Column: Betting on a coin with no realm

Dec 26 2013, 05:21 IST
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SummaryWhether digital currencies like Bitcoin have promise and, if so, how they could change our world are the real questions

This is the story of a $6 million pizza. Two of them, actually.

It begins in 2010—eons ago, in technology time—in Jacksonville, Florida. A software programmer named Laszlo Hanyecz had, to his happy surprise, persuaded someone to accept 10,000 Bitcoins in exchange for two pizzas from Papa John’s. And why not? By Hanyecz’s reckoning, the Bitcoins he had been “mining” on his computer were worth about 0.003 cent apiece. He got his two pies for $30 of found money.

You probably know the rest. Bitcoin, the digital currency that has since captured attention around the world, exploded. By November, it had skyrocketed from a fraction of a penny to $1,242, roughly the price of an ounce of gold.

It has been a wild, wild ride: up and down, down and up. Last week, Bitcoin fluctuated—again—as China clamped down. Everyone seems to be wondering what this crazy new thing might mean. The end of government control over money? The start of an international crypto-currency?

Hanyecz, 32, seems to be taking it all in stride. And he has no regrets about those pizzas. “It wasn’t like Bitcoins had any value back then, so the idea of trading them for a pizza was incredibly cool,” Hanyecz told me. “No one knew it was going to get so big.” The question now, of course, is whether digital currencies like Bitcoin will get even bigger—or collapse if the music stops.

A quick recap: Bitcoins are created, or mined, according to a set of algorithms. Essentially, computers solve some math problems and—presto!—generate Bitcoins. The coins are stored in, and traded among, digital wallets. You can buy real things with them, at least from people who accept them, or, as many people seem to be doing, sit on them in hopes the price will keep rising.

So your parents were right: Money doesn’t grow on trees. But, it turns out, money does grow on the Internet. Mr. Hanyecz grew his with open-source software. But, per the algorithms, mining Bitcoins becomes more difficult over time. Only about 21 million of them can ever be created—which is why so many people have been chasing after them.

Bitcoins are now accepted as payment at almost a thousand retail outlets and websites, including OKCupid, Reddit, and Pizza Rodi in Montreal. But what has really grabbed attention is how volatile the price has been. The value has gyrated wildly. In the last month alone, the Bitcoin market capitalisation has

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