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Worth $1 Billion, Iceland's Cryptocurrency Is the Third-Largest in the World

That might not be a good thing for the egalitarian altcoin.
Image: Auroracoin

One month ago, Icelandic programmer Baldur Friggjar Odinsson revealed his plan to give each one of Iceland's 330,000 citizens a handful of Auroracoin—an altcoin he created in the hopes of establishing an alternate crypto-economy to break the shackles of the Icelandic government's strict financial policies.

It’s a novel idea, the first of its kind, and one that apparently a lot of people believed could actually work: Over the last three weeks the currency starting gaining value at a rapid clip, and as of this morning had skyrocketed to a $1 billion market cap—making it the third-largest cryptocurrency on the market, far bigger than Litecoin, the “silver to Bitcoin’s gold.” (Bitcoin's at $8.5 billion.)

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That's a remarkable amount of growth, but the value is entirely speculative; Icelanders haven’t even received their share of the coins yet. Odinsson pre-mined 50 percent of Auroracoin and plans to distribute them to the population via a virtual "airdrop" on March 25, using the publicly available national ID numbers Icelandic citizens are given. Each person will receive 31.8 coins, which with AUR now valued at  $96.80 per coin amounts to a $3,000 hand-out to do whatever they want with.

Odinsson's hoping people will choose to use them, and that merchants slowly but surely begin accepting the alt-currency. To that end, he wanted to draw attention to the virtual coins in the weeks leading up the airdrop, to show Icelanders that the currency has value and encourage them to adopt it.

But it’s a delicate balance—too much hype and you risk the bubble bursting. Merchants could be hesitant to accept a volatile currency with a bloated speculative worth if there's a risk the value will sink later on. "I did not expect the market cap to go up to a billion one month into the project," Odinsson told me over email. That speculation could wind up hurting the long-term plan to establish a stable economic infrastructure based on the cryptocurrency.

What will all this speculation do to the Airdrop? My fear is that things are overheating.

— auroracoin (@auroracoinIS) March 3, 2014

What would make the coin a real success? Infrastructure, merchant tools, merchant acceptance - not just speculative increase in price.

— auroracoin (@auroracoinIS) March 3, 2014

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Iceland's economy is still reeling from the country's major financial meltdown in 2008, when greedy banisters nearly bankrupted the traditionally well-off nation. Following the collapse, major banks were nationalized and the government imposed capital controls still in place today—people can't freely trade internationally or invest in foreign businesses, which Odinsson says just further stifles economic growth.

"All the factors for a populace to try out a cryptocurrency are in place in Iceland,” said Odinsson. “The population is small, close knit, young and tech savvy. Word of mouth spreads fast. The logistics of distributing the coin are solvable. And Iceland is still reeling from its recent economic past. I think people began to see that the plan as I had laid it out was doable, and wanted to have a stake in it."

Auroracoin is currently being traded on the Cryptsy, Mintpal, Crypto Rush, and Poloniex exchange. The largest, US-based Cryptsy, traded $5 million worth of AUR in the last 24 hours.

But it’s far from stable. “I urge those who are investing in the coin to be careful,” Odinsson warned. “There are still many unknowns. For example, how many Icelanders will claim, and how the political aspects of this will play out.”

Unsurprisingly, the political response so far has been icy. One influential government MP, Frosti Sigurjónsson, called the coin illegal and a ‘monetary scam”. Head of the the Central Bank of Iceland, Stefán Jóhann Stefánsson, called it a "fringe activity" and potentially unlawful.

The success of this experiment hinges a lot on what happens—what will people do with their 31.8 AUR, how will the country’s leaders respond, and how will the price fluctuate. Many people will be watching closely: If tech-savvy Iceland proves to be a successful guinea pig for decentralized, nation-wide cryptocurrencies, it could clear the way for other countries in a similar economic situation.