If last November you had pressed an economist on the life expectancy of the bitcoin, you would have likely heard a variation of the doctor’s worst words: “It’s not looking good.” The bitcoin, a digital currency that operates free from central authority, was furiously shedding value, having lost nearly 95 percent of its spending power in the five months prior. By the time its freefall thudded to a halt around the two-dollar-a-coin mark, many of bitcoins’ biggest supporters had turned their back on the cryptocurrency.
Yet for the past three months, bitcoin has been making a quiet resurgence. As of today, the bitcoin is enjoying its highest value in nearly a year. What happened?
In short, it seems that people are finally learning what the bitcoin is good for. When the virtual currency was released in 2009, there was a good degree of speculation as to how exactly the bitcoin would work as a medium of exchange. What could you purchase with it? Who would accept it? Born from a code designed by an unknown programmer, bitcoins drew the notice of the Internet-savvy who were intrigued by the possibility of the secure, cheap, and—most importantly—anonymous transactions that the digital currency made possible. The problem lay in the fact that there was at first almost nothing people could buy with their bitcoins.
But the much more damaging speculation came in the form of investors, who hoarded the currency in the hope that it would boom amid a surging network of users and fawning from the media. “The bitcoin shot up a year ago because of blog posts and attention, and then there was a bubble,” said Paul Steinbart, a professor of information systems at the W.P. Carey School of Business at Arizona State University who is co-authoring an upcoming paper on bitcoins. “People treated it as an investment.”
Of course, the popping of the bitcoin bubble on June 8, 2011, didn’t put a stop to the speculation. With values so low, almost any change in price had to be in the upward direction, meaning you could follow the mantra and sell high. (Here I will offer a mea culpa: In November, I made a small purchase of bitcoins with no intent on using them as a substitute for the dollar, though as a casual numismatist, I also saw the bitcoin as a natural addition to my modest collection.)
Then, around May of this year, a strange thing happened: The number of daily bitcoin transactions, according to blockchain.info, suddenly doubled, tripled, then quadrupled. Finally, it seemed that denizens of the Internet had begun to appreciate the benefits of bitcoin not only as a get-rich-quick scheme but as a means of transaction.
And some of the primary virtues of the bitcoin turned out to be vice. Indeed, the anonymity that the bitcoin affords its users has been a competitive advantage in the online black market. For many, bitcoins have become a reliable way to pay for porn and gambling without using a credit card, Timothy B. Lee wrote on Ars Technica in June. And for those who want to get their hands on illegal drugs or even weapons, bitcoins have become the way to do so anonymously online.
As the number of bitcoin transactions has steadily increased, so has the currency’s value. In July, the price of a bitcoin crept above nine dollars for the first time since the midpoint of the crash. Is the bitcoin finally showing the feasibility of a digital currency?
It may be too soon to tell. “The big question is whether or not bitcoin is going to stay used only in the dark net or if it’s going to become an alternative to PayPal,” Steinbart said. As the bitcoin makes its comeback, it may also provoke renewed attention from law enforcement as an illegal competitor to the U.S. dollar or as a vehicle for money laundering, especially if it continues to be used predominantly on the Internet’s fringes. Still, Steinbart said, “This is the first time there has been a product that apparently seems to possess the qualities people want.”