Episode 450: Bitcoin Goes To The Moon : Planet Money The value of the virtual currency is skyrocketing. Is that good or bad for bitcoin's future?

Episode 450: Bitcoin Goes To The Moon

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Here's some boring economic news for you. The Japanese yen, this year it's up 12 percent against the dollar. The euro did not do so well. It's down about 1 percent for the year.


There is one currency, though, that is anything but boring. It has done very, very, very, very well against the dollar. It is a virtual currency called bitcoin. Bitcoins don't exist in the physical world - just on computers. At the beginning of the year, a bitcoin was worth about $20.

GAVIN ANDRESEN: This morning I think it hit $180.

KESTENBAUM: So if you had bought one at the beginning of the year, it would be worth 10 times as much now?

ANDRESEN: Yes. Yeah, it's crazy.

CHACE: Gavin Andresen, he works on the Bitcoin Project. His title is chief scientist at the Bitcoin Foundation. On a chart, the price for a bitcoin looks crazy. It is like a rocket taking off for the moon.

ANDRESEN: It is a moon shot, yep. I certainly - I never expected bitcoin prices to rise this far this fast.

CHACE: Hello. And welcome to PLANET MONEY. I'm Zoe Chace.

KESTENBAUM: And I'm David Kestenbaum. Today on the show, what in the world is going on with bitcoin? Is this a sign that currency is actually catching on? Or is it a sign of a problem?


STARS: (Singing) I'm calling on the backlines. Crawling from the battle to the other side.

CHACE: Of course, David, you and Jacob already did this big podcast a couple years back where you used bitcoins to buy lunch in Manhattan. And it was you and Jacob because you guys are the real money nerds around here. You guys are always asking what is money anyway? And how do people decide that little pieces of paper or metal are actually worth something?

KESTENBAUM: I mean, bitcoins, they're not just some way to pay for things electronically. They are much weirder and more interesting than that. I mean, most currencies have some government behind them - right? - like the dollar or the euro. But bitcoins do not. They're supposed to be a kind of universal, virtual currency. And it's a really interesting experiment that tells you a lot about what a currency really is and what it's supposed to do. The way that bitcoins came about is this great little internet fairy tale. So we're going to start by playing a section from that previous show we did that explains how bitcoins were born. It's about four-and-a-half minutes long. And you'll hear Jacob and me talking with Gavin Andresen, the guy you heard at the top.


ANDRESEN: The idea started with a guy named Satoshi Nakamoto. He's a bit of a mysterious figure. We're not sure if Satoshi Nakamoto is his real name. He doesn't give interviews. And I've only ever interacted with him via email and electronically on the bitcoin forums.


Are you Satoshi Nakamoto?

ANDRESEN: I am not Satoshi Nakamoto.

KESTENBAUM: Do you have any sense for Satoshi? Has he ever made a joke in an email or anything?

ANDRESEN: He never has.


ANDRESEN: It's sort of always been - or them.

GOLDSTEIN: Oh, them.

KESTENBAUM: Them - I like them.

ANDRESEN: (Laughter) Always is strictly business, just about kind of the Bitcoin Project and the code.

KESTENBAUM: Creating a new currency is really complicated. How do you prevent people from making counterfeit bitcoins? How do you make sure that someone can't spend the same bitcoin twice? You know, I send it to you. I send it to Caitlin.

GOLDSTEIN: Well, whoever Satoshi Nakamoto is - he or she or they - came up with really a pretty clever system. There's no center to the whole thing. It's not like one computer somewhere is storing all the information. Bitcoin isn't run by a corporation. It's not run by any nonprofit group. It's what computer geeks call a peer-to-peer system. It's run by everybody who uses bitcoin. And Gavin says because of that, you don't even have to trust Satoshi Nakamoto, whoever that may be.

ANDRESEN: If you have the technical know-how, you can look at every line of code in it and see what it does. And it cannot be changed unless a majority of the people who are running the software decide that it ought to be changed. So you're trusting the collective wisdom of all of the people who are using bitcoin not to screw it up. For me, that's more comforting than thinking that politicians or central bankers won't screw it up. I actually trust the wisdom of the crowds more. It seems like they have better incentives to make sure this system works.

