TOPICS > Economy

Bitcoin gains mainstream interest after initial ‘outlier’ appeal

October 4, 2013 at 12:00 AM EDT
Bitcoin, a digital currency, has appealed to high-tech skeptics of government-issued money, as well as global criminals who are eager and able to capitalize on a totally free market. But mainstream investors are taking notice. Paul Solman reports on the potential, advantages and risks of this crypto-currency.
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JUDY WOODRUFF: And to two stories from the world of technology, the first focusing on a digital currency that you may not have known about before it made national news this week.

Our economics correspondent, Paul Solman, has been tracking its growth and explains.

It’s part of his ongoing reporting Making Sense of financial news.

MAN: Bitcoins are digital coins you can send through the Internet.

PAUL SOLMAN: The currency known as Bitcoin, which made headlines earlier this week when the FBI seized Silk Road, the popular online black marketplace for drugs and other contraband, payable in Bitcoin, that had done over a billion dollars worth of business in just the last two years.

But what makes this strictly computerized currency, created and maintained by a network of computers solving math problems, worth anything at all?

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RICHARD SYLLA, economic historian: Money is a convention.

PAUL SOLMAN: Economic historian Richard Sylla:

RICHARD SYLLA: I take paper money — paper itself isn’t worth much — because I know you will accept it when I want to buy something from you.

PAUL SOLMAN: And that’s it?

RICHARD SYLLA: That’s right. Money is what money does.

PAUL SOLMAN: And since, these days, in the world of libertarian high-techies, skepticism about government-issued paper money abounds, Bitcoin, a digital currency attached to no country at all, is becoming their alternative of choice.

CHARLES HOSKINSON, Invictus Innovations: I have lost a lot of faith. I mean, a lot of people have. If you look at when we started the Federal Reserve system in 1913 to today, over 90 percent of the value of your dollar has gone down.

PAUL SOLMAN: Charles Hoskinson’s lament has been a familiar one among Fed phobes in the past few years.

CHARLES HOSKINSON: I was a campaigner for Ron Paul back in 2008 and also in 2012. I met Ron Paul. He was a great guy, and I really believe firmly in his message.

PAUL SOLMAN: And the key part of his message that pertains here?

CHARLES HOSKINSON: Sound money. Sound money, the idea that your money needs to have rules that can’t be manipulated based upon political convenience.

PAUL SOLMAN: By contrast, says Hoskinson, Bitcoin is unmanipulable, apolitical.

MAN: Invented in ’09 by a fictitious person named Satoshi Nakamoto.

PAUL SOLMAN: A person or maybe group which has since vanished into cyberspace. Bitcoins were invented so as to have an upper limit — 21 million Bitcoin can be created, no more.

MAN: Bitcoins are generated all over the Internet by anybody running a free application called a Bitcoin miner.

PAUL SOLMAN: Bitcoins are generated, or mined, by computers, solving math problems that become ever more complex and time-consuming. The coins themselves? Strings of characters like a password or code, hence the name crypto-currency. Easy to break the code? Absolutely not, says mathematician Hoskinson.

CHARLES HOSKINSON: If that was the case, then we’d be in bigger problems, because all of our passwords would be vulnerable. People could break bank encryption. The secret communications the NSA uses and the government uses would all be decryptable.

PAUL SOLMAN: Of course, even seemingly indecipherable codes are sometimes broken, one reason why Bitcoin currency gives economic historian Richard Sylla pause.

RICHARD SYLLA: I’m like Warren Buffett. I don’t buy something if I don’t understand it. And for all I know, the person who created Bitcoins would be like King Henry VIII in Britain, who decided suddenly to double the amount of British money units around, and there was a big inflation.

PAUL SOLMAN: Well, Bitcoins are supposedly created in a way where that just can’t happen.

RICHARD SYLLA: That’s the argument they make. And, of course, that’s the great argument for gold and silver standards, that the supply is limited.

But I think it’s much easier to change the algorithms or something like that and double the amount of Bitcoins overnight than it is to actually come up with more gold and silver.

