Bitcoins are rising fast – but risky too

Philip Salter
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RICKARD Falkvinge, the Swedish IT entrepreneur and founder of the first Pirate Party, has announced he is piling all his money into bitcoins, a digital currency that is attracting a lot of online interest. Although the technology is groundbreaking and its security substantial, Falkvinge is nevertheless taking a huge leap of faith.

Satoshi Nakamoto, a Japanese computer programmer, set out his innovative idea for bitcoin in his 2009 paper: Bitcoin: A Peer-to-Peer Electronic Cash System. Unlike every previous currency it doesn’t rely upon a central authority. It is stored virtually in the form of a file and digitally transferred. Once the money supply has reached 21m bitcoins – growing as the network grows – no more will be issued, thus prohibiting devaluation. Bitcoins can’t be frozen, tracked or taxed.

If bitcoins catch on, all functioning governments will make them illegal. This will no doubt be framed as a move to stem its criminal use. However, legitimate as these concerns are, lost tax and monetary competition will be the principal spurs for action. In making bitcoins illegal, their price, which has rocketed over 800 per cent over the last few months, will plummet, pushing the currency underground: thus cementing it as the currency of choice for criminals. Most people won’t want to hold a tainted currency which companies are banned from accepting. Bitcoins will become largely unusable.

On the other side of the coin, for people living in countries where their governments are worse than criminals, such considerations won’t apply. Indeed, it would offer some a cleaner method of payment than usually open to them. Bitcoins wouldn’t have been a bad option for Zimbabweans who could see where Mugabe’s government was taking them.

Many savers have turned to the “barbarous relic” of gold to counteract inflation. Relying upon this historically proven store of wealth is the opposite of tying up wealth in complex new code. In Nakamoto’s 2009 paper, he claims: “We have proposed a system for electronic transactions without relying on trust.” However, all stores of wealth rely on trust at some level and with its complexity and criminal potential, bitcoins can’t compete with the yellow metal. Buying bitcoins could be a profitable, if risky, short-term speculative bet. But you will have to get out before governments step in to break up the party.