GOLDSTEIN: Now, David, there's no way either of us is going to look at this code and understand it. But even assuming that Gavin and the other programmers who've looked at it are right - you know, when they say that it sets up this beautiful, self-sustaining system, and it doesn't require any central authority - there's still this other really weird problem. When you're creating a new currency, one that just didn't exist at all before, how do you get the money out there in the world in a fair way? You don't want to just give it to your friends. You want to make people work for it.

KESTENBAUM: So here's how Satoshi did it. He decided he would make bitcoins like a computerized version of gold. Just like gold, there would be a finite amount of bitcoins out there in the world. And the coins would first enter the economy through mining. People would mine for bitcoins with their computers.

GOLDSTEIN: And what this means - what mining means in the case of bitcoin - is you download a computer program, and then you run it. And your computer grinds away at this very computationally intense puzzle. If your computer solves it, you get some bitcoins.

KESTENBAUM: We thought it would be fun to try to mine some coins, so we had Gavin walk us through it.

ANDRESEN: So it should start up, and you should see a traditional, very geeky-looking application.

KESTENBAUM: Yeah, there aren't any pictures or anything (laughter).

ANDRESEN: Yeah, the bitcoin application is kind of designed by geeks for geeks a little bit.

GOLDSTEIN: It turns out, David, we are late to this bitcoin prospecting game. The bitcoin gold rush, it's basically already happened. And the more people who are looking for bitcoins, the harder it is for any one person to find some. So if we'd been doing this, you know, last year when bitcoin was just getting off the ground, we would have had a good shot - but now, not so much.

ANDRESEN: Down at the bottom of the screen, there is some number that says hashes per second probably.

GOLDSTEIN: I feel like we're just sort of, like, walking out to the banks of the Hudson River or something and sticking our hands in the mud. And there's essentially no chance that we're going to come up with a bitcoin here.

ANDRESEN: That's pretty much true. Your typical office computer would take five or 10 years of running nonstop all day long to find any bitcoins. And you would end up spending more on electricity than you do on the value of the bitcoins that you got.

GOLDSTEIN: There are still people out there getting bitcoins this way - by mining them. But those people have these very powerful computers that can essentially run circles around our little laptop.

KESTENBAUM: Jacob, it struck me at this point that whoever got in early on bitcoins and dug up the first coins when they were easy to find, they are in a position to get really, really, really rich if this thing takes off.

GOLDSTEIN: Yeah. Last year, one bitcoin was worth just a few cents. As of today, one bitcoin is worth more than $14.

CHACE: OK, I'm going to jump in here, David, because at this point, the rest of the reporting becomes wildly outdated. You guys spoke those words 21 months ago - $14 a bitcoin has become - let me just check this out - $222 today.

KESTENBAUM: It's still going up, and it's big news.


UNIDENTIFIED REPORTER #1: Everyone is buzzing about bitcoin as its total value tops 1 billion...

UNIDENTIFIED REPORTER #2: Now from just $2 two years ago, the value of the cyber cash has hit a record high of almost...

UNIDENTIFIED REPORTER #3: Bitcoins are booming. The price of one unit of the digital currency jumped during the past...

KESTENBAUM: So we called back Gavin Andresen, and we asked him what happened?

ANDRESEN: It's been a constant kind of drumbeat of good news.

CHACE: He said a handful of online businesses have started taking bitcoin more seriously. Back in November, WordPress, this blogging site - it helps you build a blog - they made this big announcement that they'd start taking bitcoins.

ANDRESEN: That kind of started the price increase. That was kind of the, you know, big internet retailer giving bitcoin a little bit of legitimacy. And that was followed by, you know, Reddit, Mega - for their Mega uploads. And there have been several others - pretty big online merchants saying that they will accept bitcoins for their products or services.

KESTENBAUM: Also, he says, a hedge fund got interested in buying bitcoins - a hedge fund in Malta.

ANDRESEN: And I just love saying that - hedge fund in Malta. It's such a - I couldn't make that up (laughter).

KESTENBAUM: And as these things happened, the price of bitcoin started edging up.

ANDRESEN: Then it went really ballistic, and it's not clear exactly what the trigger was.

