Financial traders have a new toy: Bitcoin – a digital currency variously dismissed as a Ponzi scheme or lauded as the greatest invention since the internet. Unlike conventional fiat money and other digital currencies, Bitcoin runs through a peer-to-peer network, independent of central control. Bitcoins are currently worth $4.88 (R37.41) each on online currency exchanges, where they can be bought and sold for about 15 world currencies.
Users exchanged about $4.3 million worth in just 24 hours last week.
Banking and payment expert Simon Lelieveldt believes they are living on borrowed time. “There is always a power base underlying a currency,” he said, speaking at the Digital Money Forum in London in March. “Bitcoin is not going to fly because there is no central bank or power base. It’s doomed to fail.”
But its separation from power is precisely what attracts many users. “Bitcoin is not run by people with hot sexual appetites for hotel maids. It is not run by corporations. It is not governed by people with budgets to meet. It is governed by a mathematical formula,” one trader and Bitcoin enthusiast said over a pint of Guinness in London’s financial district.
He also likes that there is a limit of 21 million Bitcoins built into the system. “If you try to print more than 21 million Bitcoins, you will be rejected by… computers whirring away in nerds’ garages. It is a better form of money than we have right now, or than anyone has designed so far.”
The trader, who was not willing to be named, said he spent four hours a day on Bitcoin, describing it as his second job. He estimated 90 percent of traders had bought it, most “looking for a quick 2 000 percent”. But he is playing the long game, accumulating as much as possible in the belief that one day, he will own a small but significant percentage of a currency with a fixed supply.
He and three other traders were currently seeking Bitcoin startups to invest in, he said, adding that he was hoping to put in $300 000 worth.
He is not alone. Workers at Morgan Stanley and Goldman Sachs in London and New York have been visiting online Bitcoin exchanges as often as 30 times a day, according to documents. Neither bank wanted to comment. Staff at almost all the major international banks and trading and investment firms have shown interest.
Bitcoin has become the Wild West of finance, with a proliferation of websites offering loosely regulated replicas of the services familiar to those in the financial industry.
There is a Bitcoin stock exchange, where companies can make initial public offerings and pay dividends in Bitcoin. One website offering Bitcoin options trading was “listed” this month for an implied valuation of $500m.
Perhaps the most notorious is Bitcoinica, a platform offering margin trading, short selling and stop orders run by 17-year-old Chinese high school student Zhou Tong. Users can leverage their bets up to a ratio of 10:1 on Bitcoinica, meaning they can lose more than their initial investment.
Zhou Tong, who is professionally advised by a forex trader and the head of a algorithmic trading firm in Singapore, now lends his name to international slang. To be “Zhou Tonged” is to be wiped out financially. The chorus of a YouTube rap laments a Bitcoin day trader rash enough to hold a position with no stop loss protection: “It’s so silly, how come you just lost funds? You got Zhou Tonged!”
Its popularity with financial professionals highlights an irony at the heart of the Bitcoin usership; suspicion of the banking system is written into the program’s DNA.
It was released in January 2009 by a developer using the probable pseudonym Satoshi Nakamoto. Embedded in the code of its first block of transaction history are the words ‘The Times 03/Jan/2009 Chancellor on brink of second bailout for banks’. This was a way of time-stamping the first Bitcoin transaction, but also a clue to the developer’s motivation.
Before disappearing as an online presence in January 2010, Nakamoto made clear his disapproval of quantitative easing measures and blamed banks for creating credit bubbles. Such sentiments are common among users.
Digital money consultant Jon Matonis, the former head forex trader at Visa, said Bitcoin was a natural fit for societies that prefer cash payments.
Bitcoin payments are difficult to trace back to a person’s identity, offering an anonymity that protects users from data-mining by advertising companies, but also facilitates illicit trade and has obvious potential for money launderers.
The currency gained notoriety alongside a website named Silk Road, where vendors offer to send heroin, LSD, or 9mm Beretta handguns in the post in exchange for Bitcoin.
Yet there are signs Bitcoin is finding a niche among ordinary people for everyday, legitimate transactions. A growing list of businesses are starting to accept it for a wide range of goods, from legal services to food.
Bitcoin poses a puzzle for regulators. It is a huge distributed peer-to-peer system, and any effort to enforce regulation would be difficult, though the exchanges, where Bitcoin is swapped for real-world currency, are potentially vulnerable. – Reuters