A new parallel currency is circulating on the Internet: Bitcoins can already be used to buy pizza, weapons and drugs. But what happens when virtual gold becomes a coveted object of speculation?
The story sounds like the blurb of a postmodern novel by Don DeLillo or David Foster Wallace. In January 2009, a developer called Satoshi Nakamoto provided the first coins for a digital currency. Nobody knows who is behind the pseudonym. The supposed Japanese is the author of a nine-page document, which is referred to in the network community as a “white paper”. Then suddenly Nakamoto disappears. Allegedly because he wants to do other things. He may now be growing ornamental gourds or he may be writing haikus as his invention continues its steep rise.
Bitcoin is the name of the virtual currency that Nakamoto created. The first real economy transaction took place in May 2010 in Jacksonville (Florida). A programmer bought two pizzas for 10,000 Bitcoins, which he ate with his little daughter.
Because the demand has exploded in the last few months, these 10,000 Bitcoins would be worth around one million euros today. No wonder that many people prefer to buy bitcoins instead of pizzas, they hope for speculative profits. Other buyers, particularly in Spain and Greece, are looking for a safe haven currency. Still others are free spirits who want to trade anonymously without government surveillance or paying fees to financial institutions.
Buying bitcoins is quite easy, they are traded on bitcoin exchanges, all you need is a computer program. Creating bitcoins, on the other hand, is much more complicated. For the typical feuilleton reader who just uses e-mail and Google, the process is difficult to understand. It helps to think of money creation as a digital version of gold mining.
Marijuana and machine guns
Bitcoins are encrypted data sets that are put into the world by users themselves. These users work with powerful computers that generate new bitcoins in a kind of arithmetic problem. The creation of money thus arises from an actual amount of work and is referred to as “mining”.
The Bitcoin system is also based on gold in other respects as referred in exchange tutorials. While the international financial system finally gave up the connection to the gold standard in the 1970s and can now create unlimited money, bitcoins are artificially limited. A total of 21 million Bitcoins can be developed, then that’s the end, that’s how the software was programmed. The currency is therefore not only considered forgery-proof, but is also immune to inflation, which is currently its great attraction.
What happens now? At the moment, bitcoins are still a niche currency and only a few merchants accept them. Pizzas, burgers and alpaca socks are some of the typical things that have long been available for Bitcoins. The nature conservation organization BUND accepts bitcoins as donations, and on certain websites you can also get marijuana and machine guns for bitcoins. But it is better to pay for going to the cinema or daily shopping in euros.
But that could change. Virtual gold is benefiting from the crisis of confidence in traditional currencies. Thanks to the media attention, Bitcoins should soon move into public awareness. The Bitcoin bulls believe that more and more people and companies will be working with the new currency and that the price will continue to rise for a long time.
At the expense of the herd animals
Should it really come that way, Bitcoins could lose their reputation as an egalitarian alternative currency at some point. To prevent tax evasion and illegal business, the authorities will do everything in their power to regulate trade more. The computational effort could also increase to such an extent that hierarchical structures would be necessary, which might be similar to the current banking system. Bitcoins would become a kind of supplementary minor currency that aligns with normal currencies. That would be a little boring.
If DeLillo had come up with the history of Bitcoins, however, a different development would be more likely. Then the new currency soon turned out to be a speculative bubble that rewards early investors at the expense of the herd animals. There are some indications of this. After all, the rate does not depend on basic economic data, but only on demand, which makes it fragile. Hacker attacks or government intervention could permanently shake the trust of the herd animals.
Since nobody guarantees the exchange into other currencies, panic sets in. The course is plummeting, and the former Bitcoin millionaires are happy when they can still exchange their credit for a pizza. For a postmodern novel that would of course be a much nicer ending.