Are Bitcoins Becoming Europe's New Safe Haven Currency?

BitcoinJoerg Platzer, a German who owns the Room 77 restaurant in Berlin's hip Kreuzberg section, has lost his appetite for euros. Instead, he has put a large fraction of his money into Bitcoin, an online currency.

"What the euro crisis and possible breakdown does is make people think about alternative [currencies] that can be used to maintain business and that cannot be manipulated by any central organization whatsoever," he told DailyFinance.

And Bitcoin, as unorthodox as it may sound, was created in 2009 to be just such an alternative.

It's not so surprising that a growing number of Europeans whose countries are in dire fiscal straits are moving their money from banks to Bitcoins. The eurozone is in end-of-times pandemonium over its debt crises; Greece is starring in its own economic tragicomedy; and Spain is scrambling for a major bailout. And just last week, the euro overtook the British pound as the second-most common currency that bitcoins are traded against (after the U.S. dollar, which has 72% of the market thanks to its large community of early adopters).

Euro hit 9% of the Bitcoin market thanks to an uptick in buyers from Greece, Italy, Spain and the Netherlands, according to Charlie Shrem, CEO of BitInstant, a New York company that allows clients to move money between Bitcoin and other currencies. Shrem's firm attributes the recent rise in euros exchanged for bitcoins to the worsening crisis in Europe and people seeking financial asylum in digital form.

As reports increase that the European banking system is evaporating into the ether, will people increasingly find it high time to bank in the cloud.

Is Bitcoin a Panacea For the Euro's Woes?

Quite simply, Bitcoins are an encrypted digital currency that can be freely exchanged between people or between consumers and merchants. Businesses like Bitcoin because it allows them to avoid paying credit card fees of up to 3% on transactions. Consumers get to dodge the costs normally associated with currency exchanges. It's only available for use in a handful of physical locations in cities around the world (it's mostly used via Internet), but a major use for it has been for conversions -- you can buy Bitcoins and then exchange them for another currency at no charge.

Bitcoin is in some senses a financial island removed from the vicissitudes and consequences of a traditional banking system. It's neither controlled by central banks nor governments, and thus not vulnerable to larger-scale shifts like changing interest rates or the rampant inflation of countries in decline.

But Bitcoin's isolation from geopolitical turmoil has been its true selling point for those in Europe.

"I have Greek friends who fear that Greece will drop out of the euro, and all of their money will be converted to the drachma," Shrem said. "And then even a cup of coffee would get pretty expensive for them, because inflation will skyrocket like what we saw in Zimbabwe."

Bitcoin was trading at about $5.26 in on Jan. 1, and bolstered by fears about the euro, its value had risen 19% to $6.28 on Monday. The euro, by contrast, dropped from $1.29 on January 1 to around $1.25, a 3% decline. In fact, Bitcoin performed better than any major asset class in the world in 2011, up 1,700%.

Jon Matonis, a Bitcoin consultant and digital currency specialist, believes moving toward Bitcoin is a smart strategy, advocating any exit from fiat currencies as a step in the right direction.

"It's like musical chairs," he said, "And when the music stops playing, the mad rush out of fiat will begin because a 'paper' con game can turn on a dime." That uncertainty in the value of a fiat currency, especially in the euro, stands in contrast to Bitcoin, which Matonis describes as "an open-source neutral method of going from paper euros to a nonpolitical unit of value in electronic form."

The Risks in Bits

But is a digital currency safe? Hackers have tapped into Bitcoin exchanges, exacerbating fears that the fully-online currency might not be such a sure bet.
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Last June, Mount Gox, a major Bitcoin exchange, was compromised, and a cyber attack this May against the Bitcoin exchange Bitcoinica resulted in 18,000 stolen bitcoins (about $90,000). These events have further reinforced some security experts' preference for traditional banking, according to Marc Vael, director of the Information Systems Audit and Control Association: Even though the eurozone is experiencing turbulent times, all EU governments guarantee banks deposits and savings accounts for up to 100,000 euros.

"The existing banking system, including online banking possibilities, still protects citizens even when money gets stolen out of their account," Vael said. "Keeping money under EU-regulated financial institutions is the safest option for EU citizens."

But as the euro's problems deepen, people are putting less faith in it, and hoping the security technology of Bitcoin exchanges is enough.

"It's as safe as the cryptography," Matonis said. "And the cryptography has been peer-reviewed, and it currently enjoys the mathematical trust of the cryptography community."

"These individuals moving their value from euros to Bitcoin are trusting the cryptographic algorithms," Matonis said. "If they store the private keys themselves, then they do not even have to trust a third-party entity."

The Future of Bitcoin

Though Matonis believes that traditional banking is "in decline" and that Bitcoin possesses important advantages for Europeans at the moment, the digital currency hasn't necessarily proven itself as a fully universal platform.

