For something that few had heard of a month ago, the online currency Bitcoin tends to elicit pretty strong responses. Depending on whom you ask, Bitcoin is the "future of money," a "crypto-geek Ponzi scheme," an "online form of money laundering," or a tool for "libertarian hipsters and criminals."
The publicity has not been kind to Bitcoin, which has faced attacks from law enforcement, hackers, and cybercriminals alike. The currency's value has seen several sharp fluctuations. The currency has been used to spread malware over Twitter. Early supporters appear to have lost confidence, and U.S. lawmakers are starting to ask tough questions. But shutting down Bitcoin may prove more difficult than its critics hope. And whether or not the experiment succeeds, its rise may herald the emergence of a new form of decentralized currency trading.
Bitcoin's origins are appropriately mysterious, in keeping with its cyberpunk image. The idea for the currency was first described in a paper in 2009 by Satoshi Nakamoto, supposedly a Japanese programmer whom no one has ever met or communicated with. The name is almost certainly a pseudonym, and many believe "Nakamoto" may not be only one person.
It's not the first attempt at creating a digital currency. There have been several attempts, including the now defunct eCash, the "Linden dollars" used in the virtual online world Second Life, and, more recently, the Facebook Credits users can use to purchase goods and services through the social network.
What makes Bitcoin unique is its peer-to-peer structure. There's no start-up company or central authority that can go out of business or be shut down by the police. Bitcoins can be purchased through online exchanges by wiring money from your bank account, and there are also sites that will provide users with a few free coins to get started.
"All previous digital currencies required a central trusted authority, which created a single point of failure," says Gavin Andresen, a programmer who develops websites and applications to help users acquire Bitcoins. "And almost all previous private digital currencies turned out to be untrustworthy, because they failed." ECash went out of business, for instance, and the use of Linden dollars remains confined to the still-small world of Second Life users.
The number of coins in circulation, as well as all transactions, is tracked by a distributed server that uses the computing power of Bitcoin users. New coins are "mined" at a rate determined by the computing power of the users involved. Like commodities such as gold or silver, there is a finite number of Bitcoins in the universe -- mining will stop when the total supply reaches 21 million. There are currently about 7.2 million in circulation. The value of these coins grew rapidly throughout this year, hitting a high of nearly $32 dollars per coin in early June.
Economists have been skeptical about the currency's future viability, though, seeing its rapid rise as a sign of irrational exuberance as new users rushed to sign on. University of California-Berkeley economics professor Barry Eichengreen wrote in the Washington Post: "If it is possible to imagine one private electronic currency, then it's possible to imagine several, and there would be no guarantee that other people would accept the particular electronic money you use." George Mason University's Tyler Cowen sees Bitcoin's rapid rise as "a sign of the dependence of the Bitcoin upon expectations, and a sign of its bubbly nature."