In a financial crisis, would you rather put your money in a beleaguered bank, or convert it to a volatile digital currency?
The meltdown of Cyprus' banking system tests that very question. Bitcoin — the open-source, peer-to-peer currency that has no government backing or practical real-world value — has seen its popularity, as well as its price, spike amid the latest euro crisis.
A brief refresher: Cyprus' banks are desperate for a bailout, and one proposed rescue plan called for a one-time levy of 6.75 percent on all personal bank deposits under 100,000 euros. That sparked a good old-fashioned bank run, as people raced to withdraw their money. Cyprus' parliament rejected that bailout plan this week, but Cypriots still fear their personal funds could be raided to pay off bank losses. Banks remain closed to prevent more panicked withdrawals.
With confidence in traditional banking shaken, some are betting heavily on Bitcoin to offer a more stable alternative. The value of a Bitcoin rose 57 percent this week alone as concern grew over the euro's health.
Launched in 2009, Bitcoins have no fixed value, fluctuating in accordance with an algorithm. They can be converted to cash, in various national currencies, as long as you can find a willing buyer. Because there's no central bank working behind the scenes, some have endorsed Bitcoins for being less vulnerable to the whims of global banking mandarins.
Like gold, Bitcoin usually rises in moments of uncertainty. Both assets are favored by critics of contemporary monetary policy; Bitcoin has no central bank, a fixed supply, and is deflationary by design. [Quartz]
Much of the interest in Bitcoin has actually come from outside Cyprus. In Spain, downloads of three Bitcoin apps spiked as the most recent crisis unfolded. Spain's economy is in terrible shape, and the Bitcoin rush there could signal a ripple effect from Cyprus' woes.
That Spaniards would consider converting a portion of their dwindling savings into a peer-to-peer currency vulnerable to wild price fluctuations and the odd thieving Trojan speaks volumes about banking confidence in some parts of Europe. [Businessweek]
Bitcoin's rise has even caught the attention of the U.S. Treasury, which released a memo this week for the first time outlining how it will handle Bitcoin transactions.
Bitcoins are still a risky form of money. Technically, they aren't even a currency, as Bloomberg's Mark Gimein notes, because they're worthless for real-world transactions unless first converted into cash.
Still, with traditional banks on shaky ground in Cyprus and elsewhere, the experimental money is proving to be an increasingly popular, if unproven, alternative.
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