Widespread Debt: This Is Only The Beginning.
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Are Bitcoins Becoming Europe's New Safe Haven Currency?

With a national debt still hovering around 120% of its GDP, Greece is still far from being out of the fiscal woods. As austerity measures bite, Greece's GDP will shrink further and its debt-to-GDP ratio will rise, putting it on course for further defaults -- er, "restructurings." Nor is Greece alone. According to official figures, debt-to-GDP ratios elsewhere are similarly high.

Photo: Gerasimos, an 83-year-old Greek man, picks through a heap of rubbish to salvage useful items as the marble gate of the Roman Agora is reflected in a mirror, in the Plaka district of Athens on Monday, March 12, 2012. Greece implemented the biggest debt writedown in history on Monday, swapping the bulk of its privately-held bonds with new ones worth less than half their original value. (AP Photo/Petros Giannakouris)

Debt-to-GDP ratio: 130%

Photo: President of Iceland Ólafur Ragnar Grímsson prior to voting in a referendum in Reykjavik, Iceland, Saturday, March 6, 2010.   Icelanders voted "no" in a nationwide referendum on approving the use of $5.3 billion of taxpayers' money to repay international debts.  The "no" vote may complicate Iceland's effort to recover from a deep recession and a banking collapse. (AP Photo/Brynjar Gauti)

Debt-to-GDP ratio: 120%

Photo: A man reads a newspaper in Milan, Italy, Monday, Jan. 30, 2012. European leaders are trying to come up with ways to boost economic growth and jobs, which are being squeezed by their own governments' steep budget cuts across the continent. The 27 EU leaders meeting in Brussels are also looking for common ground on a new treaty to toughen spending rules to dig the continent out of a crippling debt crisis. (AP Photo/Luca Bruno)

Debt-to-GDP ratio: 110%

Photo: Workers seen at the Luis Onofreâ luxury shoe factory in Oliveira de Azemeis, Portugal, Friday, Feb. 24, 2012. Debt burdens are rising fastest in European countries that have enacted the most draconian austerity programs. Portugal's unemployment rate hit a record 14 percent at the end of last year and the government imposed austerity measures to slash costs: Portugal cut pensions, reduced public servants' wages and raised taxes starting in 2010. (AP Photo/Paulo Duarte)

Debt-to-GDP ratio: 105%

Photo: People walk past a beggar on a bridge in Dublin Monday Feb. 20, 2012. Bank of Ireland, the only one of Ireland's six banks to avoid nationalization, reported it returned to net profit in 2011 thanks to heavy debt restructuring in the face of continued losses from dud loans. (AP Photo/Shawn Pogatchnik)

Debt-to-GDP ratio: 102%

Photo: The shadow of Republican presidential candidate, former Massachusetts Gov. Mitt Romney, is seen on a representation of the National Debt Clock as he spoke at a town hall meeting in Kalamazoo, Mich., Friday, Feb. 24, 2012. (AP Photo/Gerald Herbert)

Debt-to-GDP ratio: 85% each

Photo: Reflected in a window, people walk in London's City financial district, Tuesday, Feb. 14, 2012. Britain's AAA credit rating was put on a "negative outlook" by ratings agency Moody's, amid fears over weaker growth prospects and potential shocks from the eurozone crisis. Britain's Chancellor George Osborne said the assessment was a vindication of the Government's tough austerity measures and "a reality check for anyone who thinks Britain can duck confronting its debts". Moody's downgraded the ratings of six countries and also put France and Austria on the same caution as the UK amid violent protests in Greece. (AP Photo/Lefteris Pitarakis)

Debt-to-GDP ratio: 82%

It makes you wonder: Who will be next in line to default? And when they do, will we call that "good news," too?

Photo: A pedestrian looks at a sign in a shop reading: ''One euro, price haircut'' in Athens on Thursday, March 8, 2012. (AP Photo/Thanassis Stavrakis)

"What is disputed is the efficiency of a distributed system and perfect application to a scaleable monetary or payment function," Matoris said.

Currently, for example, Bitcoin's current market cap is only the equivalent of $50 million -- a drop in the ocean of the world's money supply.

But even as its future -- not just as a monetary escape route but also as a common currency -- remains uncertain, the digital trend has gained at least some traction. Consumers are using "linden dollars," the currency used in the online game Second Life, across the Internet as a true digital currency, according to the Financial Post. The Canadian Mint earlier this year also instituted MintChip, its digital form of money.

Platzer, the German restaurateur who has moved his money to bitcoins, views this change an inevitable part of our digital world.

"Cryptocurrency not only does not have the disadvantages of centralized currencies which led to the current crises," he said, "It also suits the requirements of an information society much better than the money from the Industrial Age."
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