Bitcoin Blows Up, Exchange Rate Jumps Ten-Fold in Recent Weeks

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Are we witnessing the birth pangs of a new decentralized global currency? Or is Bitcoin merely an age-old investment mania repackaged for the digital age?

Recent headlines are humming over the booming digital currency Bitcoin—it’s either the next big thing or the digital equivalent of Tulipomania. Either way, there’s no debating the fact Bitcoin’s on a wild ride.

Bitcoin dates back to 2009, but it was the 2011 Bitcoin bubble that brought the cryptocurrency mainstream. The USD/Bitcoin exchange rate jumped from $1 to $30 (+2900%) and plunged back to $2 (-93%) in a matter of months. Press coverage was equally bubblicious, a rash of articles praising then panning it. Bitcoin followed a more orderly path to a market price between $5 and $10 in 2012. Then in early 2013, the madness began again.

Since January, the market's been on a rocket ride. Due perhaps to cycling euro worries, most recently regarding frozen Cypriot bank accounts, Bitcoin is brushing the giddy heights of $235 on the biggest Bitcoin exchange, Mt. Gox. If the richest Bitcoin baron (according to this 2012 Forbes article) cashed in their computerized currency for dollars, they'd rake in $103 million. (As this article was drafted, that number shot up $30 million!)

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Bitcoin market price in USD as of 4/9/2013. Source: Blockchain

What exactly are Bitcoins? The cryptocurrency is comprised of digitally created and traded financial units. Users can install Bitcoin mining software—thus dedicating a set quantity of processing power to the creation of Bitcoins—or they can buy units with major currencies. The Bitcoin money supply is set to expand at a consistent rate, constrained by processing power, until the year 2040, when it will reach a pre-determined limit of 21 million Bitcoins. (For the finer points, check out our previous coverage here.)

A little perspective is key. Despite the outsized media coverage, the Bitcoin market is miniscule compared to most major currencies. The market for USD alone is worth trillions. Bitcoin, even after the recent boom, is but $2 billion—and just a few months ago, the market was less than a tenth of that.

Bitcoin’s diminutive size contributes directly to its massive volatility, which is problematic for a medium of exchange. If folks don’t know how much bread or beer their cash will buy tomorrow, they'll dump the currency for something more stable. Volatility’s done away with a number of major currencies in the modern era—hyperinflation in the post-World War I Weimar Republic or more recently in Zimbabwe, for example.

SH 93_#4In the case of Bitcoin, the volatility is currently in the upward direction—the currency is getting stronger. But it’s shown itself equally capable of moving  the opposite way. Those extreme swings make Bitcoin more of a speculative investment than a useful medium of exchange for now. (Bitcoin’s recent behavior is characteristic of a classic investment bubble—with some people rationalizing an irrational market and others cashing out for Porsches.)

As for whether Bitcoin will one day become a full-fledged currency, there’s no particular reason it couldn’t. What makes a currency a currency is that those trading it have confidence in its value as a medium of exchange and therefore continue using it. Humans have used cows, shells, even pieces of paper as money.

But building confidence is itself a complicated algorithm, and the crowd a fickle thing. Money is an already arcane subject, and a decentralized, digital currency may find enduring confidence elusive—proving itself particularly prone to cycling panics, as the crowd becomes suddenly, terribly aware of just how esoteric, unfathomable, and wild the system has become.

Will the cryptocurrency survive these Bitcoin booms and busts? Maybe, maybe not. The volatility may diminish as the market grows in size and liquidity. But maybe Bitcoin's greatest value is its use as a case study for future currencies that rely less on the all too human judgment of central banking’s philosopher kings.

Regardless, if recent history is a guide, it’ll be an entertaining outing as Bitcoin gives birth to fortunes and failures, buys homes and cars, gets hacked, manipulated, regulated—and generally evolves at a frenzied pace worthy of the digital age.

Image Credit: Steve Jurvetson/Flickr, Glen Cooper/Flickr

Jason Dorrier

Jason is managing editor of Singularity Hub. He cut his teeth doing research and writing about finance and economics before moving on to science, technology, and the future. He is curious about pretty much everything, and sad he'll only ever know a tiny fraction of it all.

Discussion — 19 Responses

  • Improbus Liber April 9, 2013 on 10:13 am

    I dunno, that looks like a bubble to me. I’ll grab some Bitcoins after the next crash. Do they have a trading desk for Bitcoins?

  • Bryan Palencia April 9, 2013 on 1:55 pm

    I think that the reason for the extreme jump in price may be the extreme difficulty in obtaining a bitcoin.

