ast week, Bitcoin prices catapulted from around $200 to over $350. That made the digital currency’s total purchasing power an incredible $3.2 billion — all generated from nothing but people’s desire to participate in a new, intangible system. And now, some major offline chains like Subway are beginning to join online-only businesses like Reddit, WordPress, and Amazon in accepting the digital currency.
But Bitcoin has many skeptics.
Joe Weisenthal of Business Insider wrote last week that Bitcoin is a “currency for clowns,” claiming it has no intrinsic value, unlike state-backed currencies. Column after column after column aftercolumn call Bitcoin a bubble that is going to burst. And indeed, while Bitcoin is one of the most fascinating economic and social developments of our time, it is hard to see it as a successful monetary system at present.
Money has three functions: A medium of exchange, a stable unit of account, and a store of purchasing power. While Bitcoin is beginning to achieve a wider acceptance with merchants as a medium of exchange, its extreme volatility in price means that it cannot really be seen as a stable unit of account or store of purchasing power. Its price fluctuations are far too drastic:
Bitcoin appears to be behaving as a speculative vehicle — less like a currency and more like an early stage technology stock. Speculators are buying into a novel piece of technology in the hope that it will become the next big thing. Whether Bitcoin rapidly goes bust like the dotcom failures Webvan or Pets.com, or whether it grows into a behemoth like Google, Amazon, or yes, Paypal, remains to be seen.
But if it were actually used as a piece of useful technology, than it might have a better shot at sticking around. Let me explain.
There are three main threats to Bitcoin at present: