The online currency Bitcoin went nuts today. Actually, it’s been several months of volatile trading, rising from $13 per Bitcoin in January to a high of $268 this month. Today it lost about a third of its value.
But first a refresher: What the heck is a Bitcoin?
It’s not an actual coin.
“When you hold a Bitcoin, you don’t actually hold any Bitcoins,” explains Michael Toomim, an avid Bitcoin buyer. Instead, your currency is like a password. “You hold this private key that lets you prove to everyone on the Internet who’s running the Bitcoin software that you own that money; it’s allocated to you.”
In the same way that a dollar is a piece of paper that people have faith in, a Bitcoin is a highly encrypted agreement, that people have faith in.
To take part in the digital currency market, you download Bitcoin software and go to one of a number of “exchanges,” websites such as MtGox.com, to buy and sell Bitcoins. In return for your dollars or euros – which are transferred anonymously through encrypted accounts — you get a password that assigns those Bitcoins to you. Everyone else running the Bitcoin software can see each transaction. But they don’t know your real identity. The transactions are also irreversible, and aren’t regulated by any government.
In recent months Bitcoins have become very popular. There are 11 million Bitcoins worth nearly $2 billion in circulation today. (The supple is scheduled automatically by the software to increase to 21 million Bitcoins within a few years).
As demand grew for the limited supply, prices skyrocketed. Aleks Lossenko paid 3,000 euros to buy 50 Bitcoins last month and “now they’re worth 10,000 euros,” he says.
Well, they were worth 10,000 euros this morning before the value fell by a third.
This volatility doesn’t surprise Simon Barber, a researcher at the Palo Alto Research Center.
“Bitcoin by its very nature is very prone to bubbles,” he says. They’re a way to speculate. Buyers hoard, waiting for the right time to sell. Then, along comes something to spook everyone – as happened today when hackers disrupted some of the sites used to trade Bitcoins.
“The value of Bitcoin,” says Barber “is just based on the trust and confidence that people have in it, and as soon as something happens to shake that, people start to sell their Bitcoins.”
But Barber says this volatility will fade.
“In the long term, Bitcoin does have some fundamental value,” he says, noting that it’s anonymous, unregulated and almost impossible to counterfeit. So Bitcoin isn’t not going away.
We found our own Bitcoin investor right in the office — a Marketplace audio engineer talks about his experiences in the Bitcoin market.