Breathe deep and pay in Bitcoin


arlier this month, a friend called Mats, who works in banking in Switzerland, set off on a long holiday in Bali for a spell of relaxation between jobs. Hoping to forget about finance for a while, he duly booked himself into a modest hotel in Ubud, a far-flung resort famous for yoga retreats.

But when he arrived in his tropical idyll he got a shock: the seemingly otherworldly location is in the midst of a striking monetary experiment. Over the past year, dozens of local merchants in this part of Bali have started accepting payment in Bitcoin, the electronic exchange system that is sometimes dubbed a cryptocurrency. Such is the enthusiasm for this financial innovation that Ubud was even staging a so-called Bitcoin festival, pulling people in from all over the world.

“I have never seen anything like this,” Mats declared. If you want to be a hippy in 2014, you do not just need to wear a sarong and do yoga: one of the hottest ways to become subversive or countercultural is to pay your bar bill in Bitcoin. Even, or especially, in Bali. Bitcoin illustration by Shonagh Rae©Shonagh Rae It is a fascinating sign of how tightly entwined the global economy has become today. And how potentially peculiar too. On one level, the appearance of an alternative — quasi-subversive — currency is not wildly new. After all, investors have been putting money into gold for many decades, partly because they do not trust governments (or banks). And this mistrust has been rising rapidly in recent years, as western monetary experiments keep gathering pace — hence all those gold bars now sitting in Swiss banks.

But what is striking about the Bitcoin experiment is that it takes the issue of trust to a new level. Instead of relying on governments and banks to underpin currencies, investors are essentially placing their faith in a complicated piece of cryptography and software, maintained by a community of volunteers and users with possibly conflicted interests and diverse levels of skill and commitment – and people have as little knowledge about how it really works as they have about Wall Street financial products or central bank balance sheets. To my mind, at least, that almost makes it seem rational to have faith in gold bars.

Consider for a moment how the Bitcoin project works. The currency first emerged some five years ago, when a mysterious computer expert called Satoshi Nakamoto created an online payment system using open-sourced software. This, essentially, is a peer-to-peer exchange system — using a unit of value known as Bitcoin — that does not require a central administrator or repository, since payments are recorded in a central public electronics ledger, which is maintained by the community.


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In theory, this community element is supposed to give users more independence. It is also meant to confer greater credibility to currency than fiat money. After all, the beauty of using Bitcoin is that you do not need to rely on costly and slow-moving bank payment systems: “money” can be sent to or exchanged anywhere in the world. And the value of that money will not be wiped out if a government suddenly decides to turn on the printing press. Instead, the number of Bitcoins in circulation can only increase at a fixed rate each year, and in 2140 the total supply of Bitcoins will be capped at 21 million — or so the protocols say. This ensures that the “value” is democratically determined by supply and demand.

But, in reality, it is clear that the value of Bitcoin can fluctuate wildly, just like any other asset. Over the past two years, for example, Bitcoin’s value soared from $50 per Bitcoin (in 2012) to $1,150 (in late 2013), before collapsing this year to under $400, when a scandal erupted about the use of Bitcoin for money laundering. That makes Bitcoin arguably the worst-performing asset this year. Worse still, it is also clear that Bitcoin only works as a “currency” if people have rock-solid faith in their computers. After all, the risk of having electronic ledgers as the store of value is that the money could disappear if hackers broke into the system. Indeed, it can disappear if you just lose your electronic “key”, ie passcode. (And there are cases of that happening when people have accidentally wiped their hard drive, say, or lost their records.)

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Of course, a cynic might argue that this same point about cyber risk also applies to modern global finance and many other aspects of the business world. And they do not appear to be stopping Bitcoin’s expansion, even into emerging markets. Never mind Bali bars; last week Microsoft announced it would accept Bitcoin for some accounts. Groups such as Dell, Expedia, Zynga, Virgin Galactic, PayPal and Atomic Mail have started accepting it too. Greenpeace and Wikimedia accept it for donations, and some US political candidates have declared they would accept Bitcoin campaign finance.

The more the Bitcoin revolution spreads, the more it reveals both the perils and power of innovation. The cyber technology that now ties our world together has made us dependent on potentially fragile cyber links. But it has also shrunk the globe, delivered extraordinary convenience and is making us all think afresh. Even my banker friend Mats. These days, he says he is (healthily) wary of Bitcoin. But he has nevertheless acquired a wallet of the cryptocurrency to bring with him back to Europe, as a travel souvenir-cum-modern equivalent of a gold bar. It might yet make some useful Christmas presents — and Santa might spin in his (electronic) sack.

/r/Bitcoin Thread Link -