Print your own U.S. dollars and the Secret Service will come after you. The laws of physics will stop you from turning lead into gold. But you can safely mint your own “bitcoins,” a cyber-gold currency that lies beyond government control.
In 2009 the pseudonymous Satoshi Nakamot released protocols for an online currency called bitcoins. The bitcoin system uses what’s called public key encryption to assign currency to different owners. You have a secret code that you can use to prove you own a bitcoin or to transfer ownership of a bitcoin without ever having to reveal your code. A decentralized network keeps track of all of this. With the right software you can safely, securely and anonymously send and receive bitcoins across the Internet as a form of payment. A few million U.S. dollars’ worth of trade takes place every day using bitcoins.
You get bitcoins by buying them with traditional currency, trading them for goods or creating new bitcoins yourself. If you set your computer to solve certain mathematical puzzles, the bitcoin network will occasionally assign you new coins. The supply of bitcoins, therefore, keeps increasing and people have an incentive to join the bitcoin system.
Bitcoins have the best growth potential in corrupt dictatorships where the government is a risk not only for destroying the local currency but also for confiscating dollars in electronic bank accounts. Residents could keep bitcoin wealth on cell phones and pay for goods without having to carry cash. Also, if someone password-protects his cell phone and keeps a copy of his bitcoin master code at home, he wouldn’t lose his bitcoins even if his cell phone were stolen.
Some people speculate on bitcoins by purchasing a large number of them in the hope that their price will soon rise. The daily fluctuations in bitcoin’s price are so huge and unmoored to any fundamental that this should be considered a form of gambling, not better investing.
The price of bitcoins could even fall to zero. Like any fiat currency, people want bitcoins just because other people want them, as they, unlike food, have no inherent consumption value. This means, however, that if many bitcoin holders suspect that bitcoins will become worthless, these holders will dump their bitcoins on the market, lowering their price.
Fear that this might happen could cause panic selling that quickly eviscerates bitcoin’s value. Bitcoins are like a magic deity that has power only if people keep believing in it.