    • Sharon Lank Bryan Palencia April 9, 2013 on 5:34 pm

      Cyprus inspired biz journalists to postulate how citizens could have avoided tax confiscation had their currency been extra-governmental, bringing it to the attention of millions of business-minded people. BitCoin cannot be confiscated by anyone. It can’t be regulated by anyone. The demand for such a currency increased while the supply can only be increased by mining, a slow and expensive process, so the price of existing coin goes up. Way up.

  • thadster April 9, 2013 on 2:09 pm

    It’s likely a supply demand problem. There is only so much value to be had, and Bitcoins are a great way to move money around without a lot of attention from other governments/currencies, so it’s a good tool for capital flight. There’s a real risk to having a currency not backed by sovereignty, and price volatility is built into the mix because supply is fixed and demand is not.

    I agree it’s a good test of the future of money, but it isn’t the future of money.

    • Sharon Lank thadster April 9, 2013 on 5:38 pm

      It isn’t the future of money so long as people believe their government, in whatever country they live, knows what is best for them, and will never act against their citizen’s best interests for their own personal gain.

      It just might be the future.

      • Recovering_Human Sharon Lank April 9, 2013 on 9:11 pm

        I don’t think most people use a given national currency because they think the issuing government knows what’s best for them. It’s just that money that’s backed by something, be it gold or guns, will always be more stable and more useful as actual currency. Bitcoin’s value has always been volatile, which is great for speculators, but not so great for Bitcoin’s original purported purpose.

  • benbradley April 9, 2013 on 3:55 pm

    The article says:

    “If the richest Bitcoin baron (according to this 2012 Forbes article) cashed in their computerized currency for dollars, they’d rake in $103 million. (As this article was drafted, that number shot up $30 million!)”

    What does this actually mean? The change from $103 million to $30 million is a substantial DECREASE, but the wording suggests it is an INCREASE. There must be some mistake here. Perhaps the last million should be billion, but that would go against the statement that the total Bitcoin value is $2 billion.

  • Christian Kleineidam April 9, 2013 on 4:29 pm

    If the richest Bitcoin baron (according to this 2012 Forbes article) cashed in their computerized currency for dollars, they’d rake in $103 million.”

    That’s bullshit. There’s no $100 million at mtgox waiting to buy Bitcoins at the present price.

    There are some arguments to think that Bitcoin’s are worth more than they were at the beginning of the year but it’s not clear that the total amount of Bitcoin’s should really be worth 2 billion.

    • Sharon Lank Christian Kleineidam April 9, 2013 on 5:56 pm

      Apply that same logic to Facebook’s market value. When Wall Street takes X company public, selling 10% of shares for $1 billion, market value of X company is $10 billion. There isn’t $10 billion sitting around waiting to scoop up the other 90%, it’s just a market value.

      Zuckerberg could sell all his shares, but it wouldn’t be easy and would drive down the price. Same for BitCoin.

      BitCoin does fit the singularity philosophy. Wonder why there’s such pushback here…

      • Bryan Palencia Sharon Lank April 9, 2013 on 6:14 pm

        It does fit the singularity philosophy, that I’ll admit. But whether it ends up being something good, only time will tell. Just because something is about the singularity doesn’t automatically make it good. Or even popular in the long term.

  • dobermanmacleod April 9, 2013 on 9:30 pm

    The question of the conception of currency is too hard for most people to grasp. I’ve found that an audio clip from the audio book “Atlas Shrugged” where Francisco d’Anconia expounds on the idea that money is the root of all evil. Money is simply a medium that enables the trading of goods and services.

    Furthermore, many people have a hard time swallowing the Federal Reserve setup, where a private corporation has complete control of the US money supply. Bitcoin is just another wrinkle, where the “e-currency” enables commerce to take place, and the currency takes on a weird value of it’s own, rather than as a means to an end.

  • why06 April 10, 2013 on 4:49 am

    So it’s being used like a tool for tax evasion… great :C

  • JaneFox April 10, 2013 on 5:37 am

    The price was $30 at the end of february, now I see it at $263

  • Mark Tey April 10, 2013 on 6:01 am

    Buying Bitcoins in the UK, directly without intermediators on ebay or other pages (with huges fees) is very difficult , I made this guide with a simple process:

  • Tight Transport April 10, 2013 on 12:21 pm

    Litecoins will follow Bitcoin in rise. Get into a Bitcoin fund like GBBG.

  • Dave Posh April 10, 2013 on 3:36 pm

    Bitcoin now crashing (4/10/2013). Down 50% so far.

    BitCoin Down 50% In Massive Sell Off: Over $1 Billion Vaporized In a Few Hours

    Also here (live graphs):

  • Jeff Call April 11, 2013 on 10:47 am

    Bit coins should consider buying gold and using the old gold standard to back up their currency. Right now its fiat currency that has zero backing. At least the dollar has an entire corrupt system behind it.