[FoRK] Bitcoin hits $1 Billion

Bill Stoddard wgstoddard at gmail.com
Thu Apr 4 12:30:37 PDT 2013


Bitcoin <http://spectrum.ieee.org/tag/Bitcoin>, the world's first 
open-source cryptographic currency 
<http://spectrum.ieee.org/tag/cryptocurrency>, which has been on a tear 
since the beginning of this year, set a new record on 28 March, when the 
price listed on the largest online exchange rose past US $95. With 
nearly 11 million bitcoins in circulation, this sets the total worth of 
the currency at just over $1 billion.

For a bit of perspective, that's how much Facebook spent on its 
acquisition of Instagram last April. But Bitcoin is not a company. It's 
a digital currency that runs on a global peer-to-peer network without 
the backing of a nation or any other central authority. The recent 
ascent has traditional economists scratching their heads.

"It's something of a mystery that Bitcoin has a positive value at all, 
since it wasn't launched in the way a new currency is typically 
launched," says Lawrence White <http://mason.gmu.edu/%7Elwhite11/>, an 
economist who teaches the history of banking and money at George Mason 
University, in Fairfax, Va.

"Typically, if a country wants to introduce a new currency, they make it 
redeemable for the old currency at a fixed exchange rate, and then after 
a while they cut off the link and retire the old currency," White says. 
"But they launch the new currency by giving people a sort of firm 
expectation of what it's worth. Bitcoin didn't do that. It just launched 
itself by its own bootstraps, and we don't really understand how that 
worked, as economists."

Recent events suggest that many of the people who are using Bitcoin 
don't want to replicate these old models. Much of the recent interest in 
Bitcoin is coming from places like Cyprus, whose desperate proposals for 
economic reform threaten to plunder the savings of its people.

Take what happened on 19 March, for example. In its bargaining for a 
EUR10 billion bailout from its European lenders, the Cypriot government 
instituted a bank holiday 
as it considered economic reforms that would impose severe levies on 
many bank deposits. As the situation became more chaotic, Cypriots who 
found themselves suddenly cut off from their savings accounts began 
downloading Bitcoin iPhone apps. That day, there was a steep increase in 
downloads of Bitcoin Gold, an application that tracks the exchange rate 
of Bitcoin. In rankings of finance-related downloads by popularity, the 
app went from 1171 to 104.

Without access to their money, it's unlikely that many Cypriots were 
able to buy bitcoins at that time. But interest in the currency peaked 
in other countries as well. Spain, which has kept a close eye on the 
developments in Cyprus, showed a similar spike on 17 March 
and downloads in the United States jumped a few days later 
indicating that when government currencies fray, Bitcoin begins to look 
a little more like a safe haven and a little less like a crazy 
techno-utopian experiment.

But if Bitcoin is to function as a proper currency, people will have to 
be able to spend it as well as save it. This month, Bitcoin recruited a 
couple of high-profile merchants 
On 14 February, Reddit began accepting the currency from customers 
signed up for its Gold membership. Two days later, Kim Dotcom announced 
via his Twitter feed that people could start using bitcoins to buy 
access to his new file-sharing service, Mega.

Since then, transactions in the Bitcoin network have increased 
significantly. For most of 2012, before the price of Bitcoin began its 
dramatic upward surge, daily transactions totaled about 200 000 
bitcoins. Now that number tends to be around 300 000, suggesting that 
more people are using the currency to make purchases.

BitPay <https://bitpay.com/>, one of the most successful Bitcoin payment 
processors, reports a similar trend. In March alone it set a new record, 
processing more than $2 million worth of Bitcoin transactions for its 
clients---nearly two-thirds of what the company managed in all of 2012.

"We see somewhat of a wealth effect," says Anthony Gallippi, the CEO and 
cofounder of BitPay. "As the price rises, people do tend to spend money. 
When the price falls is when they tend to spend less."

All of this is a big deal for Bitcoin. But making it into the Billion 
Dollar Club is not enough to impress professional investors, it seems. 
When asked whether Bitcoin's aggressive ascent was turning any heads, 
Michael Kagan, the senior portfolio manager at ClearBridge Investments, 
had this to say: "I just don't feel comfortable getting involved with 
something vulnerable to being hacked or manipulated, and with no 
recompense if it is. If I wanted to invest in something as an abstract 
store of value, I would buy gold."

Maybe someday Bitcoin will gain its Wall Street cred. Until then, early 
adopters can at least bask in the glory of bewildering a whole 
generation of economic theorists.

A billion dollars may be small on a global scale, but it's certainly 
hard to ignore. Perhaps the movie version of Napster cofounder Sean 
Parker <http://en.wikipedia.org/wiki/Sean_Parker> in /The Social 
Network/, as portrayed by Justin Timberlake, put it best: "A million 
dollars isn't cool. You know what's cool? A billion dollars." 

/This article was previously published as a blog post on 29 March./

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