Tech-savvy netizens and economic libertarians have adopted different forms of “cryptocurrency” or a type of digital currency that is not tied to any government and relies on algorithms to give the currency its value.

 

A pile of Bitcoin slugs sit in a box ready to be minted by software engineer Mike Caldwell in his shop on April 26, 2013 in Sandy, Utah. (Photo by George Frey/Getty Images) At first, the unregulated and untraceable money was associated with illegal online black markets, but has since become a more mainstream form of currency, attracting investors and even members of Congress. Nine different cryptocurrencies currently exist on the Internet and cater to different audiences. Bitcoin became the first traded cryptocurrency in 2009, and has since become a favorite among libertarian techies skeptical of government-issued money and global criminals who like the anonymity it offers. Dogecoin, another popular currency with a more light-hearted reputation, was created by Billy Markus, a programmer from Portland, Oregon, with the intention of reaching a broader demographic than Bitcoin. The newest cryptocurrency to emerge is Auroracoin, which is only available in Iceland, and is part of a new generation of digital currencies that are geographically limited. In March, the developer of Auroracoin made $125 million worth of coins available to Iceland’s 330,000 citizens in what was called an airdrop. This works out to roughly $400 per person According to The Verge, “Auroracoin was launched by a pseudonymous person or persons using the name Baldur Friggjar Óðinsson [a reference to Norse gods]. The goal is to decentralize power and revive Iceland's local economy, given that the kroner has fallen dramatically in value in recent years.” Iceland was particularly hard hit by the 2008 financial crisis, largely because the country is an investment banking hub that is known for financial risk-taking. Other communities around the world have also embraced cryptocurrencies as a way to stimulate the local economy, including Scotland ( Scotcoin ), Greece ( Greececoin ) and the Traditional Lakota Nation ( MazaCoin ).

How cryptocurrencies work

“Money is a convention,” economic historian Richard Sylla told the NewsHour’s Paul Solman. “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.” Cryptocurrency is generated, or mined, by computers solving math problems that become ever more complex and time-consuming. The coins themselves are strings of characters like a password or code, hence the name cryptocurrency. Bitcoins were invented with an upper limit — 21 million Bitcoin, no more –by an entity calling itself Satoshi Nakamoto who may be a person or group that subsequently vanished into cyberspace. The limit on Bitcoins is meant to prevent inflation, which happens when a government prints more money, causing the value to go down. However, some economists are skeptical. “That’s the great argument for gold and silver standards, that the supply is limited,” said Sylla. “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.” This is a claim the Bitcoin community says is mathematically impossible. Once a person has a Bitcoin, they can spend it by transferring it directly from person to person via the net without going through a bank or clearinghouse, meaning fees are much lower.

Cryptocurrency in the news

Many Americans first became aware of Bitcoin after the fall of the Silk Road website, a criminal marketplace that sold everything from hard drugs to books and art, and operated entirely on Bitcoins. Since then, Bitcoin has made headlines around the world. In February, popular Bitcoin exchange Mt. Gox closed down amid allegations of major theft. The CEO acknowledged he could not account for 850,000 Bitcoins, valued at about $425 million. It remains unclear whether the money was stolen by hackers, as Mt. Gox’s CEO claims, or whether it was mishandled by people within the exchange. The incident prompted calls for regulation, though governments have been reluctant to police a currency they didn’t issue. “There’s no legal recourse. There’s no financial system. . . . In essence, if a criminal gets the coin, the criminal owns the coin,” Mark Williams, a former Federal Reserve official who teaches finance at Boston University, told The Washington Post. Bitcoin was back in the news just a few weeks later when Newsweek magazine claimed to have found and revealed the true creator of Bitcoin ; an engineer in California named Dorian Satoshi Nakamoto. Mr. Nakamoto, however, denied any such allegations, and may sue Newsweek for defamation. Regardless of its shaky start, cryptocurrency is unlikely to go away soon. But before major investors like the famously Bitcoin-wary Warren Buffett get involved, issues like the currency’s security, stability, privacy and adherence to the law must be addressed.

-- Compiled by Allison McCartney for NewsHour Extra