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Why bitcoins matter

There's been more talk than usual lately about bitcoins. Here's why.

Read time 6min 50sec

At first, they were a curiosity. Then, like all new technologies, they attracted attention for all the wrong reasons. The coverage the digital cryptographic currency received in august journals ranged from the snide and dismissive to expressing serious interest.

According to the Wall Street Journal, CIOs are watching the evolution of the digital cryptographic currency curiously, wary of being "blindsided" by such an alternative to traditional government-issued paper money, and receptive to the opportunities that a convenient, low-fee, cross-border electronic payment method may present to their businesses.

Already, many online businesses, and some real-world firms, accept payment in bitcoins, and if anything, this trend seems to be accelerating.

Its appeal lies in the fact that it is a true alternative currency, backed by computing time and protected by cryptography and a complex trust network. Like cash, it is fairly anonymous, and transactions cannot be reversed once committed, except by a deliberate counter-transaction to which both parties agree.

It acts much like gold or silver, but is more convenient to use for payments. In terms of theft, it presents the same risks as hard asset holdings, except the risks are digital. You can lose your bitcoin holdings if your computer is hacked and your data is stolen, like you could lose your cash or gold holdings if your physical storage is compromised.

Like metals, bitcoins present a "sound money" alternative to the currency that governments issue "by fiat", so it is an attractive option for those who fear the deliberate policy of monetary inflation, also known as "printing money", which governments pursue to deflate their own debt, stimulate the economy, and bail out banks that were forced by law or tempted by regulatory incentives to take on more risk than they could handle. Such a monetary policy comes at a cost to holders of government currency, whereas sound money holdings are not subject to this kind of stealth tax, so their value cannot be eroded like that of fiat money.

"Bitcoin is to banks what e-mail was to post offices," the editor of Bitcoin magazine, Mahai Alisie, told the BBC, in a video insert that casts its creators as shifty squatters with pimples, no jobs and an anarchist gleam in their crazy eyes.

The statement is true, but the BBC's attempt to smear the currency's creators is less accurate. All indications are that the Bitcoin Foundation, which oversees the open source software system that governs the currency, is a well-run, professional organisation. The BBC's stance smacks of the disdain that surrounded Napster - and indeed, the entire Internet boom - in its early days.

To this day, music and video piracy are considered not only property crimes, but means of support for terrorism. Like "think of the little children" appeals, such rhetoric is little more than emotional lobbying. While containing a grain of truth, much like intellectual property arguments, they also bolster fear, uncertainty and doubt. The music industry lobby did hobble peer-to-peer music sharing, but it did not prevent Napster from fundamentally changing the music business and the model by which music is distributed. The same is happening to film. The owner of my local DVD store warned ominously that stores like his are the fastest-closing industry in the country, thanks not only to the growth of piracy, but to legitimate online distribution models such as Netflix and Hulu. The same is true for music, with iTunes and many more legitimate services having supplanted old-fashioned physical media in many people's homes.

Bitcoin threatens that hegemony, and if it became truly popular, it would pose a grave risk to governments' abilities to raid the piggy banks of their citizens.

The rear-guard action continues: the Google search for "online movies" that yielded the Netflix and Hulu names chosen as examples above also turned up numerous results that were taken down in terms of the US's reactionary and overbearing Digital Millennium Copyright Act. However, that Napster changed the world is not in doubt, even though it no longer exists in its original, unrestrained, wild form.

If Bitcoin does not survive, it will most likely be because it gets targeted by legislation against money laundering, or even hunted down by hackers working for the US government on pretexts like that it can be used to buy drugs, weapons and prostitutes. That this is also true for cash, while you don't see US Department of Homeland Security warnings on cash machines, doesn't dampen the sensationalist rhetoric that governments deploy against technologies that threaten vested, established interests.

The real difference is not that a market-created currency can be used for any activity, whether legal or illegal. The real difference is that ordinary cash is issued by central banks, and its quantity is therefore easily controlled by governments. Bitcoin threatens that hegemony, and if it became truly popular, it would pose a grave risk to governments' abilities to raid the piggy banks of their citizens.

Witness the Cyprus affair. In response to the proposed confiscation of a percentage of bank deposit accounts, on the premise that a haircut for depositors is preferable to the collapse of the entire banking system, interest in Bitcoin surged. According to Maria Bustillos, writing in the New Yorker, demand was especially concentrated in countries such as Spain, which may well be next in line for such officially-sanctioned raids on the money citizens entrusted to banks, in order to pay off sovereign debt incurred by their governments.

In fact, Bitcoin was explicitly built by its shadowy creator, who goes by the pseudonym Satoshi Nakamoto, in the aftermath of the 2008 banking crisis. It was intended as an alternative to fiat currencies, issued by governments, and liberally printed to fund bailouts and economic stimulus. It will appeal especially to countries with high sovereign debt, like the so-called PIIGS countries of Europe, or subject to restrictive and costly exchange control regulations, like SA and China.

Since it is still fairly illiquid, the value of bitcoins has been extremely volatile. Early buyers have made a mint, but it's been a wild ride. After rising steadily from about $5 per bitcoin a year ago to about $50 by the beginning of April 2013, it spiked to an astonishing $230, before crashing back to $70 and recovering to over $120 at the time of writing. That has firmly put Bitcoin on the radar of speculators, commentators and economists, but opinions remain divided over its ultimate value and impact.

It is possible that the hurdles Bitcoin faces may well prove too much to gain broad acceptance in the market. If so, however, like Napster, it will prove to be a catalyst for other digital crypto-currencies.

Earlier this month, a new currency called Ripple was launched by the start-up firm OpenCoin. With serious backing, this may well prove to be a bigger, better Bitcoin, learning from its failures and building on its strengths.

Either way, Bitcoin has the potential to put governments on notice. Continue to inflate money supply in order to deflate government debt, print money to bail out reckless banks, and raid deposit accounts to pay the sovereign debt piper, and they may well find themselves disintermediated from the currency system, as their long-suffering citizens increasingly take the power that technology affords them to deal directly with each other into their own hands.

For that, we can thank Satoshi Nakamoto, whoever he is. His anonymity, like the Guy Fawkes mask, is fast becoming the symbol of the 21st century's backlash against the abuses of the profligate nation-state and its crony-capitalist enablers.

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