CHACE: One explanation people have is this other piece of good news for bitcoin. The U.S. Treasury Department came out with these guidelines about the bitcoin exchanges that everyone uses to buy bitcoins. Bitcoin does have this sketchy reputation. One reason people like it so much and like to use it is that they are anonymous. They're not traceable. It's just an online version of cash.

KESTENBAUM: There have been news stories about websites where you can use bitcoins to buy illegal drugs. And on that other bitcoin show we did, Jacob and I talked to a lawyer who's told us it was unclear if it was even legal to launch a new currency in the United States. So when this new guidance from the Treasury came out, a lot of people saw it and said, oh, the government is saying it's OK to use bitcoins.

CHACE: The very same day that those regulations were released, something else big happened in the world - this other thing that fits perfectly into the narrative of why a currency that's not backed by any government might be the way of the future.

KESTENBAUM: That thing was Cyprus. The Cyprus crisis hit the front pages. So as you've heard on this show, Cyprus government is in a lot of debt. And the news on that day was that there was this plan afoot to take money from people's savings accounts. The law that passed only ended up applying to people with a lot of money in banks, but the whole thing freaked out a lot of ordinary people with money in banks. And this kind of story, it's perfect for bitcoin. If you start losing faith in government, why not switch to a currency that doesn't depend on a government?

TOM: And to me, that triggered alarm bells - that if they can do that in Cyprus, they could do that anywhere. It made me feel unsafe with my money. And I wondered what else I could do with it.

CHACE: Meet Tom. He did not want us to use his last name. Tom is a radar scientist in the middle of the English countryside. People in Cyprus couldn't easily buy bitcoins because their bank accounts were frozen. But Tom, in the middle of England, read about what was happening there and started reading up on bitcoins. He found someone locally who would sell him some - this taxi driver.

TOM: I drove to a train station and met a taxi driver there who dealt in bitcoins. And I had to hand over 10, 20 pound notes.

CHACE: Before handing over the money, he watched the taxi driver press this little button on his phone. And he heard the beep of bitcoins being transferred into his new online account. He said it was thrilling and a little sketchy.

TOM: Well, I mean, I've never paid for sex, but it felt kind of like going to meet somebody you don't know and handing over dirty money.

KESTENBAUM: So to summarize, the press writes about how people might be buying bitcoins. Guy reads article, decides he wants to buy bitcoins. And the price goes up. Media hype can be a sort of self-fulfilling prophecy. And we should say the bitcoin market is not that big, so it doesn't take a ton of people buying or selling to push the price around. But still, for sure, a 10-fold run up in price, there has been a big uptick in interest in bitcoins.

CHACE: And you could imagine this would be good for bitcoin's future as a legit currency - all this new interest, people wanting to own bitcoins, the press taking notice and covering it a lot - including Felix Salmon, the finance blogger at Reuters.

FELIX SALMON: They suddenly blew through $20, $30, $40, $50. I'm like, what the hell is going on here? And so that's when I started paying attention again.

KESTENBAUM: Felix Salmon's take is that this is not a good sign for bitcoins. Think about it, he says. Huge fluctuations in the value of your currency, that can be a real problem. One reason for having a currency in the first place is to use it as a - economists call it unit of account. And currency is supposed to be stable from day to day, so you can use it - like a ruler for your economy.

SALMON: The currency is the measuring stick. The way that we measure how much things are worth is we bring out our ruler. And we measure things in - you know, from one dollar, three dollars one million dollars. And then we'll say, oh, well, you know, this is how much it's worth. And this is a constant measuring stick. The bitcoin is a bit like a ruler made out of a slinky, you know? It can kind of expand and contract insanely and with, like, no limit to how big or how small it is.

KESTENBAUM: Imagine how crazy an economy based on bitcoins would actually be, he says. Prices would shift all over the place. I mean, imagine you live in bitcoin land, and you're renting an apartment. At the beginning of the year, you agree the rent is going to be 100 bitcoins a month, which at that time is about $2,000. But then the value of bitcoins goes through the roof. Your rent is still 100 bitcoins, but that now is the equivalent of $20,000 a month.

