Bitcoin’s huge fluctuations pretty much rule it out as a replacement currency, but it’s early days yet
From $13 in January, the value of a Bitcoin soaring to $900 a few weeks ago, pretty much rules it out as a viable mass currency of the future—how do you sell something in terms of a currency whose value dramatically changes the next minute. Theoretically, that shouldn’t happen since, the way it is conceived, bitcoins don’t get created until more of them are demanded, making it the near-perfect currency—yet, in reality, its prices have fluctuated dramatically. One reason could be that, thanks to its relatively small base, it doesn’t take too large an amount of transactions to move the digital currency’s value sharply. Which is why when illegal drug market Silk Road shut down some years ago—it accepted only bitcoins as payment—the value of the currency collapsed dramatically.
Given the number of currencies, even those backed by governments, that have collapsed historically, bitcoin collapsing in itself may not be a big event. What is more important, and that is why even the US Fed is bullish on it, is the near-complete safety it provides for online transactions—apparently, no transaction can be completed without all concerned persons verifying their end of the transaction immediately—and also the dramatically lower costs compared to online transaction fees for banks and credit card companies. And, yes, there is the complete anonymity that even secure online transactions can’t yet provide. For now, till it dies or flourishes, bitcoin is an interesting experiment with, as Ben Bernanke put it, “long-term promise, particularly if the innovations promote a faster, more secure, and more efficient payment system”.