April 6, 2013

Cyber currency gains followers, value

Bitcoins exist only on computers but have gained plenty of real-world worth.

By ANTHONY FAIOLA and T.W. FARNAM / The Washington Post

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click image to enlarge

Jonathan Harrison, left, and Amir Taaki hold a copy of Bitcoin magazine in London. Harrison quit his job as a gold trader and has seen his bitcoin portfolio grow quickly in recent weeks.

Photo for The Washington Post by Michael Kemp

To avoid counterfeiting, bitcoins are accounted for on public ledgers. Holders of bitcoins – which are stored using electronic "wallet" software downloaded from the Internet – are kept anonymous unless they choose to disclose their identities. Yet there is no centralized authority that regulators could hone in on to shut the system down. Though government- and bank-free, the users pay a certain price for that freedom. U.S. bank deposits, for instance, are insured up to $250,000 by the FDIC. But this week, when hackers struck bitcoin wallet provider Instawallet, the company issued a statement saying it would refund clients holding more than 50 units only on a "case-by-case and best-effort basis."

Nakamoto seemed to vanish more than a year ago, leaving other developers to advance the technology. A year later, initial waves of publicity and word of mouth created a surge in value that sent the price of one bitcoin soaring from less than $5 to almost $30.

There were now two ways of getting bitcoins - mining them yourself or, more commonly, buying them from current owners using real-world currency. However, after a series of high-profile hacker attacks - including a hit on the computers at Mt. Gox, the Tokyo-based exchange site that is the cyber-currency's largest - its value collapsed, falling back below $10 and increasing only modestly until a few months ago. Another wave of attacks hit the exchange house this week but have thus far not caused equal damage.

No one knows what, exactly, is behind the currency's staggering climb that started earlier this year and accelerated in recent weeks. Some cite a change in the network's programming in December that cut the number of bitcoins released each day. Others say new interest from Russians and others looking for safe havens after bank account seizures in Cyprus is behind the climb. Bitcoin promoters credit new interest by venture capitalists. Yet Wall Street analysts who follow bitcoin say there is still no indication that major investors are seriously dabbling in them. Critics say those paying hefty fees for bitcoins are investing in a ghost currency whose value is fictional.

"What's behind that billion-dollar value? Nothing, except some people would claim a billion dollars worth of burned electricity," said Ben Laurie, a software engineer and visiting fellow at Cambridge University.

Though critics warn current buyers will themselves be burned if the price collapses, bitcoin's rise already has early merchants ruminating about what might have been. George's Famous Baklava in New Hampshire, for instance, sold a pan of dark chocolate pastry online for 14 bitcoins in 2012 – a sum worth about $1,890 today. "I'm already looking back on that and smiling," the company's owner, George Mandrik Skouras, wrote in an email.

The anti-establishment nature of bitcoin has also made it the preferred currency of antigovernment activists. Harrison, the bitcoin trader, for instance, first learned about the currency after watching a viral video made by Amir Taaki, a former online poker player turned freelance software developer who now organizes bitcoin conferences. Taaki's conferences have drawn interest from everyone ranging from money laundering experts to the likes of Cody Wilson, the American crypto-anarchist who is pioneering 3-D printing technology to create plastic guns.

The marketplace that accepts bitcoins is small but growing. At Room 77 in Berlin, you can use your smartphone to digitally pay for a hamburger in bitcoins. More often, you can shop online for a range of items including, as bitcoin enthusiasts admit, illegal drugs.

Once the province of hobbyists rigging together off-the-shelf computer parts, bitcoin "mining" is also rapidly evolving. The math puzzles that award bitcoins have become harder as more and increasingly powerful computers mine them.

It has led cyber-thieves to hijack computers via viruses that help them mine bitcoins. Legal miners such as Bennett Hoffman, a California-based bitcoin enthusiast who once hunted them on his gaming computer, are joining up with business partners to invest in new professional bitcoin-mining machines costing $30,000 each.

The European Central Bank issued a report in October on growing bitcoin use. Last month, a branch of the U.S. Treasury concerned with money laundering issued guidance to online exchanges in the United States, warning that they must report large cash transactions and suspicious activity on their systems.

"In a way it is like … Monopoly money being used rather than your respective currency, not knowing who owns the bank and who is the dog, the car, the top hat or thimble," said Rusty Payne, a spokesman for the U.S. Drug Enforcement Agency. "Bitcoins are virtually untraceable."

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