I'm calling it: this is what the death of state-backed currencies and central banks will look like.

BitCoin is an atom bomb poised to explode over the financial sector. It challenges everything we think we know about the way currency works and by the looks of it, it is unstoppable.


Created in 2009 by Japanese cryptographer Satoshi Nakamoto, BitCoins are a new form of digital currency known as a "cryptocurrency." Rather than being printed by a central bank or backed up by something like gold or silver, they are generated by computational power as the result of solving complex hash functions. Anyone running BitCoin "mining" software on their computer can generate BitCoins for themselves, free. Once generated or traded, they are stored on your personal computer in the form of a wallet file, or kept with a third-party wallet service. They can be sent by anyone with a Bitcoin address to anyone with a BitCoin address and the transactions are completely untraceable. They can be traded for dollars at exchanges, such as Mt. Gox. One BitCoin is currently trading for roughly $20.

It sounds completely mad, but here's why it works:

A large amount of computational power is required to generate a single BitCoin. In order to run the functions that "make" BitCoins, your computer must spend a long time doing some very hard decryption. The rate at which BitCoins are generated is also fixed, meaning that as more people decide to run mining software, the calculations required to generate a BitCoin also become more difficult. Because the process is distributed across a peer-to-peer network (similar to BitTorrent), no matter how many people decide to start generating BitCoins or how powerful their computers might come to be, the rate at which new BitCoins enter into circulation is fixed. Also as a result of peer-to-peer distribution, in order for anyone to stop it they'd have to to take down the Internet itself. In short, the rate at which Bitcoins are created is determined by cryptographic and computational principals rather than the misguided judgement of a Federal Reserve Cheif or banker. Currently, there are 6.2 million BitCoins in existence. This number will double by 2012, with the total number topping out at 21 million around 2033.

I first heard about BitCoins around six months ago. I thought it was a brilliant concept, but I was wary of investing any of the little cash I've got into the whole thing. As it turns out, if I'd bought 200 dollars worth of BitCoins back then, they'd be worth about $12,000 today. An $1,800 computer set up for optimized mining would have paid for itself roughly 25 times over in the past six months if it had been left on 22 hours a day.

While replacing the almighty dollar is a lofty goal, lord knows I'd love to see Goldman Sachs squirm.

Bitcoin's creators have said that they are going to revolutionize finance in the same way that the web has already revolutionize publishing. As a journalist, that analogy tickles me.