Bitcoins are the top-performing money in the world — but what are they?
The best performing currency of the past year isn't Brazil's real, up 15% versus the U.S. dollar, or Australia's dollar, up 27%. It's the Bitcoin. A year ago one was worth half a penny. Thursday morning it hit $10.50. That's a gain of more than 200,000%.
What's a Bitcoin? It's a peer-to-peer system of electronic money that allows payments to be sent directly between two parties without the need for a financial institution. It's related to Bit Torrent, a system for sharing large files like movies, but in this case the "movie" is a file with the currency's entire transaction history. And because users themselves all share that history, "it's more secure than even bank transactions," says Donald Norman, a spokesman for the Bitcoin Consultancy, which is seeking to gain wider acceptance for the currency.
As befitting a virtual currency, no one is quite sure who created the Bitcoin. A white paper and software turned up three years ago listing Satoshi Nakamoto as the author. That's presumed to be a pseudonym. All that's known about Nakamoto, based on his paper and message board comments, is that he's fluent in English and has a deep understanding of Internet security.
Dotcom crash veterans might recall failed currencies like Flooz and Beenz, but those were mere means of online payment. Bitcoin is an entire monetary system. It doesn't require a Treasury Department, because there are no bills or coins to mint. It doesn't need a Federal Reserve to create money. An algorithm does that at a rate that slows by half every four years. There are about six million Bitcoins today. The number will approach 21 million beginning in the 2030s but never exceed it.
The finite supply of Bitcoins might help explain the frantic demand for them. Dollars and euros are created at will by central bankers. Some economists see that as useful for smoo...