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BIT BY BIT: Homemade bitcoin tokens created by a collector in Utah.
George Frey/Bloomberg via Getty Images
BIT BY BIT: Homemade bitcoin tokens created by a collector in Utah.

Funny money

Technology | Bitcoins are a new fad for online currency, but their value may be as illusory as they are

Issue: "Boy Scout dilemma," May 18, 2013

If the World Wide Web were an ocean, and gamblers and drug dealers were pirates, their gold purses would be filled with “bitcoin.”

What’s bitcoin, you ask? It’s imaginary money, a computer-created currency traded online. Anyone who possesses the digital code for a bitcoin can sell or trade it to anyone else in the world willing to accept it. The value fluctuates with demand—so much so this year a bitcoin owner could be seasick.

Bitcoin is like the U.S. dollar because it is fiat money, without the backing of gold or silver or anything else of physical value. Unlike the U.S. dollar, no central bank or government stands behind bitcoin—with only the Bitcoin Foundation monitoring the encryption code keeping bitcoin transactions secure. Because the transactions are unregulated and difficult to trace, bitcoin has become a favorite currency not just for futuristic computer geeks and anarchist-minded libertarians, but for hawkers of pornography and illicit drugs, and shady gambling websites.

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Someone—or some group—using the pseudonym Satoshi Nakamoto invented the bitcoin protocol in 2009, then allegedly disappeared. About 11 million bitcoins exist today, but according to rules built into the system, people can create new coins by putting their computers to work solving progressively complex mathematical puzzles (fondly known as “mining”). Cleverly, the inventors limited the total number of bitcoins that can be created to about 21 million.

Bitcoins this year attracted the interest of investors, who drove the value of bitcoins to astonishing heights: A bitcoin worth just $15 in January was trading at $260 in April.

It was a bubble that may have been inflated by media hype. After cresting at $266, bitcoin prices plunged 70 percent in one week, with the price bobbing up and down hour to hour. The swing revealed, of course, a market trying to determine the worth of inherently worthless computer currency.

Advocates say the value of bitcoins will stabilize in time, but other analysts think bitcoins will ultimately sink under their own weight: If bitcoins keep growing in value, people may stop trading them and hoard them instead, making them useless as currency.

Another weakness: Although bitcoin is supposed to be secure from counterfeiting, hackers have emptied people’s computer-based bitcoin purses. And once stolen, there’s no online police that can retrieve the currency. The web is largely a world without law enforcement, where savvy criminals abound, and it takes some inside know-how to keep your money safe from those you do business with. Pirates have the same problem.

Computer meltdown

Scott Olson/Getty Images

People seem to be falling out of love with laptops and desktops: Research firm IDC said worldwide sales of personal computers plummeted in the first three months of 2013, down 14 percent from a year earlier. It’s the worst such computer crash since IDC starting keeping count in 1994 (or since 2001, by another firm’s estimate).

What are consumers buying instead? Tablets and smartphones. Together, the mobile devices could outsell PCs by a ratio of nearly 4-to-1 this year. Some analysts blame Microsoft’s poorly received Windows 8 operating system, released last fall, for failing to lift the sagging PC market. —D.J.D.

Daniel James Devine
Daniel James Devine

Daniel is managing editor of WORLD Magazine and lives in Indiana. Follow Daniel on Twitter @DanJamDevine.


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