Sorry, Bitcoin Isn’t a ‘Currency’

Dollars Cents and Bitcoins

Photographer: Stephen Hilger/Bloomberg News.

Unlike Bitcoins, real currency can be used to buy stuff.

The most recent permutation of the euro crisis seems to have enlivened a renewed interest in Bitcoin, the artificial “currency.” Since Monday, the value of a single Bitcoin has shot up to $72.50, a gain of more than 50 percent.  Businessweek‘s Bernhard Warner reports on the surge in Bitcoin interest as Europeans wonder if their money is safe in the wake of the Cyprus deposit tax fiasco.

One place where it’s not safe is in Bitcoin. Bitcoin is generally referred to as a “digital currency” or “virtual currency,” a form of cash that doesn’t need government backing. Unfortunately  it’s missing the most essential aspect of money: it’s not useful for buying anything. Bitcoin’s rise as a tool for financial speculation underlines the failure of the virtual currency idea.

The original pitch for Bitcoin was that it could be used for real-world transactions. In practice, it seems to have seen minimal use outside of the tiny Silk Road marketplace, largely devoted to illegal drugs. In the last two months, the value of Bitcoins has more than tripled (see the chart below). If you like you can download all the encryption software needed to access Silk Road to your computer and try to figure out if that’s the result of some new flood of activity.

I won’t bother, because I’m pretty sure that by far the main use of Bitcoins is trading them back and forth and converting them into dollars or euros. If you have done that recently, congratulations, you may have made a lot of money. Keep doing it and you could get richer still (take note, withdrawing your money is not an instant process) — or you may lose a lot of money in the future. You might go to the daily data at Bitcoincharts.com, look at the five day chart and see how prices have spiked on just a few high-volume trades.

That times of economic turmoil lead to a surge of gambling and cons and shoot-the-moon investments isn’t a surprise; think of Eastern Europe in the 1990s. That some of those, like Bitcoin, spiral upward isn’t evidence that we should dump our current monetary systems. On the contrary, it’s evidence of how hard it is to make a real currency work.

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