Yet another funny story I found over the weekend for all you Bitcoin lovers…
Will using Bitcoin to buy sex trigger a financial revolution - or cause the digital currency to crash and burn?
On a sparsely designed website, dozens of young women have posted images of themselves in their underwear. When visitors hand over small payments, or ‘tips’, the women uncover what remains of their modesty, before uploading more images.
Usually, their faces remain concealed. Occasionally, they post comments thanking patrons for their generosity, and revealing a few personal details: a first name, perhaps, or age, or the town or city they call home.
Sometimes, perhaps after a particularly generous ‘tip’, the women, who hail from every corner of the globe, upload a tawdry home video.
The business model of the site, called Girls Gone Bitcoin, may be simple, but it’s depressingly effective. Indeed, only a few weeks after a low-profile launch, it already claims more than 4,000 free-spending ‘subscribers’.
This success is due to a canny technical innovation which differentiates the site from its thousands of rivals in the smuttier reaches of the worldwide web.
For while the online sex industry has — like most e-commerce — until now been largely financed via credit card transactions, Girls Gone Bitcoin is one of a fast-growing new wave of X-rated sites that accepts payment only in a form of electronic money called Bitcoins.
Put simply, Bitcoins are a currency which can be bought and sold using regular cash. They exist only in cyberspace, in the form of a numerical code. Once purchased, they can be exchanged for goods and services, like normal money.
Importantly, unlike rival currencies, which are issued by banks and heavily regulated by governments, Bitcoins — which were invented in 2008 — are untraceable, and can be exchanged anonymously, with anyone in the world at the click of a mouse. They occupy a medium far beyond the reach of either the taxman or the normal rules of law.
All of which explains the popularity of sites such as Girls Gone Bitcoin. Users can pay for its wares without fear of their partner finding details of the transaction on a credit card or bank statement.
The anonymity also explains why the currency has, for most of its five-year existence, been widely used by criminal gangs looking for a way to finance a trade in drugs, guns or child pornography.
Indeed, in October the FBI closed a notorious website called The Silk Road, which was being used to trade roughly £1.25 million in drugs each month, and was dubbed the ‘Amazon or eBay’ of narcotics. It required all users to pay for goods using Bitcoins.
So far, so murky. Yet in recent months, there have also been signs that Bitcoins are beginning to be used as a form of payment for legitimate consumer products.
In Canada earlier this year, for example, a man called Taylor More put his house on the market with an asking price of £261,000, payable only in the online currency. In Austin, Texas, an un-named man sold a Porsche using Bitcoins.
Over the summer, a website called Pizza For Coins was launched allowing users to spend Bitcoins on deliveries from Domino’s or Pizza Hut.
A popular British site, takeaway.com, which works with thousands of UK curry houses, kebab shops and fast-food outlets, has also begun to accept them.
Several iPhone apps have tapped into the increasing use of Bitcoins, allowing consumers to use them to pay for goods, or to transfer funds to friends. A ‘cash machine’ which turns Bitcoins into cash was unveiled at a London conference in July.
Today, there are around 12 million Bitcoins in existence, with an overall value of around £7.8 billion, though it is hard to be precise because the price of a Bitcoin fluctuates widely and quickly.
More than a million people are thought to own them, and their number is now growing. The currency may, in other words, have started to enter the mainstream.
With this in mind, many believe there is a fortune to be made from the currency, which has soared in value in recent months. Worth a few pence when launched, each Bitcoin was changing hands for £5 only a year ago. Last week, its market price broke through the psychologically important $1,000 (£612) mark. Major investors have duly jumped on board.
The Winklevoss brothers — the U.S. twins who became famous when they sued Mark Zuckerberg in a dispute over the founding of Facebook — announced they were setting up an investment trust for speculators to invest in Bitcoins.
Peter Thiel, a billionaire Silicon Valley venture capitalist, has already put millions into the currency. So, too, have Fred Wilson, a financier behind Twitter, Jim Breyer, the leading backer of Facebook, and Marc Andreessen, a co-founder of Netscape.
They have experienced a bumpy ride. In April, the Bitcoin exchange rate dropped from £175 for one Bitcoin to £50, then back up to £105 within six hours. However, they are taking a long-term gamble that Bitcoins will become a major player in the valuable electronic payment market.
Since retailers can accept the currency without having to pay credit card fees (which average three per cent), these multi-millionaires believe it will take market share from Visa, Mastercard or even the online service PayPal.
Given the travails of the likes of Royal Bank of Scotland — which last week left millions of customers without funds following a computer glitch — and given paltry savings interest rates, they believe there is demand for an alternative to High Street banks.
Perhaps that explains why Wedbush Securities, a Los Angeles investment house, this week published a research note suggesting Bitcoins could be undervalued by a factor of between ten and 100.
Instant regret: James Howells carelessly threw away an old hard drive which would now be worth more than £4million in Bitcoins
Yet not everyone agrees with this bullish position. Just glancing at the currency’s stratospheric rise — it has increased in value by a factor of six since early November — is enough to convince many experts that the boom is the latest in the long history of financial bubbles.
These go back to the tulip-buying mania of the 17th century, when bulbs were being traded in Holland for the modern-day equivalent of hundreds of thousands of pounds.
One veteran American stockbroker, Art Cashin, recently warned his clients that the Bitcoin market is just ‘trading tulips in real time’.
The precarious nature of the market was underlined last week when Bitcoins plunged dramatically in just one day on the MtGox exchange — from nearly £800 per coin to £550 — after the People’s Bank of China said it was introducing regulations targeting Bitcoins ‘to protect the interests of the public, to protect the legal status of China’s yuan currency and to prevent money-laundering risks’.
The danger lies not only in the fact that some governments do not recognise them as legal tender, but also that the currency does not physically exist.
It was launched by a hacker using the pseudonym ‘Satoshi Nakamoto’, who created a code that would allow other programmers around the world to create, or ‘mine’ new Bitcoins, using powerful computers to solve mathematical problems.
Each Bitcoin is, in effect, a unique number. Owners are identified by a second number. They can exchange their holdings for cash via online exchanges. Nakamoto’s code dictated that new Bitcoins would be released at a rate of around 25 every ten minutes, and the total that could ever be mined would be limited to 21 million. So far, just over half have been ‘mined’.
The problem is that the currency has value only as long as people are willing to trust it. No central bank will honour Bitcoins. So if there is a collapse of confidence, there is no one to sue and no government to bail out the currency.
Holding Bitcoins is also fraught with danger. You cannot simply stash them under a mattress. Instead, most are held in virtual ‘wallets’ on computers, though these can be hacked.
This week, a U.S. online trading exchange called Sheep Marketplace was shut down by the FBI after Bitcoins worth £3 million were stolen from its users by a hacker.
Holding your Bitcoin codes on a memory stick, or hard drive, can also end in tears. They can break, crash or simply go missing.
Last week, a man from Newport, Gwent, James Howells, revealed he had accidentally thrown away a computer hard drive which contained £4 million worth of Bitcoins. It had ended up on a refuse tip and is never likely to be recovered.
Normal investors, who may not be computer savvy, struggle to invest in Bitcoins with full confidence they’re buying the real thing.
‘It’s a Wild West with regard to exchanges and wallets, so if you are choosing to buy, really do your homework,’ advises Garrick Hileman, an economic historian from the London School of Economics.
‘When people ask if Bitcoins are a bubble, my standard response is that it’s too early to tell,’ he says. ‘But if it does succeed, the return for early investors will be huge.’
And for everyone from strippers to drug dealers, to squeaky-clean venture capitalists, there is already an awful lot of money riding on this giant internet gamble.