In this article, I will be talking about Bitcoin. Bitcoin is a digital asset that can be traded as a currency and contains a public ledger where trades are recorded. Bitcoin has been on the rise since its creation in 2009 and recently exploded upwards by 20% in 24 hours to reach a price of $100 per Bitcoin on the MT. Gox exchange. While Bitcoin has become more popular over time, it remains an enigma to many people who do not understand how it works or why it would go up so much so quickly. While there are several advantages associated with Bitcoin which could lead to an increase in value, I believe Bitcoin is nothing more than a speculative bubble that will eventually burst at some point due to market forces. You can also check the Meta Profit website for further details.
Advantages of Bitcoin
Bitcoin has a few advantages over established currencies such as the U.S. dollar which could contribute to an increase in interest and prices. Bitcoin is decentralised from any financial institution, so all transactions are directly between user and merchant, without having to go through a bank or credit card company as with traditional currency exchanges.
In addition, Bitcoin is relatively anonymous, as each transaction does not contain personal information beyond the public Bitcoin address of the wallet it is sent to or from; however Bitcoin addresses can be traced back to previous transactions if enough effort were put into it. Bitcoin also has a feature called "mining", which is where users run the software and help verify Bitcoin transactions around the world for Bitcoin rewards and fees. Mining exists alongside Bitcoin as a separate economy, with Bitcoin having a set amount of 21 million Bitcoin which will be mined at some point.
Advantages of Bitcoin
While these advantages give Bitcoin an edge over traditional currencies, they are not enough to support Bitcoin's price level. As Bitcoin is traded as a currency on exchanges alongside other currencies, supply and demand dynamics come into play. Market forces cause Bitcoin to behave like other speculative assets such as tech stocks or housing prices, making good news about Bitcoin good for the price of Bitcoin while bad news causes the price to drop. This type of feedback mechanism can drive prices up quickly, but will also lead to a sharp downward spiral if something negative happens that affects confidence in Bitcoin. For example, if someone creates malware that steals accounts containing Bitcoins users will stop trusting Bitcoin, causing the price to drop sharply. This type of negative feedback loop can also cause Bitcoin's price to explode upwards equally quickly if there is enough positive news about Bitcoin's advantages over traditional currencies. Since Bitcoin is still in its early stages and not widely used, it does not have much if any history with market forces at play, which is part of why Bitcoin has exploded so rapidly over the past two months.
Another problem with Bitcoin is that it has no intrinsic value whatsoever. While this makes Bitcoin reasonably stable relative to many other financial assets, without some underlying essential value Bitcoin could be destroyed by either a technological improvement or government crackdown on Bitcoins use as currency. Technology improvements happen all the time with computers since new technologies allow programs to run more quickly, which Bitcoin mining is currently not designed for. In addition, Bitcoin has been featured in a few negative news stories over the past month, and Bitcoin's potential use by criminals who want to transact anonymously will make it difficult for Bitcoin to gain mainstream acceptance as a currency. While Bitcoin may hold value as an anonymous payment service on the internet for purchases like drugs or other contraband, Bitcoin's price cannot grow exponentially forever without some intrinsic value based on either growing demand or technological improvements.
Finally, Bitcoin runs into trouble with its extremely volatile price. Many of Bitcoin's advantages lie in its low transaction costs and ease of transferring money between parties; however, these attributes depend on Bitcoin having a steady price that does not change much on a day-to-day basis. Bitcoin can make up for this volatility by being a good store of value over the long term, but Bitcoin's price has been too volatile to support Bitcoin as a reliable long-term store of value. For Bitcoin to be used as money it must have a relatively stable price level, and without that Bitcoin will not succeed as a currency. Bitcoin's price is currently extremely unstable, which will cause Bitcoin to not be a reliable store of value and make it difficult for Bitcoin to succeed.