Bitcoin is the latest alternate currency to crash

 

The history of bogus currency schemes is long and sad

The bursting of the Bitcoin bubble

BITCOIN, briefly the world’s favorite cryptocurrency, is in trouble. It plummeted from a peak of around $33 per unit in June to just $2.51. In May Rick Falkvinge, the founder of the Pirate Party in Sweden, famously blogged that he was converting all of his Swedish-crown savings to Bitcoins. Five months on, he tweeted that after “hoarding” Bitcoins until they hit $18 or so, he had moved to a “buy-and-sell pattern”. Mostly sell, it seems. “I currently don't hold any,” he admitted.

When Bitcoin emerged ex machina in 2009, geeks worldwide immediately embraced the idea of an unregulated currency which is free from meddling governments and relies on seemingly unassailable cryptography to create, trade and use. (Babbage explained the system's technical nitty-gritty in depth in an earlier post.) Yet for all its technological cleverness, Bitcoin’s economic sense has remained far from assured.

For a start, it remains notoriously hard to spend directly; most of the time it has to be converted into dollars, euros, or another real-world currency. In a notorious incident (at least among Bitcoin buffs) in June, James McCarthy, a Briton living in China who goes by the online handle Nefario, was turned away at the airport in Seattle. He was planning to enter the United States to start a Bitcoin-related business with partners in the city. However, he failed to convince American border agents that he had sufficient resources to cover his travels into the United States. The assurance that he had Bitcoins aplenty did not wash with them.

Proponents of the currency point out that Bitcoins can be exchanged in any amount, at a nugatory transaction cost. They also stress that in early 2011 one bitcoin traded for a mere 30 cents. In that respect, it is as easy to use as cash. Bitcoin.it, a website about all things Bitcoin, lists a few hundred businesses that will accept the currency in exchange for actual goods and services. Most are technology-related: web hosting, virtual private networks, or other online services. A handful are not. Green Copy, a small photocopying and print shop in Oakland, California, will take the currency. Only six eateries worldwide (three in New York and three in Germany) appear on Bitcoin.it's list.

It is hard to say for sure why Bitcoin crashed the way it did. One plausible hypothesis holds that the currency's rise was the result of a speculative bubble. As the currency made more headlines around the globe (including in The Economist), less techie types wanted in on the action. Then, like Mr Falkvinge, they decided to cash in, and the bubble burst. 

Those who have remained faithful to Bitcoin claim to be unfazed by such wild market swings. Volatility, they argue, is hardly surprising for a relatively inchoate, newfangled currency, especially against the backdrop of economic turmoil. Bitcoin's stumble was not, then, entirely unanticipated. But it probably wasn't hoped for, either.

 

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