Money

Bitcoin trumps Twitter in bubble stakes

Bitcoin has elbowed out the newly listed Twitter to form the world's biggest financial bubble, jumping almost $US200 overnight to a record $US704.

The price of Bitcoins is soaring
The price of Bitcoins is soaring Photo: Bloomberg

The spike followed a sea change in how the virtual currency - which is no more than a string of computer code which anybody with the know-how can create - is viewed by the world at large.

On Monday the US Department of Justice said Bitcoins can be “legal means of exchange” at a US Senate committee hearing, boosting prospects for wider acceptance of the virtual currency.

Bitcoin's rise and rise.
Bitcoin's rise and rise. Photo: Blockchain.info

“We all recognise that virtual currencies, in and of themselves, are not illegal,” Mythili Raman, acting assistant attorney general at the Justice Department's criminal division, said at the hearing.

The Committee on Homeland Security and Governmental Affairs, had scheduled the hearing “to explore potential promises and risks related to virtual currency for the federal government and society at large” after the Silk Road Hidden Website was shut down in October.

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The closing of the marketplace, where people could obtain drugs, guns and other illicit goods using Bitcoins, is helping fuel a rally in the virtual currency as speculators bet that the digital money will gain more mainstream acceptance.

Bitcoins skate around the banking system and are used for purchases online.

They can be cashed in for conventional currencies at online exchanges such as www.coinjar.com.au or bitcoins.com.

You can even buy an off-road vehicle from Tomcar Australia with Bitcoins and a rapidly growing number of online businesses accept them. There's also a PayPal version, naturally called BitPay.

But making Bitcoins isn't easy. The designers, who have never been properly identified and hide behind the pseudonym Satoshi Nakamoto whose academic paper is the basis of the system, have made it hard but not impossible for any software geek with the inclination.

The bitcoin is a sort of cyber co-operative, governed by a secret herbs and spices software which controls how many are made. After four years there are about 11 million Bitcoins circulating online and the software decrees that the maximum that can be produced is 21 million by 2140.

Because bitcoin transactions are anonymous – they are kept in, and transferred between, electronic purses that are identified only with a coded address and password - they are ideal for laundering money and trafficking drugs.

As the demand for bitcoins rises, the supply of them after 2140 will fall as some disappear into cyberspace chasing lost passwords.

That's because if you forget the password there isn't a bank you can ask to re-set it. As a result your bitcoins disappear into cyberspace.

Nor is the e-purse failsafe. “It cannot protect against keylogging hardware or software,” says the mythical Mr Nakamoto.

You also have to go through an unregulated online exchange which gives bitcoins the flavour – and perhaps appeal – of the wild west.

Strictly speaking Bitcoins don't exist outside the internet but some websites sell physical versions using cheap metal which has an encrypted hologram, not unlike a debit card.

As an investment you have to trust the software won't be hacked, or Mr Nakamoto doesn't change his mind at some point about how many can be created.

You also have to go through an unregulated online exchange which will charge commission of up to 10 per cent, giving bitcoins the flavour – and perhaps appeal – of the wild west.

And what creates digital dollars can also destroy them.

The Bitcoin is complicated to set up and transfers money in 10 minutes. The way the internet is going, well before 2140 that will seem an eternity.

With Bloomberg

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