So, is this a scam, a bubble or the start of a serious alternative currency? The judgement may depend on your instinctive reaction. If you like innovation, disruption and things that regulators and state agencies don't understand, then you will love bitcoin. However, if you prefer duller though not necessarily contemptible characteristics, such as stability and predictability, then bitcoin may be the work of the devil.
That does not automatically turn bitcoin into 'bitcon'. Indeed, the bitcoin movement lacks one obvious characteristic of a scam - it is not clear that any party benefits hugely from its success. The exception to that assertion could lie in the role of so-called ‘miners’, whose job in the bitcoin structure is to take the place of, say, PayPal or MasterCard in a conventional transaction between a buyer and a seller.
Miners verify transactions for which they charge a small fee. Verification is valuable because it prevents the fraud of a buyer spending the same bitcoin twice. So, in addition to their fees, miners can be rewarded with new bitcoins. In fact, this is the only way that new bitcoins can be created (or 'mined', which is an appropriate metaphor because it reminds us that a key attraction of bitcoin is that it is closer to a currency that is fully convertible into gold or silver than to the fiat variety, which banking systems churns out so prodigiously).
However - and this is where credibility gets strained - verification is done when miners find a sequence of data that matches another sequence generated by a transaction. But finding the correct sequences will become increasingly difficult and miners will be rewarded with fewer new bitcoins as transaction numbers rise. Eventually the task of mining bitcoins will be so difficult that no new ones will be created. That is projected to happen in 2140, when the last 'satoshi' (or 0.00000001 of a bitcoin) will be mined. Along the way transaction numbers should grow to such an extent that miners will be able to make a living providing processing services and some - the ones who are really good at solving algorithms - will have grown rich. Just in case bitcoin inflation overwhelms the project, an arbitrary cap of 21m bitcoins has been ordained by the concept's founder, Satoshi Nakamoto, who, most likely, does not exist anyway. Does all that sound plausible?
Anyway, despite that - or perhaps because of it - there are about 11m bitcoins in existence. At last week's high point of $900 per bitcoin that gave them a global value of about $9.9bn (£6.1bn). Lest we get carried away with bitcoin's importance, let's remind ourselves that notes and coins in circulation in the UK alone total £66bn and there are £1,333bn-worth of retail deposits on top.
So in the wider scheme of things, bitcoins aren't even small change. Meanwhile, by creating a structure that makes it tough for new bitcoin to be mined and by putting an arbitrary cap on the number that will ever be created, speculation and hoarding are encouraged at the expense of using the cryptocurrency as a means of exchange.
Not that the latter function is completely absent. Worldwide, 600 online businesses are willing to accept payment in bitcoin. True, a high proportion of transactions are for online gambling, which is mostly illegal in the US. That says as much about the stupidity of online gambling laws as it confirms that a currency unregulated by conventional state authorities will be popular with marginalised suppliers and consumers. That also explains why bitcoin is especially popular in China and Iran, where it is used to evade restrictions on exporting money, and in Argentina, where government policies consistently undermine the value of the peso. And it helps that bitcoin has so far proved surprisingly resilient to the stresses and strains of being a new currency that lacks a central bank. It isn't - and is unlikely to become - the currency of choice for criminals (for that, cash remains king) and its systems and online infrastructure have been quite robust.
So which is bitcoin - a quasi-currency we should take seriously or a speculative bubble? A bit of both, though much more of the latter. True, its very existence is a timely reminder to central bankers of the damage they may be doing, That in itself is a useful function. But remember this - like the paper money that the bankers print so freely, a bitcoin has no intrinsic value; it has no claim on a chunk of assets or a stream of income. It is worth only what you reckon others reckon it is worth. Could there be a better definition of a bubble?
