What to Expect Next From Bitcoin
Don't declare the bitcoin bubble popped just yet.
Wednesday, the digital currency's value plummeted from over $260, eventually settling around $150. At current writing, the value is at $120 per bitcoin on Mt.Gox, the largest online bitcoin exchange. That fall came after a meteoric rise. The four-year-old currency is a decentralized type of money that allows for anonymous online transactions, though very few outlets accept bitcoins right now. Bitcoin prices had held below $15 for much of the past year before a quickly accelerating spike in March and this month, according to stats from BlockChain, a bitcoin tracking site.
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However, it may have been too much demand (plus some technical difficulties) that drove the prices down. Thursday, Mt.Gox released a statement explaining that the massive number of new accounts and trades slowed down the system, causing lags that caused people to panic and sell off their bitcoins. The exchange has also halted all trading until 10 p.m. EST "to allow the market to cooldown."
The current round of violent price swings may not be over, but once the market cools down, here's a guide to what to expect next from bitcoin:
More Stability
Currently, the market is trying to figure out "how much bitcoin should cost," says Vitalik Buterin, head writer at Bitcoin Magazine.
"The market is trying to figure that out and settle down on some kind of price," he adds. "Eventually, I assume, it's going to stabilize at some point. It [was] fairly stable in 2012, so it will go back to something like that eventually."
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So the stability may not come in the next couple of days, but eventually prices should settle. Bolstering that stability may be the latest round of overwhelming media attention the currency has received. That attention helped to fuel a price spike, sending people scrambling to buy bitcoins. However, it also brought the currency further into the mainstream. As bitcoin becomes more and more well-known, it may make for less volatile fluctuations.
"As most people start to have heard of bitcoin, anytime there is some media attention, it won't cause huge numbers of people to go out and start buying it or, as soon as there's a little bit of trouble, start selling it," says Reuben Grinberg, a lawyer in the financial institutions group of Davis Polk LLP.
...But Nothing Rock-Solid
There may be fewer media-fueled spikes and panicked sell-offs in the future, but that doesn't mean an end to booms and busts. One reason the bitcoin's value will not attain dollar-level stability is that it the supply of bitcoins is controlled. There are around 8 million bitcoins in existence right now, with computers slowly "mining" new bitcoins. The system only allows so many bitcoins to be created periodically, and only 21 million will ever be created. With these tight rules in place, it means that if demand grows faster than the supply of bitcoins, the price will move upward.
Still a Fringe Currency
Bitcoin isn't just a currency; it occupies a gray area between currency and commodity and is an optimal choice in neither area, as Grinberg pointed out in a 2012 article. "[B]itcoins are inferior to gold and other precious metals that are liquid, widely available and pose no exotic security issues," he wrote. And, he added, bitcoins are still rarely used and difficult to obtain, making cash and credit cards far better methods of spending. In addition, security issues plague anyone holding bitcoins for spending; dozens of stories tell of firms and consumers' ewallets getting "pick pocketed."
Still, the anonymity that bitcoin affords its users makes it appealing for particular populations. He points to people who, for whatever reason, want total anonymity in their purchases. That does mean that bitcoin may be used for some criminal activities or purchases of illicit goods, but it could also simply be a matter of philosophy -- a way of staying off the grid for people who fear that the government, or anyone else, could track their activities.
But "illegal" doesn't have to mean "bad," particularly in some foreign nations, says Grinberg.
"One example would be the provision of services that technically are illegal but that most people, or people in the U.S. would view as legitimate," says Grinberg.
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He uses the hypothetical example of people living in repressive countries that censor the Internet. Users could use bitcoin to anonymously pay for VPN or blogging services in order to access the Internet and communicate with less fear of being caught by the government.
In addition, bitcoin could become more attractive in finance circles for activities like arbitrage. Still, between day traders, criminals, subversive foreign bloggers and privacy fanatics, the population of people who prefer bitcoin is likely to remain small.