PAUL SOLMAN: No, mathematically impossible, counters the Bitcoin community. And how do Bitcoins actually work?

MAN: Bitcoins are transferred directly from person to person via the net without going through a bank or clearinghouse. This means that the fees are much lower. You can use them in every country. You can purchase video games, gifts, books, and alpaca socks.

PAUL SOLMAN: And, as we saw this week, you can also purchase heroin, high and consistent quality. Buy 10, get two bags free. The FBI has now seized the Silk Road site, calling it the most sophisticated and extensive criminal marketplace on the Internet today.

So, first and foremost, does Bitcoin represent an unholy alliance of high-minded, freedom-minded high-techies and global criminals eager and able to capitalize on a totally free market? Look, says mathematician Charles Hoskinson, digital currencies are like any new technology.

CHARLES HOSKINSON: And just like the Internet can be used for bad things, like terrorist activity or child pornography, Bitcoin could be used for bad things, for example, funding rogue states like Iran or North Korea.

PAUL SOLMAN: Or dealing drugs, or laundering money. Yes, Bitcoin as a currency did initially appeal mainly to outliers, admits Kinnard Hockenhull, but it has begun to go mainstream, especially with investors.

KINNARD HOCKENHULL, Bitcoin entrepreneur: They think this is skyrocketing, I better get into it. But you also have people who want to use it to send money instantly over the Internet. And with Bitcoin, you can send money the same way you send an e-mail.

STEPHEN PAIR, BitPay: It’s money that’s designed for the Internet.

PAUL SOLMAN: Stephen Pair has co-founded BitPay, a Bitcoin payment processor.

STEPHEN PAIR: If you think about credit cards, they were designed in the 1950s, before the Internet existed, right? So this is the first time we have taken everything we know about cryptography and the Internet and security and designed a new payment system from the ground up.

PAUL SOLMAN: A system that bypasses the usual middlemen, making most non-cash transactions way cheaper.

JONATHAN MOHAN, Bitcoin entrepreneur: So, remittances.

PAUL SOLMAN: Like remittances, says Bitcoin promoter Jonathan Mohan, the money sent back home by workers in the developed world, now wired via a third party like Western Union.

JONATHAN MOHAN: If your family at home makes $100 in a year, it costs 40 bucks to send them that $100. And with Bitcoin, it would cost several cents.

PAUL SOLMAN: As illustrated by the small bubbles, some representing tiny transaction fees, on this real-time Bitcoin trade and transaction visualizer.

JONATHAN MOHAN: The vast majority of the planet don’t even own a bank account. And it’s my contention that — and a lot of people think this — that, just as in Africa, they didn’t go to phones. They went directly to cell phones, that, in the same sort of adoption curve, in these developing nations, you’re not going to see them start getting bank accounts. You’re going to see them just going straight to Bitcoins, because if you own a Bitcoin address, you have a bank account on your phone that you can interact on the global stage with.

PAUL SOLMAN: Meanwhile, other so-called crypto-currencies have been started, with different mathematical formulas and rules, trying to compete.

KINNARD HOCKENHULL: There’s PPCoin. There’s BBQcoin. There’s Litecoin. There’s Feathercoin. Primecoin is a very interesting one that looks for really large prime numbers.

PAUL SOLMAN: And all because, says historian Richard Sylla, who chairs the board of Wall Street’s Museum American of Finance, there’s so much skepticism about government and its money in and around the high-tech community these days.

RICHARD SYLLA: Bitcoins are sort of a modern version of gold, computerized, sexier than gold. You know, we think gold is pretty nice. It shines. It looks nice. But Bitcoins are — appeal to the more technologically savvy of people today.

PAUL SOLMAN: And since many of them have money, and crypto-currencies do have certain advantages, says Sylla, the Bitcoin story may be with us for quite awhile.

JUDY WOODRUFF: And a postscript to Paul’s report. The price of Bitcoins did indeed sink shortly after the FBI raid, dropping from $140 to nearly $120. But they have now rebounded back to almost $140, and some observers suggest the bust may have helped boost Bitcoin’s legitimacy by ending the Silk Road connection.