Bitcoin Streaks Toward the Sun
Is Bitcoin spinning out of control? The consensus appears to be that the virtual currency's incredible increase in valuation over the past couple of months is a bubble that must eventually burst. Since avoiding controls is integral to Bitcoin's very nature, however, no one is really sure where this apparent madness will end. One thing is clear: The struggle between financial regulation and nonregulation just got a lot more interesting.
Bitcoin's meteoric rise has pushed it over the US$200 mark. Five days ago, the open source peer-to-peer digital currency was trading at $150, a level that alternately wowed and worried speculators. Two months ago, it was worth about $20.
Bitcoin's sudden ascent has fueled talk of a bubble -- and not just any bubble, but one in a financial asset class that is not regulated by the government and has no backing.
"I think a dramatic fall or bubble burst is almost certainly going to happen," Peter Cohan of Peter S. Cohan & Associates, told the E-Commerce Times.
How It Works
Bitcoin is an electronic currency that uses cryptography for transactions. The concept launched in 2009 and began to take off in 2010. In June and July of 2011, it became a topic of discussion in mainstream media as it rode a massive rally. Later that year, the value deflated but the currency kept trading.
Bitcoin celebrated another milestone in September 2012 when the Bitcoin Foundation was created to standardize and promote the currency.
How it works is simple: A user chooses a wallet to install on a computer or mobile phone. Once the wallet is installed, it will generate a bitcoin address, which is used to receive funds. A user who wants to send funds will need the recipient's bitcoin address -- a process that is similar, in a way, to email.
There are some rules of the road. For starters, transactions are irreversible and the technology prevents double spending. The transactions are usually broadcast within seconds and verified no more than an hour later.
They can be received whether a computer is on or off. As of February 2013, there was more than $1 million in daily trade volume distributed across 40,000 transactions, and the total value of bitcoins in circulation was more than $300 million, according to the currency's official site.
Although there are investors interested in the currency -- especially now -- its fans for the most part have been people interested in trading with an alternative currency that resided outside of the formal, regulated world markets.
Hence, when doubts circulated about Cyprus' banking system -- doubts that were eventually realized when the country opted to tax bank accounts to help finance its bailout -- interest in bitcoins exploded.
Since then, there has been a chain reaction.
Investors who like it tend to want an alternative to gold, which has dropped sharply in price, Cohan said.
"Many of these people are in the same anti-Fed camp that have negative feelings about the Central Bank's monetary policies right now," he pointed out.
Bitcoin will enjoy its ride for a while longer, but eventually something will happen to cause a crash, Cohan predicted.
Perhaps money will be lost due to a major hack attack, he suggested. "At that point, people will realize it is completely unregulated and there is no way to recover the value."