The Bitcoin phenomenon is hard for many to understand. Given it’s a digital currency that has no central authority, has mystery surrounding its creator and revolves around ‘online mining’ for its creation, it’s easy to understand why.
But while many remain confused, the price of the currency – which acts more like a commodity – has climbed to record highs above $US1000 ($1092). Just a week ago, one Bitcoin was worth around $US500 but after last night’s feeding frenzy, one solitary Bitcoin will now set you back a staggering $US1012.
It has many uttering the word ‘bubble’ – in fact, it has several analysts screaming it from the rooftops. And should Bitcoin indeed prove to be experiencing a bubble, many will look back and ask, ‘How did a currency with scarce global acceptance move from $10 to over $1000 in under a year?’
That answer appears quite simple: growing media interest has created a spiral of demand. The more rapidly the price has moved, the more press coverage it has received and, consequently, the more people have been introduced to – and demanded – the digital currency.
Google searches for Bitcoin since beginning of 2011. Source: Google Trends.
In recent weeks the currency has also been assisted by a sudden surge in Chinese demand, which may be linked to local residents wanting to move wealth more freely out of China while also looking to hedge against the doctored value of the yuan.
Meanwhile, US Senate hearings last week, which saw regulators indicate a willingness to accept Bitcoin as a legitimate currency, offered another leg-up. The hearings indicated harsh regulation of Bitcoin was unlikely, and as a result the currency has quickly shaken off the shadow of the shifty dealings of Silk Road, which came to a head early in October.
Through this rapid price growth, however, a great irony has been revealed in that if you truly believe in Bitcoin’s worth, you should never actually use it as it is intended: a medium of exchange.
The first ever reported Bitcoin transaction is the best evidence of this, with Jacksonville resident Laszlo Hanyecz reportedly paying 10,000 Bitcoins for a $25 pizza three years ago.
If you factor in the current value of one Bitcoin, that pizza has cost over $10 million for Hanyecz in future value. One hopes it was a good pizza.
Given most of the people buying into Bitcoin believe strongly in its future worth, the argument can be made that until the price settles down, it will be no more than a faux currency serving as an investment.
Still, press coverage of breaching the $1000 mark will no doubt lead to another wave of demand in the coming days, even if there is a brief pullback. That’s what happens when there’s a mob mentality; the fear of missing out drives a rally of unthinkable proportions.
The real question we need answered now is whether it really is a bubble or the start of a steady move toward cryptocurrency. Perhaps it’s both.