Cyprus fallout: rise of digital currency

Worried that their bank deposits aren't safe from a banking crisis, some investors are moving their money into a form of digital currency called 'bitcoins.' The trading value of bitcoins has soared since the Cyprus crisis erupted.

By Jeff Cox,?CNBC.com Senior Writer / March 28, 2013

Women sit and wait as other people stand in line outside a branch of Laiki Bank in the southern port city of Limassol, Cyprus, Thursday, March 28, 2013. Banks in Cyprus reopened to customers for the first time in nearly two weeks Thursday, albeit with strict restrictions on transactions. Some investors are moving bank money into an alternative form of digital currency, known as bitcoins.

Pavlos Vrionides/AP

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They won't make a sound no matter how many of them you try to toss in a bucket, and you can't pitch them in a fountain and wish for good luck. But make no mistake, bitcoins are getting big.

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The online alternative currency, previously little more than a curiosity in financial markets since its 2009 inception, has zoomed in trading value since the Cyprus banking crisis erupted two weeks ago.

With fears spreading that even insured deposits might not be safe in similar nations hit by banking crises, those looking for a haven to store their wealth have fled to the complicated world of digital cash.

"Incremental demand for bitcoin is coming from the geographic areas most affected by the Cypriot financial crisis?individuals in countries like Greece or Spain, worried that they will be next to feel the threat of deposit taxes," Nicholas Colas, chief market strategist at ConvergEx, said in a report on the startling trend.?(Read More:?It's Back! Dark Cloud From Europe Stalls US Stock Market Bull Run)

Bitcoins operate on a network that, at least on the surface, resembles a typical exchange on the capital markets. Buyers can exchange their paper currencies for bitcoins and use them wherever they are accepted. Sellers can exchange their bitcoins back for their original currency.

But the value of the currency has been anything but typical.

Bitcoincharts.com?lists the value of bitcoins compared to other currencies, including U.S. and Canadian dollars, euros and pounds.

On one of the U.S. currency exchanges, labeled "Mt. Gox," the bitcoin value has zoomed to more than $87 in Wednesday trade. That represents close to a 20 percent gain over just the past week, a one-month gain of 41 percent and nearly a quintupling of value in the past year.

The "Mt. Gox" euro trading has seen numbers nearly identical to the dollar pairing.?(Read More:?Cyprus Controls to Hit Foreign Transactions)

A more sober perspective might suggest that bitcoins are at best a momentary bubble and at worst a risky chance to take considering their novelty.

But the trend also exemplifies just how nervous cash-holders are over the European situation.

"This is a clear sign that people are looking for alternative ways to get their money out of the country," said Christopher Vecchio, currency analyst at DailyFX. "If we're going to talk about the stability of the euro and whether or not there are going to be capital controls in place not just in Cyprus but around the euro zone, I think there is some efficacy behind bitcoins as an alternative liquidity vehicle."

The role of alternative currency had been falling largely to gold over the past several years. But the precious metal has been on a pretty aggressive downward path since its most recent peak in October.?(Read More:?CNBC Explains the Wild World of Currency Trading)

Gold advocates, though, continue to stress its importance as a safe haven and store of wealth.

"Why would anyone trust an electronic form of money that could get hacked and then diluted into oblivion?" said Michael Pento, president of Pento Portfolio Strategies. "We already have a form of money that is indestructible and whose supply cannot be increased by any government or individual decree. It's called gold."

Yet currency pros are at least willing to give bitcoins the benefit of the doubt as a legitimate trading vehicle as situations like Cyprus continue to crop up.

The $964 million bitcoin network pales to the $4 trillion a day in total currency trading, but it's clearly growing.

"Right now it seems safe. Personally it wouldn't be my preferred vehicle to trade money because it's unregulated," Vecchio said. "But people are deeming it legitimate even though it's not backed by a sovereign. That could be the attraction behind it. There's no sovereign credit risks to bitcoins."

Source: http://rss.csmonitor.com/~r/feeds/csm/~3/CljyiojjHTM/Cyprus-fallout-rise-of-digital-currency

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