Bitcoin Is Now a Billion Dollar Industry

Flickr / zcopley

Adam Clark Estes 5,372 ViewsMar 28, 2013

A tremendous thing happened in the weird world of bitcoin on Thursday. For the first time in the currency's history, the total value of all bitcoins in circulation topped $1 billion.

That's right: A billion bucks, right out of thin air. That's oversimplifying things a bit, but we'll get back to that. (By the way, if you still don't understand how bitcoin works, read this.) For now, let your jaw drop — watch the drool — and start wishing you'd bought a bunch of the cybercurrency way back when the exchange rate was less than $5, because on Thursday it zoomed past $95 per bitcoin. Just to rub that in: if you'd invested $500 in bitcoin about a year ago, which is probably less than one month's rent for you city dwellers, you'd have nearly $10,000 worth of stuff today. That's about a year's worth of rent. Stings doesn't it?

In a way, this is just a microcosm of our financial system as a whole. Haters love to point out how bitcoin just appeared out of thin air on January 3, 2009. It was a pet project of Japanese mathematician Satoshi Nakamoto. Or rather, bitcoin was created by some talented coder slash economist slash enigma using what's probably a made up name. Nakamoto had an axe to grind, too. The basic idea was to create a currency that exists independent of any state government. "The root problem with conventional currency is all the trust that's required to make it work," he wrote in an essay about government-backed currencies. "The central bank must be trusted not to debase the currency, but the history of fiat currencies is full of breaches of that trust. Banks must be trusted to hold our money and transfer it electronically, but they lend it out in waves of credit bubbles with barely a fraction in reserve."

Over the course of the next four years, though, bitcoin proved that this virtual currency was just as capable as complex financial products like derivatives when it comes to producing wealth from nothing. Bitcoin's value first exploded in the summer 2011, when Gawker's Adrian Chen wrote about a website called Silk Road, where you could buy any drug you wanted with bitcoin. The value of the virtual currency spiked and then settled down. (See the chart below.) The currency sort of wavered for the rest of 2011 and most of 2012, sometimes dropping down to a couple bucks per bitcoin. But then a weird thing happened earlier this year. Bitcoin exploded.

Exactly why bitcoin has skyrocketed in value these past couple of months is up for debate. It's up 152 percent this month, and nobody's really sure why. A lot of people think that the crisis in Cyprus and the situation in Spain to blame, but some have a more sober read. As Quartz's Zach Seward argues, it's nothing but a good old fashioned bubble. Basically the currency is surfing on a wave of hype that's bound to come to an end, sending the exchange rate tumbling onto the beach with sand in its teeth. On the eve of bitcoin's billion dollar milestone Seward writes:

Bitcoin is going through a "demand crisis"… As bitcoin's value rises, so does interest in it, which drives the price up even further, leading people who own bitcoins to expect even more gain, making them reluctant to sell, reducing the available supply of bitcoins, driving the price still higher, leading to more interest…

Frankly, the legend of bitcoin is an extraordinary one, and one day it might be just that: a legend. If skeptics are correct and we are witnessing a bitcoin bubble, then we'll mourn its demise as we would the death of a video game character. Sure, some people will lose money. But many of the people who've been mining bitcoin — that is, creating it from thin air using powerful computers — will simply lose a little pride.

But if this value holds, this could be something big.

Friday, March 29, 2013