Sunday, April 14, 2013

Mind-Blowing Fact or Debate: Will Bitcoins make you Rich?

The digital currency is increasing in value at a stupendous rate. But is it now the "perfect asset bubble"? 

Let me begin this column with a lengthy disclosure. One morning last week, I stopped at my bank, filled out a withdrawal slip for $1027.51, and walked away with an envelope full of cash. The odd amount was deliberate; I had been instructed by LocalTill to be exact in everything I did. What's LocalTill? Don't bother Googling it – its shady-looking website offers only murky details, explaining that the firm is a way for "merchants to accept secure transactions when selling goods online". It's something like PayPal, except LocalTill isn't tied to your bank account or credit card, and instead deals only in cash. This makes its transactions less traceable, less regulated, and, as I would soon experience, more final.

Next, per LocalTill's instructions, I drove to a local Bank of America branch and asked for an out-of-state wire transfer slip. I scrawled out LocalTill's New York bank account number and handed my wad of cash to the teller. This was a dizzying moment: I've been on the internet forever and have been well-schooled in frauds that begin with the instruction, "First, wire your money to an out-of-state account ..." Yet here I was doing exactly that. If LocalTill was a scam, I'd have no recourse. So why was I willing to take such a risk?

Bitcoin, of course. Bitcoin is a "digital currency" invented in 2009 by a cryptographic expert who went by the pseudonym Satoshi Nakamoto, but whose true identity remains unknown. It exists only in computers, minted at a regular rate by a network of machines around the world, and its value isn't regulated by any government. The currency, like its creator, clings to the shadows. Bitcoins are like cash in that they aren't tied to your identity, and transactions made with Bitcoins are irreversible and untraceable. But they're like credit cards in that they aren't physical. In the past, if I wanted to pay you for certain unmentionable services rendered, I'd have to get a fancy briefcase, fill it with bills, then take a long, dangerous trip with my stash. Bitcoin allows me to transfer money to you online, instantly, for free. As a result, it's perfect for the black market – a couple of years ago, it became a media sensation when Gawker reported on its use as the central currency on Silk Road, a site that sold virtually any drug in the world. Lately, Bitcoin has also been hailed as an emerging global safehaven, a place for nervous Europeans and panicky gold-bug types to store their wealth away from the prying reach of financial regulators.

I'm not very panicky about the world's currencies, nor am I looking to buy drugs online. Indeed, I don't care at all for Bitcoin as a currency. Instead, I wanted to buy Bitcoins as pure, shameless speculation. I wanted a chance to ride a rocket ship. Partly due to its growing legitimacy as a currency, but mainly because of speculators like me, the value of Bitcoin is entering a bubble phase – its exchange rate with real-world currencies is hiking up at an incredible, likely unsustainable pace. In 2011, back when Gawker reported on Silk Road, you could buy a Bitcoin for about $US9 ($8.60). Since then the price has seen terrific fluctuations, but it has generally gone up. At the start of this year, each Bitcoin was worth about $20. From there, the chart turns into a hockey stick – by March, Bitcoins hit $40, and within a month they'd doubled again.

Three weeks ago, I began hearing about Bitcoin everywhere I turned. One afternoon I had lunch with a partner at Andreessen Horowitz, the large Silicon Valley venture firm, who told me that he'd been fielding pitch after pitch for start-ups that offered Bitcoin-related services. After lunch, I got an email from David Barrett, the chief executive of the fantastic, expense-reporting start-up Expensify. Barrett wanted to let me know that his firm would soon let people submit expenses and get paid by their employers in Bitcoins. He explained that the feature wasn't a gimmick. Bitcoin would be helpful for people who regularly submitted expenses internationally; other services – like PayPal – charge hefty fees for moving money overseas, but with Bitcoin people could send money for free. - Read more here:

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