A fiat currency used in Internet commerce, Bitcoins aren’t pegged to an outside barometer. Instead, their worth is determined by a computer algorithm invented by an anonymous, shadowy programmer. No clearing house, government agency or mint watches over them. Instead, peer-to-peer networks dispense and monitor coins, which can be exchanged for dollars.
Given their newness, novelty and volatility, Bitcoins have passionate fans — and critics.
“This is a long-term, high-risk investment,” says Patrick Strateman, a software developer and Bitcoin investor. “Some people are speculating. But others are holding on for much higher returns.”
These wild fluctuations make Bitcoins a difficult investment for average investors, though. Bitcoins have been known to go from $17 a coin to pennies in the blink of an eye.
The coins have also created Bitcoin millionaires, who were early investors. Investment bubbles may even just be part of Bitcoins birthing drama, say fans. Bitcoin lead developer Gavin Andresen has predicted that there will be between one and five Bitcoin bubbles by 2015.
This high-stakes currency does have some key strengths going for it too.
Supply is limited. The Bitcoin algorithm mimics dwindling gold or other precious metal supplies. And the algorithm slows coin issuance by half every four years. Today, there are 7.5 million Bitcoins. The ceiling is 21 million, when no more Bitcoins will be issued.
Also, lots of people want to see Bitcoins succeed, since they’re riding strong anti-government sentiment.
“This is a truly Democratic currency,” says Donald Norman, spokesman for the Bitcoin Consultancy in London and who sees Bitcoins either growing wildly or dying. “No one can manipulate it. It’s a new tool.”