The Bitcoin Bubble’s Bursting
Earlier this month people began noticing that Bitcoin, the digital currency, was exploding in value. This isn’t the first time. As the Wall Street Journal explained back in 2011, Bitcoin at that time the world’s fastest-gaining currency. They also provided a good explainer about how Bitcoin actually works:
If returns like those seem otherworldly, perhaps its because Bitcoin is a world unto itself. To recap, it’s is a purely online currency with no intrinsic value; its worth is based solely on the willingness of holders and merchants to accept it in trade. In that respect, it’s not so different from fiat currencies like the dollar or Euro, but whereas governments back such money, Bitcoins lack central control.
In another way, the appeal of the Bitcoin echoes the appeal of gold. Istead of a central bank, a computer algorithm dictates their supply. Today there are six million Bitcoins, a number that will grow at a steadily slowing rate until it approaches 21 million, but no more. As with gold, some see such limited supply as built-in protection against inflation that could result from runaway government budget deficits. Gold, of course, has been a store of value for thousands of years and has at least some industrial use, whereas Bitcoins are brand new and exist only on the Internet.
Back when the WSJ wrote this article, a bitcoin was worth $30. Yesterday, it hit $250.
Today, people are cashing in their chips and it’s tumbled (as of early this afternoon) back down to $190.
But let’s get to some good Bitcoin reading. Here are items that have have crossed my feed over the last few days:
- MIT Technology Review: Cryptocurrency — The bitcoin, a virtual medium of exchange, could be a real alternative to government-issued money—but only if it survives hoarding by speculators. James Surowiecki dips into the currency’s background and history. See also Joshua Davis’ New Yorker article, The Crypto-Currency, about the mystery behind Bitcoin’s creator Satoshi Nakamoto… if there really is, or was, a Satoshi Nakamoto.
- Slate: Will Bitcoins Make Me Rich? — A dispatch from inside the digital currency bubble. Farhad Manjoo withdraws $1,027.51 to buy himself a couple of coins.
- Felix Salmon, The Bitcoin Bubble and the Future of Currency. Written just last week, Salmon notes that although the value of all bitcoins surged past $1 billion for the first time, it is/was a classic bubble, but still had “fascinating implications for anybody who cares about payments, or currencies, or trust.”
- Business Insider: There’s Someone Called ‘The Bitcoin Billionaire’ Who’s Randomly Giving Out Thousands Of Dollars On Reddit.
- Quartz: Why Bitcoin “millionaires” could accidentally become tax felons. Hint: capital gains.
Image: Screenshot, Real Time Bitcoin Market Data, by Clark Moody.