When 14-year-old Manix Wolan decided to invest in bitcoins, he thought it was a pretty good idea. “Bitcoins had gone from $5 to $120 in one year,” he says, “That would obviously catch the eye of anyone who wanted to make money.”
His father, Alan Wolan, the author of “Moneyology: A Kid’s Guide to Money,” also thought bitcoins were a good investment. He had been teaching his son about stocks and investing. He also was a big fan of putting money into gold and silver and found a lot of appeal in the characteristics of this new virtual money.
“When I learned about bitcoins I thought it was like electronic gold,” he says.
Unlike dollars, which are backed by the U.S. government, or euros, which are backed by the European Union, bitcoins are a monetary system outside the control of any one nation. They are entirely digital. You can’t hold them like a coin. They are based on complex mathematical algorithms and cryptography and various protocols that make them practically anonymous. But they can be used like money — usually in online transactions.
After bitcoins were invented in January 2009, the number of transactions per day hovered around 500 for two years. Now there are around 50,000 transactions a day for things ranging from buying a cup of coffee to hiring a lawyer. They also have a darker side.
As bitcoins have become more prominent, they have attracted the attention of regulators who are worried about the currency being used for illicit transactions. Earlier this month, the FBI arrested Ross William Ulbricht, the formerly anonymous purveyor of the online illegal drug website, Silk Road. The website used bitcoins to hide the identity of buyers and sellers. The FBI electronically seized 26,000 bitcoins, according to the Guardian, and is trying to access 600,000 bitcoins Ulbricht is thought to own, worth about $80 million. Arrests continue to be made around the world as that bitcoin-based black market collapses.
In March, the U.S. Treasury Department notified various companies trading in bitcoins that they need to protect against money laundering. But unlike other monetary systems and payment systems, there is no central authority to regulate.
In some ways bitcoins are like using PayPal to buy something on the Internet. In other ways they are like airline frequent flier miles. They are like bags of virtual cash. They are like using a credit card. The analogies fly when experts try to explain what bitcoins are.
Kevin McIntyre, an economics professor at McDaniel College in Westminster, Md., compares bitcoins to the private money that was used in the 1700s and 1800s before the federal government started issuing money. Banks used to issue their own paper money, backed up by valuable metal such as gold or coins. Such money was vulnerable to collapse if more paper was issued than was available in their reserves.
Bitcoin is like that, except it is a pure “fiat” money — its value comes entirely from what its users think it is worth.
McIntyre says there are several ways people are using bitcoins.
First, he says, people are using them as a speculative financial instrument — like investing in British pounds or the euro. People buy them, hoping the value will go up.
He says another use is popular with the “tinfoil-hat-wearing, Ayn Rand, Libertarian, anarchist crowd” who are concerned about institutions like central banks and their control over money supply. Bitcoins are outside the control of such institutions.