Digital currency Bitcoin soars as panic afflicts Cyprus

The panic in Cyprus surrounding plans to levy private citizens’ bank accounts to pay for a bailout has driven a steep rise in the value of digital currency, Bitcoin.

As part of a 10 billion euro economic rescue deal Cyprus struck with its euro area partners and the International Monetary Fund, bank depositors would be subjected to a one-off levy: 6.75% on all insured investments below 100,000 euro and 9.9% on everything above that.

The move saw worried Cypriots lining up at ATMs to withdraw their money. Banks placed withdrawal limits on ATMs and many ATMs ran out of cash.

The deal as laid out did not proceed, however, being rejected by Cypriot legislators. Another deal, one that did not need the parliament’s approval, later went ahead.

In the panic surrounding the deals, many Cypriots have evidently turned to the digital currency, Bitcoin.

For the uninitiated, Bitcoin is a controversial, bankless currency based on peer-to-peer transactions over the internet.

The value of the Bitcoin has grown over the last few weeks, and many believe it to be as a result of Cypriots investing their money into something they may consider safer than their own economy.

Given that the Bitcoin has suffered from wild fluctuations in the past, this is a pretty telling indication of the faith the Cypriot people have in the country’s economy.

And it seems Spaniards too may be looking to Bitcoin: Businessweek reports that downloads of Bitcoin apps have soared in Spain, following the initial announcements about Cyprus’ bailout plan.

But the Economist says there is significant risk in investing in Bitcoins.

“There is every reason to think that the current Bitcoin boom will shortly bust,” a writer for the Economist website said.

“[Bitcoin] still has relatively few users. Its primary commercial use is probably to buy drugs from Silk Road, a sort of pirate eBay hidden in the ‘deep web’. This suggests that the new users are buying Bitcoin as an investment, not as a means of exchange. For any currency to thrive it needs users, not just speculators.”

As of writing, the total value of the Bitcoin economy sits at US$842.5 million.

Bitcoin image courtesy of bitcoin.it