VANCOUVER — It was a stunning crash — a currency’s value dropping from about $17 to just pennies per unit in a few short minutes, wiping away millions of dollars in the process.
It happened last month but it wasn’t in a country you’ve ever heard of. In fact, it wasn’t in any country at all.
The crash hit Bitcoin, a two-year-old attempt to create an alternative currency that exists entirely online, free from the control of any centralized authority. Millions of Bitcoins are in circulation and a handful of merchants, including several in Canada, accept them for purchases.
The crash itself occurred after a website that exchanges Bitcoins for real-world dollars was hacked. The value quickly rebounded and Bitcoins are now trading at about $14 each.
But the incident focused outside scrutiny on what had been an obscure online movement to create a new currency, which advocates say will not only make online commerce easier but also wrestle at least a small part of the financial system away from governments and big banks.
“Bitcoin is an already functioning potential means of future commerce. Bitcoin is already an economy,” says Donald Norman, who runs a London-based Bitcoin consulting company and is connected to the Bitcoin project.
“Unlike banks, it’s always running, 24-7. Right now there are no fees. It’s international, it has no borders.”
Bitcoin was created in 2009 by a mysterious person known as Satoshi Nakomoto, though most Bitcoin advocates assume that isn’t his or her real name.
There is no central bank or governing authority. Instead, the system is set up as a peer-to-peer network, similar to file sharing systems such as bit torrent, with users sharing and distributing a single — and constantly growing — file that catalogues every transaction.
Each user has a digital wallet and a unique address and software checks transactions against the master file and then appends new transactions.
Norman says access to those digital wallets are encrypted with the same technology that many banks use and advocates insist the system is secure.
Several hundred online merchants, including about half a dozen in Canada, accept Bitcoin, and exchanges have been set up in several countries to allow users to buy and sell Bitcoins.
Bitcoin was also designed to mimic a real-world, commodity-based currency.
Users can “mine” for Bitcoins by running the software that secures the system and, over time, it has become more difficult to mine for new Bitcoins, requiring more powerful computer hardware. There are nearly seven million Bitcoins in circulation but the number will be capped at 21 million — which, at the current pace, should be in about 20 to 30 years.
But it faces some of same problems as real-world currency. There have been reports of fraud and theft, with some online security firms warning viruses or Trojan horses could target digital wallets. Critics have also raised concerns about online markets selling illegal goods such as drugs.
And, like real-world commodities such as gold, Bitcoins have been subject to wild price fluctuations and speculation.
Werner Antweiler, an economics professor at the University of British Columbia, is more than skeptical. He says Bitcoins magnify the same problems that exist with commodity-based currencies such as the gold standard, which he says was abandoned decades ago for good reason.
“As an economist, I think it’s just a stupid idea,” says Antweiler, who teaches about online commerce.
“I would tell everybody who thinks about participating, ’Watch out, know what you’re getting into.”’
Antweiler says private currencies like Bitcoin will never rival the dollar, mainly because they are not legal tender. Businesses are required by law to accept the Canadian dollar but no one is obliged to take Bitcoins.
Still, Antweiler says Bitcoins should prompt a debate about online transaction fees, which drive up the cost of goods and make small payments more difficult.
“To reduce the transaction costs is something that would be good for the economy but creating a new currency, unfortunately, isn’t,” he says.