Just over a year ago, I wrote about the digital “crypto-currency” Bitcoin. It has been an eventful year for Bitcoin.
Designed to provide a secure yet anonymous, decentralised means for making payments online, the first Bitcoins were virtually minted in 2009. By early 2011, Bitcoin had begun to attract attention. Various sites, including the not-for-profit champion of rights online, the Electronic Frontier Foundation (EFF), began accepting Bitcoins as payment. But when Gawker reported that Bitcoins could be used to buy drugs on “underground” website Silk Road, interest in the currency exploded and within a few days, the price of Bitcoins soared to almost $30.
This kind of attention was unwelcome for some, and shortly afterwards EFF announced that they would no longer be accepting Bitcoins, fearing that this would be construed as an endorsement of the now controversial currency. Around the same time, the first major theft of Bitcoins was reported and the Bitcoin exchange rate fell sharply.
Bitcoin Exchange Rate
More recently, another high-profile theft has caused ructions in the Bitcoin economy, prompting e-payments provider and PayPal competitor, Paxum, to abandon the Bitcoin experiment, which in turn forced one of the larger Bitcoin “exchanges” to shut down. The anonymity of Bitcoin is a design feature, but it also makes it almost impossible to trace thieves once they have their virtual hands on Bitcoins.
How much damage this does to the fledgling currency remains to be seen, but it certainly makes for a volatile currency. The free-floating Australian dollar is a reasonably volatile real-world currency but, as is evident in the chart below, Bitcoin volatility is an order of magnitude higher. That in itself is reason enough for any online business to think twice about accepting Bitcoins.
Whatever its future, Bitcoin is a fascinating experiment and, even if it does not survive, digital currencies of one form or another are surely here to stay.
Data sources: Bitcoin charts, Bloomberg.