As the so called ‘crypto-currency’ Bitcoin rose to over US $100 it has generated a wildfire of criticism and predictions that it will inevitably bust in a short time. This is not new as the Bitcoin phenomenon has been many negative articles and stories from its initial released on 3rd of January 2009.
The exchange rate for Bitcoins to major currencies has nearly tripled in the last month, which has once again spurned the Bitcoin mining industry to new heights. The sources of new Bitcoins are the miners that ‘hash’ transactions and earn new generated Bitcoins as these blocks of highly encrypted hashes are processed.
The value of the total amount of Bitcoins is approaching $2 billion dollars and the new technology and larger mining rigs that miners are bringing online is rapidly increasing the amount of Bitcoins that are being brought onto the market. This would in most other currencies signal to the market that it should discount the exchange rates. Many analysts are confused and negative about Bitcoins because they do not react in a typical fashion to normal indicators making them very nervous.
While there is a small but growing Bitcoin economy, it has almost nothing in common with traditional economies that are naturally, based on the economic conditions in the physical area the country is situated in. The mistake that many people are making is that they are treating a currency that is mainly used as a convenient exchange mechanism or that is used in very limited circumstances the same as a mainline currency.
Bitcoin is convenient for people that want to transfer currency to different physical places in a secure transaction. It is like giving a person or business cash in the hand but they can be anywhere in the world. The ability of anyone to then allow someone with Bitcoins to exchange them for local currency is both amazing and slightly worrying.
I have witness a transaction where a person looked up a local Bitcoin exchange person, called them up and arranged to meet in a local bar. They both had Smartphones and the person counted out the local currency equivalent to about US $1000. When the tourist was satisfied he logged onto the internet and transferred the agreed upon amount of Bitcoins to the person doing the exchange. Within three minutes the transaction was completed with no names, addresses, bank accounts or any other identification exchanged.
This shows two sides of the Bitcoin currency, the entrepreneurial businesses that it generates and the almost untraceable nature of this digital currency. The entrepreneurial side has led to a raft of businesses opening and more than a few failing in a spectacular fashion. The lack of regulation and oversight that makes many support this currency can also leave investors with little recourse if things go wrong. The interesting longer-term question is what will stop this currency growing when it has no government to control it and no economically draining support such as healthcare or pensions to influence the economic development of the Bitcoin economy.