Volatile virtual currency causes a stir online

Bitcoins exist only on the internet, are unregulated, untraceable and unpoliced, and may soon be worth millions. Could lines of code be the money of the future?

The internet has dramatically altered every part of our lives. Instead of sending letters, we use email. Instead of buying a paper magazine, we read one online. And rather than cash and coins, we need nothing more than the 16 digits on our debit cards.

But now, a revolutionary new project is leaving the technology of online payment in the dust. Usually, when we pay for something online, we transfer real, established currencies, issued by governments. A small but growing number of people, however, are now using a special currency called Bitcoin, which only exists online.

The currency is not regulated or issued by a central bank, and Bitcoin transactions, unlike other online payments, aren't handled by recognized financial institutions. Purchases work through a peer-to-peer system, untraceable and unmediated – the digital equivalent of handing over a briefcase full of banknotes. They can be used, in theory, to make any purchases – although right now only a small number of merchants actually accept them.

Since their creation in 2009, a Bitcoin's worth has fluctuated from a few cents up to nearly $25. But how do these virtual coins work?

Traders, in theory, can choose to exchange anything for their wares – and, as many online merchants have opted to take Bitcoins, the currency can be used to buy a range of goods and services.

Like gold or silver, Bitcoins are a finite resource: only 21 million will ever be created, through 'mining' digital data for mathematical codes that make up each Bitcoin. As they are used in more outlets, more people will want to use Bitcoins and their value will increase.

Because they can operate separately from any formal economy and work on a peer-to-peer system, Bitcoins have become popular with anarcho-libertarian s and hacker groups, who believe they can help people free themselves from an over-powerful state.

But because they are untraceable, Bitcoins may also have been used for online trade in illegal drugs, arms and even people. And when one Bitcoin user had £500,000 worth of the currency mysteriously stolen, nothing could be done – just like cash, the currency could not be traced.

A new currency?

At a time of crisis for conventional markets and currencies, many pioneers see Bitcoin as the future. As conventional banks struggle with the global economic crisis, does Bitcoin offer us a valuable chance to cut out official middlemen and take our financial lives into our own hands?

Not likely, say critics. Though they may have problems, established currencies are far more trustworthy than a volatile, untraceable system. Barely understood outside the world of techies, and with scant benefit other than a questionable political ideology, Bitcoins may be a bubble destined to burst.

You Decide

  1. What gives a banknote – which is, after all, only a bit of paper – its value?
  2. What are the advantages and disadvantages of an untraceable currency? Do they balance out?

Activities

  1. Produce an advert for Bitcoin as a currency to invest in.
  2. Do some research into the history of currency, from Bitcoins all the way back to cowrie shells and lumps of iron. Present your findings as a poster or timeline.

Some People Say...

“It's time to create a new anarchist economy.”

What do you think?

Q & A

Is this the first totally online currency?
Not really. Online platforms like World of Warcraft and Farmville have long allowed users to earn virtual currencies and trade them for virtual goods. But these can only be used within the game – not for purchasing things in the real world.
I don't really get this mining thing – how does it work?
'Miners' use complicated processors to break down a block of digital data – think of this as the resource from which Bitcoins are extracted. As the coins are used for transactions, more data is added to their underlying code – which, crucially, means one coin can't be copied and spent twice.
How do I get my hands on some Bitcoins?
They can be bought for conventional currencies, like dollars or Euros, then stored in a digital wallet.

Word Watch

Peer-to-Peer
Sharing files or data directly from person to person, via the internet. Filesharing sites like Limewire or Pirate Bay work on this system.
Fluctuate
To swing up and down. A certain amount of fluctuation is natural in most currencies, but when values change wildly it can cause serious problems.
Anarcho-libertarian
A radical political ideology, advocating complete freedom from government and law.

Subjects

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