Bitcoin: the virtual currency built on math, hope and hype

Bitcoin's sharp rise in value this year has many questioning whether the virtual currency is sustainable in the long term

By , IDG News Service |  IT Management

The ascent this year of Bitcoin, a virtual currency forged through hardcore mathematics and buoyed by promises of financial liberation from banks, has been nothing short of mesmerizing.

It is being increasingly embraced as a viable means of exchange and a valuable investment, free from meddling by central banks and what some view as untrustworthy financial systems.

A pseudonymous programmer calling himself Satoshi Nakamoto developed the Bitcoin system, releasing a white paper in 2008. The network, launched in early 2009, uses peer-to-peer software to transfer bitcoins.

A purely digital currency, a bitcoin is essentially a secret number that is transferred from one party to another using public key cryptography. "Miners," or people running high-end computers that verify the transactions, are awarded newly minted bitcoins for their efforts.

Bitcoins distance from the established financial system and lack of regulation so far is partly what has made it attractive. Virtual currency projects have largely failed over the years, but Bitcoin has so far defied predictions it would meet the same fate.

Bitcoin "seems to resonate quite deeply" with people who dont trust banks, even if the rosy predictions of its potential are baseless in standard economic theory, said Dick Bryan, a professor with the Department of Political Economy at the University of Sydney.

No one can create an accurate economic model for Bitcoin, and everyone who thinks they can give an explanation is posturing," Bryan said.

So far, Bitcoin's early supporters have been joyous: If you bought the virtual currency in early 2011 at US$1 each instead of a new pair of $600 snakeskin cowboy boots, you'd be up roughly $600,000, depending on fluctuating exchange rates.

In its first-ever report on Bitcoin released Dec. 5, Bank of America Merrill Lynch predicted a value of $1,300 per bitcoin if it becomes a force in e-commerce and money transfers.

It's easy to be dazzled by the numbers. And when proponents elevate Bitcoin from a clever system for transferring value to a potential replacement for government-issued currency, the sky appears to be the only limit.

"Buy bitcoins now. Take 5 percent of your net worth, and put it into Bitcoin," said Steve Kirsch[cq], CEO of OneID, a startup that provides encryption services to protect people's data, at the Future of Money and Technology conference in San Francisco in early December.

"You won't be sorry," Kirsch said. "I think for the next few years, any time you buy bitcoins and hold onto them, and then sell it, you'll make substantial amounts of money. You'll be so happy."

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