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11/18/13

Money: The Rise of Bitcoin - QuickTake - Is It Real Money If It Doesn't Come From the Mint? By Max Raskin

They’re called Bitcoins, but you can’t put one into your pocket. Don’t try to use it to tip the waiter. So what makes Bitcoin money? The same thing that makes all money money — trust, in this case backed up by a lot of code-breaking computers.

Created in 2009, Bitcoin has grown into the world’s largest virtual currency, traded on exchanges around the world. It’s the product of open-source software and a decentralized network of electronic “miners,” making it a multibillion-dollar experiment in monetary privatization and perhaps the first step toward an age when the digital economy outgrows the restraints of nation states and wallets full of paper.

he value of Bitcoin soared in early 2013 amid a torrent of media coverage, hitting an intraday record high of $266 in April. Some buyers were drawn by a mistrust of central banks they saw as fueling inflation; for them, Bitcoin, which has rigid limits on money supply written into its software, was a safer alternative.

Others liked its anonymity for online transactions, legal or not. But much of the surge was driven by newer investors with more traditional motivation — getting in on the ground floor of a product in demand. In July 2013, the Winklevoss twins of Facebook fame announced that they had bought 1 percent of the Bitcoin in existence and later filed to offer a Bitcoin ETF.

Prominence also brought new problems, however. The largest Bitcoin exchange, Mt. Gox, located in Japan, was  the target of hacking attacks that drove the price down. In the summer of 2013, regulators began to take notice, raising thorny questions of oversight.

Then on Oct. 2, Bitcoin prices plunged by a third after U.S. prosecutors announced the indictment of the operator of Silk Road, an anything-goes online market where drugs and other illicit goods were peddled for Bitcoin. But it soon rebounded to set new highs, and the Justice Department declared in November that Bitcoins can be “legal means of exchange.”

For more: Bloomberg

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