Financial traders have a new toy: Bitcoin, a digital currency variously dismissed as a Ponzi scheme or lauded as the greatest invention since the Internet.
Unlike conventional fiat money and other digital currencies, Bitcoin runs through a peer-to-peer network, independent of central control. Bitcoins are currently worth US$4.88 each on online currency exchanges, where they can be bought and sold for about 15 world currencies.
Users — an odd assortment of uber-geeks, anarchists, libertarians, scammers and foreign-exchange traders — send about US$4.3 million to each other in 24 hours.
Banking and payment expert Simon Lelieveldt believes they are living on borrowed time.
“There is always a power base underlying a currency,” he said, speaking at the Digital Money Forum in London last month. “Bitcoin is not going to fly because there is no central bank or power base. It’s doomed to fail.”
However, its separation from power is precisely what attracts many users.
“Bitcoin is not run by people with hot sexual appetites for hotel maids. It is not run by corporations. It is not governed by people with budgets to meet. It is governed by a mathematical formula,” one trader and Bitcoin enthusiast said over a pint of Guinness in London’s financial district.
He also likes that there is an absolute limit of 21 million Bitcoins built into the system.
“If you try to print more than 21 million Bitcoins, you will be rejected by cold, loveless computers whirring away in nerds’ garages,” he said. “It is a better form of money than we have right now, or than anyone has designed so far.”
The trader, who was not willing to be named, said he spent four hours a day on Bitcoin, describing it as his second job. He estimated 90 percent of traders have bought it, most “looking for a quick 2,000 percent.”
However, he is playing the long game, accumulating as much as possible in the belief that one day he will own a small, but significant percentage of a world currency with a fixed supply.
He and three other traders are currently seeking Bitcoin startups to invest in, he said, adding he was hoping to put in US$300,000.
He is not alone.
Workers at Morgan Stanley and Goldman Sachs in London and New York have been visiting online Bitcoin exchanges as often as 30 times a day, according to documents seen by Reuters. Neither bank wanted to comment.
Employees at almost all the major international banks, and numerous trading and investment firms have shown an interest.
Bitcoin has become the Wild West of finance, with a proliferation of Web sites offering loosely regulated replicas of the services familiar to those in the financial industry.
There is a Bitcoin stock exchange, where companies can make initial public offerings and pay dividends in Bitcoin. One Web site offering Bitcoin options trading was “listed” this month for an implied valuation of US$500,000.
Perhaps the most notorious is Bitcoinica, a platform offering margin trading, short selling and stop orders run by 17-year-old Chinese high school student Zhou Tong (周同).
Users can leverage their bets up to a ratio of 10:1 on Bitcoinica, meaning they can lose more than their initial investment.
Zhou, who is professionally advised by a foreign-exchange trader and the head of a Singapore-based algorithmic trading firm, now lends his name to international slang.