The Ups And Downs Of Cyber Currency Bitcoin

Bitcoin is a virtual currency that's traded online. It's been on a wild ride lately, soaring in value during the Cyprus banking crisis. And this week, the price plummeted after a Bitcoin trading exchange was hacked.

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Bitcoin is a virtual currency that's traded largely online. It was created in 2009 in the aftermath of the global financial crisis as an alternative to currencies which are controlled by countries and central bankers. But Bitcoin has been on a wild ride lately, soaring in value during the anxious days of the Cyprus banking crisis.

We're going to look at the currency's history in today's Business Bottom Line. Here's NPR's Steve Henn.

STEVE HENN, BYLINE: The money supply in the U.S. economy is controlled by the Fed. In Europe, the number of Euros flowing through the financial system's dictated by the European Central Bank. But Bitcoin - this cyber currency - is different. Bitcoins are mined - well, kind of.

CHRIS KOSS: My name is Chris Koss, and I'm a Bitcoin miner, and I've been mining bitcoin since about August of 2011.

HENN: But Chris Koss doesn't wield a pickaxe.

KOSS: I'm walking into my room, and I'll sit next my computer - and you can hear there's a pretty good humming going on right now.

HENN: Roughly every 10 minutes, the Bitcoin network creates a kind of code, and then Bitcoin miners like Chris Koss race to crack it open.

KOSS: Basically, you want your computer to run through as many random guesses as possible, as quickly as possible.

HENN: The first miner to crack the code gets 25 brand new Bitcoins - coins that didn't exist before. And at today's exchange rate, those coins are worth more than $3,000. This process of mining new Bitcoins is the only way the currency is created. And it's completely predictable - roughly every 10 minutes 25 new Bitcoins come into circulation. And that stability, say Bitcoin advocates, gives the currency real value.

PATRICK MURCK: It's similar to gold in that there is a limited supply of Bitcoin and there is a limited supply of gold.

HENN: Patrick Murck is a lawyer and the general counsel at the Bitcoin Foundation. And in the last four years, little markets have grown up around this currency. Murck lets clients pay their bills with it - blogging sites accept it - so do a few restaurant and even some hotels. And like gold, recently Bitcoin has attracted speculators.

MURCK: We've seen orders for $250,000 open market orders. We've seen $500,000 open market orders.

HENN: In the past two months - as the banking crisis in Cyprus has simmered - Bitcoins' value has surged, almost quadrupling. And for guys like Chris Koss, that's been, well, a bit bonanza.

KOSS: I have all my money, except what I plan to spend in the next month, in Bitcoin.

HENN: Basically, Chris Koss's entire life savings is now locked up in a cyber currency that's barely four years old. Ken Kuttner, an economic professor at Williams College, says this kind of behavior has all the hallmarks of a bubble.

KEN KUTTNER: The only possible thing that can really be driving a price rise is an expected future price rise.

HENN: Kuttner points out that Bitcoins don't pay a dividend, and unlike a dollar, you can't buy much with them.

KUTTNER: You value a dollar because you go down to the corner store and buy yourself a can of Coke.

HENN: With Bitcoin - probably not.

KUTTNER: My understanding is it's used by just a small cadre of technophiles and perhaps people on the shadier side of the economy.

HENN: Today, even many Bitcoin enthusiasts like Chris Koss say they lose sleep trying to predict when or if a Bitcoin panic could wipe their assets out.

KOSS: I definitely have probably gotten a couple grey hairs thinking about where should the price be and is it about to pop at any moment.

HENN: Bitcoins took root in a corner of cyber-space in part because of distrust of central bankers. But in a panic, central bankers can step in and prop up market. They can save a life savings. Still, Koss says he's keeping his assets in Bitcoin - at least through the end of the week. Steve Henn, NPR News, Silicon Valley.

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