The recent decision by the government of Cyprus to shut down the island's banks and limit the amount depositors can withdraw from their accounts reveals just how real the country's financial woes are. Yet even as Cypriots are most keen to get their hands on cold, hard cash, some investors are placing their bets on the virtual currency known as bitcoin.
%VIRTUAL-pullquote-Bitcoin in some senses is a financial island, operating at a safe distance from the traditional banking system.%Used primarily to buy goods and services online, bitcoin is a recent invention, created just four years ago by an Internet hacker (or group of hackers) known as Satoshi Nakamoto. As Bloomberg BusinessWeek notes, even by Web standards, bitcoin "is a strange and supergeeky phenomenon."
Bitcoins operate on a network that somewhat resembles a typical exchange on the capital markets. As CNBC reports, buyers can exchange national currencies for bitcoins and use them wherever they are accepted, and sellers can exchange bitcoins for traditional national currencies.
As the financial crisis has deepened in Cyprus, and holders of euros and Russian rubles become increasingly anxious, the value of the bitcoin has surged. As ABC News reports, the exchange rate for 1 bitcoin has soared to nearly $80 from $40 just two weeks ago.
Bitcoin is "clearly having a breakthrough moment here, and a deeply surprising one given its novelty and nascent infrastructure," Nicholas Colas, chief market strategist at ConvergEx Group, told the network.
As DailyFinance reported last year, bitcoin in some senses is a financial island, operating at a safe distance from the traditional banking system. It's neither controlled by central banks nor governments, and thus not vulnerable to larger-scale shifts like changing interest rates, nor the rampant inflation of countries in decline.
It's that isolation from geopolitical turmoil that has been its true selling point for people in Europe.
How does it work? As Motley Fool reports, instead of relying on a central bank or other regulatory body, bitcoin transactions are verified through peer-to-peer interactions. If a user sends bitcoins to another user's "wallet" file, that transaction is verified through other users, and is written into a collective transaction log. Transactions are easy, and fees for transfers are minimal.
As with any currency, however, there are risks, including volatile swings in the value of bitcoin, which makes it difficult for businesses to accept them with any degree of confidence.
Currency analysts, however, are at least willing to give bitcoin the benefit of the doubt as a legitimate trading vehicle as situations like Cyprus continue to crop up.
As Christopher Vecchio, currency analyst at DailyFX, told CNBC. "Right now, it seems safe, [though] it wouldn't be my preferred vehicle to trade money because it's unregulated."