The Bitcoin bubble

How the digital currency became all the rage, and why it could be dangerous

Around the time the EU was engaged in a rescue act involving Cyprus's metastised banking sector and ill-considered deposit taxes, a virtual currency called Bitcoin was witnessing an unprecedented boom. Suddenly, there were reports of panicky European investors putting their money in Bitcoins and the value of the currency doubled, and then doubled again. So just what is Bitcoin? It's exactly what it sounds like: a system of currency not backed by a central bank or any other authority, and one that exists only in the digital world. But it is not a make-believe currency like Monopoly money. It has value in the real world and currently, it costs around $242 to buy one Bitcoin up from $142 last Friday, $44 a month ago and $4.93 a year ago.

Bitcoin was created in 2009 by Satoshi Nakamoto, an unknown programmer. The network is a decentralised cash exchange system, which means that people can directly trade among themselves using Bitcoins, without involving the formal banking system. They can trade Bitcoins for offline currency. The network is cryptographically secure, although Bitcoin heists have been known to happen and the source code for it is free and public.

Bitcoin's emergence is impressive. A once-shadowy digital currency favoured by those involved in illicit activities to move money around the world without detection is now acquiring the legitimacy governments find difficult to garner for newly established currencies. But there's a sting at the end of the money trail. The explosive appreciation in Bitcoin's value could be a sign that its popularity is driven mostly by speculation, especially since the global supply of Bitcoins will never exceed 21 million. And given that no central bank will issue more Bitcoins to dilute the value of existing ones, it encourages hoarding. That makes it hard to escape the idea that the current spike in Bitcoin prices indicates a bubble that is bound to burst.

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