CHACE: Yeah, this would screw up a whole bunch of things - the simplest decisions like when you're going to buy something. So at the beginning of this podcast - we started recording it around lunchtime - and we looked up the price of a fancy digital camera on the bitcoin store, which is just this online store where you can buy stuff in bitcoins - that things are priced in bitcoins. And the price of one of these fancy cameras was 7.17 bitcoins. But by the end of lunchtime, an hour later, the price of this camera had dropped to 6.98 bitcoins as the bitcoins have become more valuable. And so why would you buy the camera at the beginning of lunch? You'd wait till the end of lunch or the end of the day or the end of the week or whatever. You just hold back. And if you have a lot of people in the economy making that decision, the economy just kind of grinds to a halt. Money stops moving. Economists call this hyper-deflation.

KESTENBAUM: Hyper-deflation is not a good thing to happen to your currency. And this is another thing that makes Felix Salmon skeptical. Right now, people are not really using bitcoins as money to buy stuff. We don't live in that bitcoin land. We live in dollar land. Felix Salmon says he thinks the main reason people are buying bitcoins is just because their value is going up. To him, it looks like a speculative bubble that he says will eventually pop.

SALMON: Because there's nothing there. It's an entirely virtual game that people are playing. And at some point, people are going to get bored with it, and it will go to zero. Well, it won't go to zero, zero. There will always be some residual value - that someone is going to be playing the game. You know, in that sense, it's a little bit like gold. Only it has no use at all, and it's not even shiny.

CHACE: And in fact, the radar scientist we talked to in England - the guy who bought bitcoins. He's very clear about this. He says, yeah, he's speculating.

TOM: For me, at the moment, it's a gamble. And it's a way of storing some of my money.

CHACE: How are your bitcoins doing right now?

TOM: They're doing fantastically. They've - it's sort of scary. They've doubled in a week and a bit since I bought them. They've gone up four-fold in the month.

CHACE: Tom says, sure, he might use it to buy stuff if anyone took them. But at this point, the smart play is to hoard them all. And that, of course, would drive up the price further.

KESTENBAUM: We ran all this by Gavin Andresen. We told him Felix Salmon compared his bitcoins to a slinky. And Gavin said yes. He actually sighed. He said all that is true. And, yes, he actually agrees this is probably a bubble that will pop. But he said he still sees this new demand for bitcoins, in the long term, as good news because it means more people are aware of bitcoins. More people own bitcoins. And if they own them, that's the first step to using them.

ANDRESEN: And so, you know, as long as people have bitcoins, they're going to look for places to spend them. And then I think merchants will wake up and decide, yeah, why not? It's just another payment method I can accept. So I'm actually not that worried about that.

CHACE: Do you buy stuff with bitcoins?

ANDRESEN: I do. I bought some computer stuff yesterday with bitcoins.

CHACE: From whom?

ANDRESEN: Bitcoinstore.com.

KESTENBAUM: What did you buy?

ANDRESEN: I bought a computer mouse and an external hard drive.

KESTENBAUM: Gavin says even if people don't end up using bitcoins to buy stuff very often, bitcoins could still be this other thing - less impressive than a full-fledged, new currency but still.

ANDRESEN: A good number of people who just plan on holding them as kind of a small percentage of their portfolio in the same way that people buy gold.

KESTENBAUM: If bitcoin has become that, that at least is something. It's become something like gold.

ANDRESEN: Yeah, no, that's - it's definitely - I mean, it's definitely something (laughter).

CHACE: Bitcoin is still an experiment, he says. There are a lot of things that might happen. Maybe someone will find a way to really hack it and take it down. Some government might declare bitcoins illegal.

KESTENBAUM: Gavin says when people ask him if they should buy some bitcoins, he tells them not to put any money in that they're not willing to lose.


STARS: (Singing) Running from the battle to the other side. If living isn't hard-wired, I see it in your eyes.

KESTENBAUM: As always, let us know what you think. You can send us email - planetmoney@npr.org. We'll also put up a link to the previous bitcoin show if you want to listen to that.

CHACE: Find us on the blog - npr.org/money. I'm Zoe Chace.

KESTENBAUM: And I'm David Kestenbaum. Thanks for listening.


STARS: (Singing) Calling to the backlines. Crawling from the battle to the other side. If living isn't hard-wired, I see it in your eyes. I'm crawling from the backlines. Hiding from the shadows that we left behind. Courage is a lot wider. I see it in your eyes. I see it in your eyes.

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