Column: Betting on a coin with no realm

Written by New York Times | Updated: Dec 26 2013, 10:51am hrs
This is the story of a $6 million pizza. Two of them, actually.

It begins in 2010eons ago, in technology timein 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 Johns. And why not By Hanyeczs 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 fluctuatedagainas 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 wasnt 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 biggeror 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 andpresto!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 doesnt 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 createdwhich 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 swung between $14 billion and $7 billion. But to Bitcoin believers, that really isnt so surprising. They are taking the long viewthe one in which Bitcoin, despite the ups and down, keeps appreciating in value and eventually becomes a serious currency.

People talk about the volatility with surprise, but its exactly what youd expect from a new global asset class whose regulatory landscape is still developing, Tyler Winklevoss told me. He and his twin brother, Cameronfamous for their involvement in Facebookhave invested heavily in Bitcoin. By some estimates, they own 1% of the market. We have never sold a single Bitcoinwe started buying in the high single digits and were in it for the long haul, Winklevoss said. We dont look at it in terms of day-to-day. We look at in terms of years.

The Winklevosses are hardly the only ones who are bullish on Bitcoin. Bank of America recently put out a report saying Bitcoin has clear potential for growth and may emerge as a serious competitor to traditional money transfer providers. Jed McCaleb, creator of the Mt Gox Bitcoin exchange, a sort of Nasdaq for Bitcoin, says there is a possibility the price could hit $30,000 in a few years. McCaleb sold the exchange to a Japanese Bitcoin firm in 2011.

Mark Williams of Boston University has insisted that the value of a Bitcoin will pop, falling as low $10 next year. Others say it is all just another bubble.

Which is why this whole will-it-go-up, will-it-go-down business misses the point. The real question is not what Bitcoin will be worth next week or next month. It is whether digital currencies like this have promise and, if so, how they could change our world. Digital currencieswhether Bitcoin or something elsecould make it cheaper and easier to move money around.

While there are questions about the future of Bitcoin, there is clearly going to be a digital currency that can be used for remittances, micro payments, and across borders, said Susan Athey, a professor of economics at the Stanford Graduate School of Business. In todays system, you see a number of different kinds of commerce not taking place because the fees are too high relative to the transactions.

With small transactions, the cost to send money can be more expensive than the actual money people are spending. People are charged credit card fees, transfer fees and other expenses that all go to a middle man. This is why there are no 10 cent apps on the app store, many companies try to clump small transactions together online. With virtual currencies, in comparison, there is no middle man. With Bitcoin, for example, anyone running the software on his or her computer also acts as the bank storing the exchange information.

Athey said that while it was unclear if Bitcoin or a competing math-based currencyand hundreds of other virtual currencies are in the market nowwould prevail, it was clear that there was a need for this type of tender online. Something that has less frictions could enable certain types of commerce to occur that arent occurring today, she said. And figuring out which digital currency will catch on could make you very rich. Hanyecz, for his part, has given up mining. With so many people trying to create Bitcoins, and the entire process becoming more difficult, the cost of running mining computers, in terms of the electricity bill alone, has soared.

Any regrets about those pizzas

No, not really, Mr. Hanyecz said. He sold the rest of his Bitcoins as the price approached $1, netting him about $4,000. That was enough to get a new computer and a couple of new video cards, he told me, proudly. So Id say I ended up on top.

Nick Bilton