On Monday, the Bitcoin rate reached its all time high at US$750. At the beginning of this year, it was US$13. Bitcoin is the most recognised of the so-called virtual currencies, digital money with no relation to central banks. There are many other varieties with different set-ups, but Bitcoin is the most popular. It was the main currency for Silk Road, the infamous black market website that the US-government has tried to close down.
The principle is that the amount of Bitcoin in circulation is fixed and the value is decided by traders on a free market. Servers distributed across the internet keep track of the money and each Bitcoin is encrypted. There has been controversy around the money-laundering and organised crime opportunities surrounding virtual currencies, but so far it seems most criminals prefer hard currency and virtual money remains the domain of geeks and risk-hungry investors.
Like any money, the value of virtual currencies is decided by the market: in effect what somebody is prepared to pay or trade for it. Just like normal money its value changes over time according to a lot of factors and it relies on a silent agreement about the value. The difference is that there is no central bank involved that monitors and influences the value by increasing/decreasing the amount of money in circulation or buying/selling hard assets like gold. Virtual money are normally disconnected from the “real” economy, but it also exists in virtual worlds – like World of Warcraft Gold, which can be traded against a US-dollar rate decided by the market (transactions are a little complicated as Blizzard, the company that operates the game service, tries to limit this practice).
What a civilisation decides to use for money, is a question that has intrigued economic historians since the subject started about a century ago. The Mayans used cocoa beans. Gold and silver is familiar to many cultures. Edward Castronova is a professor of Telecommunications at Indiana University, he uses game worlds to experiment on what object becomes money in an economy. There is no law of nature that decides that!
The practice of virtual currencies is older than Bitcoin and World of Warcraft, even older than the world wide web. The most influential virtual currency so-far was the European Currency Unit, ECU, the pre-cursor to the Euro in the 1980’s. It was a “basket” of member state currencies and traded by banks like a real currency, but had no bills, coins or other physical representation. It was however used for international financial transactions in some cases.
The ECU spawned the Euro and while Bitcoin may be the digital anarchists fantasy, it is actually the opposite. Currency is the foundation of an organised economy, once that is in place many other functions of society (including regulation) are very likely to follow. So while Bitcoin might look like a threat to existing power structures, it might just as well be a seed for a lawful online world. Who knows, it may be just what the doctor ordered to cure the current Euro-crunch. That, or it could be just a fad.
