Is Bitcoin Doomed?

The concept of a “peer-to-peer” currency, with a value not impacted by the shenanigans of various governments, is a really cool idea in theory. When Bitcoin was first unveiled, it was thought of as a further indication that people’s lives on the internet were becoming nearly as legitimate as their “real” lives. This seemed to be supported by Bitcoin values growing steadily, or at least avoiding tons of instability. However, with recent news that Bitcoin values have fallen off 90% from their June 2011 peak. Ars Technica reports:

Unfortunately, the currency’s value hasn’t proven stable in practice. Several waves of media coverage between April and June pushed the currency’s value up from less than $1 to more than $30. Soon after it reached a peak, the currency had a series of PR disasters. One Bitcoin user claimed that a half-million dollars worth of Bitcoins were stolen from his PC; he may have fallen victim to Bitcoin-stealing malware. A few days later, the most popular Bitcoin exchange was hacked, forcing a multiday suspension of trading and generating another wave of bad press. Trading resumed in late June at around $17, and the currency’s value has been steadily declining ever since. In August, one of the most popular Bitcoin “banks” claimed it had been hacked, and had lost hundreds of thousands of dollars worth of Bitcoins, triggering a fall in value to under $7. Bitcoin fell below $5 in September, and it is now worth less than $3.

One of the article’s point is that while there are a lot of Bitcoins in circulation, the number of transactions is quite small in proportion, and thus the value of the currency is very vulnerable to volatility:

The value of Bitcoins is (like any fiat currency) ultimately driven by supply and demand. With dollars, the supply is controlled by the Federal Reserve, and the demand is driven by the size of the US economy. The supply of Bitcoins grows automatically, asymptotically approaching 21 million, and the demand for Bitcoins is driven by the volume of Bitcoin-denominated transactions. And that’s Bitcoin’s fundamental challenge: as far as we can tell, the volume of Bitcoin-denominated transactions is tiny. True, there are a few hundred merchants who say they accept Bitcoin, but most of them appear to be small concerns, and almost all of them also accept dollars, euros, or another national currency. They may do only a small fraction of their business in Bitcoins.

So while Bitcoin is a very interesting concept, the jury is still out on whether a currency not endorsed by a major entity (i.e. a government) can remain viable and stable.


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