Most digital payment concepts are tied to a national currency, which traditionally is backed by a stack of real-world gold. But what if you didn't need all that?
Bitcoin, an electronic alternative currency that appeared in 2009, tests the limits of virtual riches—as reporter Joshua Davis, '96, learned when he set out on a quest for the New Yorker to find Bitcoin's creator.
People who want to acquire Bitcoins "mine" for them using computers to crack complex computations. Once accumulated, Bitcoins can be traded via online exchanges for traditional currencies or for goods and services among Bitcoin adopters.
Only 21 million Bitcoins will be released into the system over 20 years, and their value is based solely on the collective faith of their users. As Bitcoin's wiki baldly states: "As a young and unestablished currency, it is only worth something because people are willing to trade it."
Bitcoin's creator signed his work as Satoshi Nakamoto, a Japanese programmer. But that's widely regarded as a pseudonym and whoever he was, he vanished in 2011. That hasn't stopped anyone from parsing Bitcoin's philosophical underpinnings, which, Davis says, may appeal to people worried about inflation or politically driven monetary policy. "Satoshi seemed to believe that by creating a currency that was entirely divorced from politics, it was going to serve the long-term interests of the economy better."
But a peer-to-peer crypto-currency raises its own economic questions. Will the limited number of Bitcoins lead to deflation? (Proponents say they'll subdivide existing Bitcoins into smaller denominations.) What about wild price swings? (Last June, a Bitcoin was worth about $29. This June, they were trading at $6.65.) And what can you actually buy with them? No major retailers accept them, although hundreds of small vendors do, mostly for DIY odds and ends or online services like web design.
"The things you could buy were very strange. You could buy beef jerky and you could buy alpaca wool socks," says Davis, who tried spending Bitcoins. He used his to check into a Howard Johnson's near Disneyland, a transaction made possible because the owner's son is a Bitcoin miner. (They didn't tell Mom.)
Because Bitcoins are exchanged anonymously, they are also attractive to those dealing in contraband. Last summer, two senators urged the Department of Justice and the Drug Enforcement Agency to shut down Silk Road, a Bitcoin-friendly online bazaar that can be accessed only through ID-scrambling software. "Once you're there, it's astounding what you can buy," says Davis. "There's ecstasy, there's acid, there's weed, there's cocaine, from what I saw."
It's also not clear how legal it is to launch an alternative currency. In 2007, Davis points out, the government indicted the owners of e-Gold, a company that exchanged electronic money for gold. But if the government wants to quash Bitcoin, Davis asks, "Who are you going to arrest for it?"
After all, the Bitcoin founder's identity remains as ethereal as his currency. While Davis's search turned up some intriguing leads, he says, "I did my best and it's still an open question."
