Bitcoin :Boom or Bubble?

What is Bitcoin ? This is a "digital currency," Bitcoin originated in early 2009 with a software program written by Satoshi Nakamoto.
You can do two things with bitcoins: buy stuff, just as with traditional money; and hold them as an investment or speculation, hoping their price will rise.
Some shopping does occur with bitcoins. Recently, -- an online retailer -- agreed to accept bitcoins; the Sacramento Kings basketball team will do likewise. According to, about 2,600 stores and businesses worldwide accept bitcoins, with concentrations in Western Europe, California and New York.
Still, bitcoins today are mainly a financial gamble. They're traded on electronic exchanges, where price swings have been mind-blowing. When Hanyecz bought his pizzas, bitcoins were perhaps worth less than a penny each. In late 2013, prices exceeded $1,000. Short-term variations are enormous. Prices now bounce between $800 and $900.
Basic economics teaches that money serves three roles:
-- a medium of exchange, buying and selling;
-- a store of value, something whose stability protects wealth;
-- a unit of account, a way to price goods and services.
Bitcoin's wild price fluctuations seem disqualifying on all counts. A business that accepts bitcoins takes an immediate risk that the funds will lose 5 percent or 10 percent of their worth before they can be converted into traditional money (dollars, euros, yen). By this logic, retail uses will remain limited. For similar reasons, bitcoins flunk as a store of value and unit of account.
What's boosted bitcoins' price is speculative mania and specific events that increased demand. Cyprus' financial crisis in 2013 reportedly caused European investors to convert euros into bitcoin as a way of evading controls on moving money abroad. Prices rose when Baidu -- China's Google -- said it would accept bitcoins in some situations. Because it's hard to identify owners, bitcoins may also lubricate crime, money-laundering and tax evasion. Bitcoins were used on "Silk Road," a website that peddled illegal drugs.
To skeptics , Bitcoin seems a collapse waiting to happen. There's nothing behind it except clever programming. It's extremely vulnerable to hostile government actions. Baidu reversed its decision after China's central bank criticized Bitcoin; Germany's Bundesbank has done likewise. The FBI pierced Silk Road's anonymity and shut it down. Could bitcoins be worth $80 or 80 cents instead of $800?
Hold it, retort Bitcoin's defenders. The standard "bubble" analogy distorts Bitcoin's technology and potential.
It won't replace the dollar or the euro, says Brito of the Mercatus Center. Instead, Bitcoin represents a payments technology that competes with Visa and PayPal. Against these, he says, Bitcoin has some huge theoretical advantages. Except for cash, most payment systems require a middle man (usually a bank) to move funds from the buyer's account to the seller's account. By contrast, buyers and sellers of bitcoins deal directly with each other. Bitcoins are deposited automatically in the seller's electronic "wallet." Savings could be sizable, Brito says.
Jeremy Allaire is CEO of Circle Internet Financial, a startup company striving to commercialize Bitcoin. With time, he thinks Bitcoin's price volatility will subside or be hedged. He says that Bitcoin's frantic trading is not just mindless speculation. "People are making a bet," he says. The bet is that Bitcoin will emerge as a global payment platform operating through smartphones, tablets and other devices.
Ours is an era when technologists are leading us in directions that neither they nor we fully understand. That's why it's so hard to know whether Bitcoin represents constructive innovation -- or just another old-fashioned swindle.
(c) 2014, The Washington Post Writers Group

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