Monetarists Anonymous

[Eugen Leitl]

http://www.economist.com/node/21563752?fsrc=scn/fb/wl/pe/monetaristsanonymous

Monetarists Anonymous

After a spectacular crash, an online currency makes a surprising comeback

Sep 29th 2012 | from the print edition

bGIVE me control of a nationbs money supply, and I care not who makes its
laws.b So said Mayer Amschel Rothschild, founder of the Rothschild banking
dynasty. What would he make of Bitcoin, an online currency with no issuing
authority whatsoever? Despite being written off following a speculative
bubble and crash last year, the online cryptocurrency is still going strong,
not least thanks to its ability to circumnavigate the law.

Bitcoin was devised in 2009 by a mysterious figure known as Satoshi Nakomoto.
It is the worldbs first, and so far only, decentralised online currency.
Instead of a central bank, Bitcoins can be issued by anyone with a powerful
personal computer: it mints them by solving extremely difficult mathematical
problems. The problems are automatically made harder to ensure that the
overall supply of Bitcoins cannot grow too fast. They are traded online, with
transactions cryptographically authenticated.

These curious capabilities make Bitcoins a combination of a commodity and a
fiat currency (creating the coins is referred to as bminingb and they have
value only because people accept them). But boosters inflated a Bitcoin
bubble. Shortly after the currency launched, articles spread around the
internet arguing that Bitcoins would protect wealth from hyperinflation and
that early adopters would make a fortune. The dollar price of a Bitcoin
currency unit climbed from a few cents in 2010 to a peak of nearly $30 in
June 2011 (see chart), according to data compiled by Mt Gox, a popular online
Bitcoin exchange. Inevitably, the currency then crashed back down, bottoming
out at $2 in November 2011.

But in the nine months since, Bitcoin has recovered. One unit now costs $12,
and the volume of transactions is increasing. Though the price still
fluctuates against the dollar, it is less volatile than it was, which makes
it a better store of value. Its use as a means of exchange is also getting
easier: an increasing number of online retailers take the currency, and new
smartphone apps make Bitcoins almost as easy to use as cash. A proliferation
of exchanges means that it is relatively easy to swap Bitcoins for
conventional currencies.

Tony Gallippi, the boss of Bitpay, which processes Bitcoin payments for
retailers, says that his client list has increased from around 100 in March
to 1,100 now. These are mostly e-commerce businesses, selling things like
domain names and web hosting. But the list also includes a taxi-driver in
Chicago and a dentist in Finland. bCredit cards werenbt designed for the
internet,b he says. Bitcoin transactions cost less and cannot be reversed in
the way credit-card transactions can be. This is important for firms selling
to customers in countries known for credit-card fraud, such as Russia or
Belarus.

But another big reason for the currencybs success is its role in dodgy online
markets. Although tracing Bitcoin transactions to real people is not
impossible, the currencybs relative anonymity and ease of use makes it a
natural conduit for criminal funds. On the website Silk Road, a sort of eBay
for drugs hidden in a dark corner of the web known as Tor, Bitcoins are the
only means of transaction. Buyers transfer their Bitcoins into an escrow
account where they sit until receipt of the goods is confirmed. Bitcoin
transactions on Silk Road are now worth $1.9m per month, estimates Nicolas
Christin, a researcher at Carnegie Mellon University.

This may explain why users put up with a big drawback. Bitcoins tend not to
be very secure, says Richard Booth, a consultant at RSA, a cyber-security
firm. As some users have found to their cost, hackers can sometimes steal
Bitcoins from usersb online vaults. In the latest raid, on September 5th,
hackers stole $250,000 in Bitcoins from Bitfloor, a large American exchange,
causing it to shut down its operation. But although the raid caused a dip in
the price of Bitcoins, it soon recovered. It turns out that a currency can
thrive even when no one is making laws for it.