Bitcoin’s future questioned as fluctuations continue

Amidst a sharp fall in value apparently triggered by selloffs, Bitcoin, an open digital currency, has come under scrutiny. No government or central regulator controls the currency’s value, and its rise to prominence has sparked both optimism and pessimism among journalists, government agencies and retailers.

Founded by a pseudonymous person or group named Satoshi Nakamoto, Bitcoin has been attracting increasing attention as its acceptance has broadened to include companies like the WordPress blogging platform and OKCupid. The BBC defines Bitcoin as “virtual tokens which have value because enough people believe they do and there is a finite number of them.” Around 11 million Bitcoins are now in existence, each one identified by a unique registration number. New Bitcoins are created by users downloading computationally demanding software that solves complex problems. Once a problem is solved, a new Bitcoin is created, up to a limit of 21 million. Forbes reports that over 15 million transactions have been performed by 50,000 senders.

Bitcoin transactions are anonymous and heavily encrypted to ensure that anonymity is not compromised. That has made it attractive to black market traders like Silk Road, which in turn brought Bitcoin to the concerned attention of the FBI as early as last May. According to an Ars Technica report on a leaked FBI document concerning the currency, the bureau, states that the economy for Bitcoins, as of last May, was estimated to be around 40 to 50 million dollars.

The report reads, “If Bitcoin stabilizes and grows in popularity, it will become an increasingly useful tool for various illegal activities beyond the cyber realm. For instance, child pornography and Internet gambling are illegal activities already taking place on the Internet which require simple payment transfers. Bitcoin might logically attract money launderers, human traffickers, terrorists and other criminals who avoid traditional financial systems by using the Internet to conduct global monetary transfers.”

Of course, that stabilization is not guaranteed. In a contribution to The Atlantic, writer Matthew O’Brien criticizes the currency for not being a currency. Instead, he writes, “It’s a commodity. A currency needs a relatively relatively stable value to function as a medium of exchange. If it goes up too much, everyone will hoard it. If it goes down too much, nobody will want it. In 2013, Bitcoin’s annualized volatility has been 105 percent.”  Compared to volatility rates of 5.5 percent for the dollar and 8.5 percent for the euro, this might indeed be troubling. O’Brien accuses Bitcoin of being a new form of dotcom stock, referring to the bloated and overvalued tech firms like whose demise triggered the stock bubble burst in the early 2000s.

Those who use the currency every day, however, seem to have a higher opinion. Silk Road founder and head Dread Pirate Roberts (DPR) stated that the rapid fluctuations in value do not undermine the currency’s importance as a medium of exchange. “It is just as important to the functioning of Silk road at one dollar as it is at one thousand dollars,” he wrote. Forbes writer Andy Greenberg says that, unlike investors, black market users are actually less likely to buy and spend Bitcoins at the site if their value is appreciating too quickly. They would instead hoard them.

The enormous volume of digital print used up in the wake of this past week has been entertaining to watch, if nothing else. Alex Ferrara, also writing for Forbes, takes a more measured view of the situation we might be better off keeping in mind: “Bitcoin may or may not ultimately prove to be the right implementation, but it is a compelling concept.” Whether or not it ultimately flounders or succeeds, Bitcoin has proven that there is a significant interest and even utility for such a currency, at least in the short run. You may not be buying your groceries with Bitcoins anytime in the near future, but it will likely remain a staple of anonymous transactions on the Internet for some time.