The virtual currency Bitcoin has taken a hit in worldwide trade recently. Prices lost half their value to hit $230 on Japanese exchange, Mt. Gox exchange on Sunday. Traders have shown signs of lack of confidence due to recent events. However, in spite of the risk involved, Bitcoin remains popular among traders and businesses.
Bitcoin is digital cash traded on the internet, though not backed by any regulating government or central bank. However, It can be used to purchase goods and services from stores and particularly from online retailers.
Meanwhile, worldwide confidence remained shaky after hackers pirated nearly $2.7 million from Bitcoin over the weekend. Along with the internet based piracy, many believe that Bitcoin suffered from a bubble effect. The currency’s value soared from $100 in October of last year, to over $1,200 at the end of November.
Tokyo-based Mt. Gox was the world’s largest Bitcoin trading exchange, boasting more than 1 million trades a day at its peak. It has since fallen to third-largest Bitcoin exchange in the world. Slovenia-based BitStamp is now the world’s largest Bitcoin exchange, while BTC-e, based in Bulgaria, the second-largest. Bitcoin last traded at $631.95 on BitStamp, while it closed on BTC-e at $596.20. Meanwhile Mt. Gox’s Bitcoin traded at only $400.
Some analysts believe that the movement in leadership among Bitcoin trading companies is its strength. Timothy Lee of The Washington Post writes that Bitcoin itself is an open-source technology platform. If one supplier or trader, such as Mt. Gox fails, another such as the two Eastern European companies will pick up the ball and run with it. Mr. Lee describes the current Bitcoin trade as being in the “Wild West” stage, and that issues will be resolved eventually. He goes on to compare Bitcoin’s current risk to the early internet and “dot.com” businesses. In spite of many of those companies failing miserably, internet-based business as a whole matured and stabilized well. It was able to do so fairly quickly, thanks to companies like Yahoo! and Google. The determining factor was not a start-up company selling its goods online. Likewise, Bitcoin will remain because of itself, not because how popular the company selling it is at a certain time.
Another weakness that may be a strength to Bitcoin users is that it is not backed by any government. By being untied to a government, Bitcoin can avoid government controls of a national banking system. This was the case with an issue in Cyprus last year. Additionally, since Bitcoin keeps its number of coins low, traders can avoid inflation related issues caused by countries printing too much money. It is also very difficult for an individual to create Bitcoin, so analysts do not typically worry about counterfeit.
A caveat from economist Bryan Caplan is that as Bitcoin gains in popularity, and in fact increasingly replace national currencies, governments will seek ways to circumvent Bitcoin’s independence and crack down on its use.
Bitcoin continues to enjoy interest and popularity among traders and businesses in general. In spite of the well-known risks many analysts believe it to be a good investment. Yet, other analysts will be just as quick to discourage its use due to the risk.
By Ian Erickson