The Bitcoin Boom

[phantom power]

On March 16th, the Cypriot President Nicos Anastasiades, who’d been in office for about a month, announced a strategy to solve the country’s banking crisis. This plan, which would be funded in part by confiscating money directly from every single bank account in Cyprus—even the very smallest—met with instantaneous and violent opposition from the country’s citizens. Offstage, the European Union, led by a group of adamant Germans, Finns, and Danes, as well as the I.M.F. and the European Central Bank, pointed a cannon at Anastasiades’s head: if he didn’t move forward with this plan, the Cyprus banks would go bust and their hapless customers would lose pretty much all their money, instead of a measly 6.75 per cent. However, under great pressure from their constituents, Cypriot M.P.s rejected the proposal and sent Anastasiades back to the drawing board.

The following Monday, the price of the decentralized electronic currency bitcoin rose from forty-five to fifty-five dollars on the major exchanges, and by Wednesday it had nipped up to sixty-five dollars. The financial media generally agreed that the two dramas are related. According to Bloomberg Businessweek, it appears that Spaniards are liable to have been particularly active buyers of bitcoins that week, having taken the debacle in Cyprus as the likely sign of a forthcoming governmental plunder of their own savings. The evidence coming out of Spain is circumstantial—a spike in Google searches for “bitcoin,” and another on mobile-app downloads of Bitcoin-related software were widely reported—but the pieces appear to fit. Subsequent developments (including the announcement of an eleventh-hour bailout deal for Cyprus) have so far failed to stabilize the euro or cool the bitcoin fever, with the price over a hundred and three at the time of writing.

That a number of panicked Europeans appear to have reckoned the wildly volatile, vulnerable, and tiny bitcoin market a preferable alternative to their own banking system, even temporarily, signals a serious widening of the cracks between the northern and southern E.U. countries in the wake of the euro-zone debt crisis. It also illustrates the broader collapse of trust that is threatening the world of global banking and fiat money.

The weakness in existing currencies stems from lack of faith in institutions—particularly central banks, which are often in league with commercial and investment banks. When a government bails out a failed bank or insurance company—in essence, by printing money—the net effect is that the currency as a whole is debased, in favor of a few and at the literal expense of everyone else, which amounts to a fair description of today’s global financial system. Hence the sudden appeal of bitcoins, which appear, for the moment, at least, to be immune to the machinations of inept or crooked bankers and politicians.

In many ways, bitcoins function essentially like any other currency, and are accepted as payment by a growing number of merchants, both online and in the real world. But they are generated at a predetermined rate by an open-source computer program, which was set in motion in January of 2009. This program produced each one of the nearly eleven million bitcoins in circulation (with a total value just over a billion dollars at the current rate of exchange), and it runs on a massive peer-to-peer network of some twenty thousand independent nodes, which are generally very powerful (and expensive) G.P.U. or ASIC computer systems optimized to compete for new bitcoins. (Standards vary, but there seems to be a consensus forming around Bitcoin, capitalized, for the system, the software, and the network it runs on, and bitcoin, lowercase, for the currency itself.)

http://www.newyorker.com/online/blogs/elements/2013/04/the-future-of-bitcoin.html