripple and Linden Dollars in the computer game Second Life, but nothing has captured the imagination like Bitcoin, which can be spent directly in some places or traded for other currencies. Hackers from around the world supported the open-source software that allows Bitcoin to exist, unlike other currencies, without a central bank able to manipulate its value by printing more notes in tough times.
The economic crisis in Cyprus shot Bitcoin into the mainstream. Internet entrepreneur Jeff Berwick aims to open the world's first Bitcoin ATM in Cyprus within weeks. March saw frenetic Googling sessions by people all over the world desperate to discover how this digital, encrypted "crypto" currency works. The answer is more simple than you'd imagine – a fixed amount of 21 million Bitcoins are being slowly released or "mined" until 2030. Each has a unique numerical code and they can exist as a physical coin the size of a 2p piece printed with a holographic number, in online "wallets" or even in bonkers "brain wallets" where you memorise set codes. Popular sites to trade them include Blockchain.info and Localbitcoins.com.
With a stream of recent cash crises of confidence, the price of Bitcoin has risen dramatically. When the online trader Mt. Gox started tracking Bitcoin in July 2010, one was worth 3p. Now one is worth £64. Bitcoin is the world's fastest growing currency – but is this a Bitcoin bubble? The market for it has topped the symbolic $1bn USD mark – it's now worth more than the currency stock of 20 separate countries including The Seychelles, Liberia and The Gambia.
Amir Taaki was also at the Cleveland Arms last week. He's one of the main developers of Bitcoin – he also lost out on $500,000 by flogging a batch of Bitcoins when they were worth peanuts. But he's sanguine. "500k is only enough to improve a single life," he joshes. Taaki, 25 and buzzing with optimism, is more interested in changing the world. "Last September, my bank accounts were closed and I was blacklisted. I've been depending on Bitcoin, travelling the world without using money changers or banks."
Taaki believes that Bitcoin "is the currency of the resistance; informal markets of people, not corporations. It's a true global free market".
Bitcoin's advocates, such as renegade business broadcaster Max Keiser, posit that governments could lose control of individual state economies and people could live outside conventional financial and taxation systems. Banks could shut. In a capitalist society where everything has a fixed price, the cost of resistance could be high: Bitcoin's Young Turks seem set on a collision course with some powerful people who have a lot to lose.
"These people – states and established financial institutions – will move against Bitcoin because Bitcoin strikes at the root of current power structures," reckons Frank Braun, a German tech consultant and privacy advocate who appears in public wearing a surgical mask and dark glasses. "The latest FinCEN regulation is a prime example of that." FinCEN is America's Financial Crimes Enforcement Network – a bureau of the US Treasury which aims to counter money laundering.
Last month it issued new guidelines to regulate "virtual currency" trading. It could be the thin end of the wedge. The White House has a score to settle: when the US piled pressure on Wikileaks in 2010 and 2011, it was to Taaki's "currency of the resistance" that the group turned when their conventional methods of banking were blocked. "Within a day their VISA, MasterCard, PayPal, Swiss bank and Amazon accounts were closed," points out Taaki.
"Wikileaks was unable to continue soliciting donations – except through Bitcoin. It was their lifeline."
Rebecca Burn-Callandar, editor of Managementtoday.co.uk, has other worries. "A brave new currency unregulated by markets, banks or governments is dangerous. Bitcoin is the province of hackers and the technorati now, but the real risks come when ordinary people – hammered by low interest rates and the whims of government – become entranced by it." Yet there is something about Bitcoin, something which increasingly entrances those from both ends of the political spectrum.
"From anti-capitalists to hardcore capitalists, people are all trying to give Bitcoin their spin," notes Frank Braun. "I just talked to a guy in his 60s from a high-inflation country who put all his retirement money into Bitcoin and gold." The media seems fixated on Bitcoin being the currency of choice on the mystical Silk Road – the Amazon of recreational drugs. But what's more intriguing is how Bitcoin will change the way we use money to buy and sell everything else. A new economic system could evolve. Is The City rattled?
"City traders have mixed feelings," says mischievous City Boy author Geraint Anderson. "On the one hand they'll be quaking in their boots about a rapidly-growing currency they currently can't manipulate, trade or make commission from. On the other, they'll welcome any innovation that will facilitate the acquisition of high-quality cocaine after the market shuts."
Bitcoins: how to pocket them
What you need? To start collecting bitcoins, you need a digital wallet downloaded from weusecoins.com, which will store your money for you.
How to get digital coins: Mining for new bitcoins is competitive and requires specialist hardware, so most bitcoin users get their coins from online currency exchanges. MtGox is the most popular, allowing you to trade bitcoins in exchange for sterling. Bonus Programmes such as Bitvisitor offer coins in exchange for taking surveys or visiting websites.
How to get physical coins: Coins and bills can be bought using digital bitcoins on casascius.com or bitbills.com. Both sites take a small production mark-up.
How to spend them: There are plenty of participating online merchants. Coindl.com sells music, ebooks and other digital goods and bitmit.net is the ebay of the bitcoins world. A limited number of independent restaurants and B&Bs even accept the currency – bitcointravel.com can point you in the right direction.