A rapid run-up in bitcoin’s value – it hit US$1,000 on the Tokyo-based Mt.Gox exchange yesterday after doubling over the past week, and continued its rocket ride this morning as it blasted through US$1,200 – is the clearest sign yet that the headline-grabbing virtual currency may be more viable as an investment for very speculative investors than something the rest of us can use to buy and sell stuff.
Slowly going mainstream
Bitcoin has been gaining momentum for much of the past year as a growing number of mainstream businesses have begun to accept it. WordPress and Reddit users can now use bitcoin to make purchases on their sites. Shopify announced its 75,000 merchants now take bitcoin in addition to conventional currencies and online services like PayPal. You can even use it to go to space, as Virgin Galactic now takes bitcoin for its sub-orbital rides expected to launch next year.
Here in Canada, the first ATM that converts between conventional dollars and bitcoin opened in Vancouver last month. In the U.S., over 400 retailers have signed on for Bitcoin Black Friday, which offers up special deals for holiday shoppers who pay using the virtual currency.
Cryptocurrencies appeal to tech-savvy users because unlike conventional currencies, they’ve been designed from the ground up to facilitate online purchases and transfers. Because they aren’t controlled by any central bank, they easily cross international borders. They’re relatively easy to carry – anyone with the means can stuff a fortune’s worth of Bitcoins onto a flash drive – and relatively difficult to track or hack thanks to embedded encryption.
Seems perfect, but…
As more business and consumer transactions shift online, a net-centric currency would seemingly be an ideal solution to the security, logistics and cost-related challenges of using traditional currencies and payment methods. On that front, bitcoin has fallen somewhat short of its Utopian promise, with a number of high-profile cases this year serving as reminders that the high-tech currency doesn’t come without new risks of its own.
- The sudden closure of GBL, a Chinese Bitcoin exchange, in October left about 1,000 investors $4.1 million poorer. Amid surging demand for bitcoin in China, investors ignored warnings about questionable practices at this exchange, including licensing gaps and unclear contact information.
- The FBI raid on the Silk Road Internet marketplace, where some of the site’s registered users paid for drugs, weapons and murder-for-hire using bitcoin.
- A British man inadvertently threw out $7.5 million worth of bitcoin when he tossed his obsolete hard drive in the trash last summer.
- A distributed denial of service (DDoS) attack on European bitcoin processor BIPS allowed hackers to steal $1 million from customers.
- Australia’s TradeFortress lost $1 million in an attack earlier this month.
- Hackers stole $100,000 in bitcoin from customers of the Czech exchange Bitcash.cz.
None of this is stopping investors from trying to make a quick buck. But there’s a huge gulf between bitcoin serving as a speculative investment and becoming a stable, broadly accepted mainstream currency.
Like any good bubble, this one, too, will eventually burst – just like an earlier crash in April. And when it does, bitcoin won’t be the only casualty. Beyond the obvious investors who stand to get swallowed up in any future crash, the entire cryptocurrency category itself will find itself consigned to the fringe by businesses and consumers too afraid to get burned again.
For now, regular old dollars should be good enough for most of us.