Image Source: Business Insider.
One globe, one currency? The Bitcoin - an online unit of exchange comprising a collection of numbers in a cyber-wallet - has exploded in value as speculators rush to buy the supranational virtual currency. They are buoyed by a widely-reported October 2013 investment success story and the simultaneous closure of the Bitcoin-loving online black market, The Silk Road. From The Guardian:
Kristoffer Koch invested 150 kroner ($26.60) in 5,000 bitcoins in 2009, after discovering them during the course of writing a thesis on encryption. He promptly forgot about them until widespread media coverage of the anonymous, decentralised, peer-to-peer digital currency in April 2013 jogged his memory.
Bitcoins are stored in encrypted wallets secured with a private key, something Koch had forgotten. After eventually working out what the password could be, Koch got a pleasant surprise:
"It said I had 5,000 bitcoins in there. Measuring that in today's rates it's about NOK5m ($886,000)," Koch told NRK.In April 2013, the value of bitcoin peaked at $266 before crashing to a low of $50 soon after. Since then, bitcoin has seen large fluctuations in its value, most recently following the seizure of online drugs marketplace Silk Road, plummeting before jumping $30 in one day to a high of $197 in October. ...Typically bitcoins are bought using traditional currency from a bitcoin "exchanger", although due to strict anti-money laundering controls, the process can can be tricky. A user can then withdraw those bitcoins by sending them back to an exchanger like Mt Gox, the best known bitcoin exchange, in return for cash.
However, bitcoin is gaining more and more traction within the physical world too. It is now possible to actually spend bitcoins without exchanging them for traditional currency first in a few British pubs, including the Pembury Tavern in Hackney, London, for instance. On 29 October, the world's first bitcoin ATM also went online in Vancouver, Canada, which scans a user's palm before letting them buy or sell bitcoins for cash. ... In August, Germany recognised bitcoin as a "unit of account", allowing the country to tax users or creators of the digital currency.
- World's first Bitcoin ATM opens in Vancouver, CBC (29 October 2013)
- Bitcoin entrepreneurs want to put virtual coins in your wallet, The Toronto Star (12 November 2013)
- Bitcoin accepted as payment for $1 million Canadian home, IB Times (4 December 2013)
- Greenspan says Bitcoin a bubble without intrinsic currency value, Bloomberg (4 December 2013)
- Greenspan baffled over Bitcoin 'bubble': "To be worth something, it must be backed by something" Zero Hedge (4 December 2013)
- Bitcoin $10,000? Forbes (4 December 2013)
- Bitcoins crash after China says they're not real currency, Softpedia (7 December 2013)
- Korea decides not to recognize Bitcoin as real currency, Korea Herald (10 December 2013)
- Time to take the Bitcoin bubble seriously, FT (11 December 2013)
- Bitcoin and intrinsic value: A layman's response to Alan Greenspan, CoinDesk (11 December 2013)
- Are gold, art and Bitcoin worth your money in 2014? Forbes (11 December 2013)
- Bitcoin should not be seen as a currency - Ernst and Young, Guardian (11 December 2013)
"Waves Coffee House is one of at least 20 businesses in Vancouver [Canada] that currently accept bitcoins." Image Source: CBC.
Despite the warnings, speculation has driven the price of 1 Bitcoin to a value of between USD $600 and USD $1,000. See CoinDesk's Bitcoin price index, here. But for speculators, the time to buy Bitcoins should have been between 2009 and 2012, when they were worth a few dollars.
Two cultural spheres are appearing around these financial activities: the first is the older financial world we know well, which is only partly virtual, but theoretically still grounded in reality; and the second is the Millennial, completely virtual world. Bitcoins diverge radically from the stable currencies associated with the nation-state establishment and the whole economic and governmental order built around that establishment. The new virtual currencies are completely surreal and chaotic, like a bad dream in a dystopian sci-fi novel. Welcome to what designers of the movie Aeon Flux called, the "burning garbage can vision of the future." Bitcoins are traded by iPhones in coffee shops and pubs, or in online chatrooms, rather than banks. The exchanges are vulnerable to hackers and theft. The currency also suffers from price fragmentation; that is, it varies in price on different online exchanges in the world. In this regard, Bitcoins differ from major national currencies; from CoinDesk:
The US dollar and other major national currencies effectively trade at the same price, regardless of whether they are exchanged in Tokyo, London, New York, or any other major foreign exchange market. ... The reason for the near-perfect price synchronization we see in major currencies like the US dollar relates to an economic concept known as the ‘law of one price’.
Put simply, this concept means that prices for fungible, freely-traded items like currency should be equal across all open markets.
If we were to observe any material, persistent price variation between US dollars exchanged in Tokyo versus those exchanged in London, then this would be due to the existence of some cost or barrier – like variations in transaction fees, the speed at which information can travel, transportation expenses, or restrictions to the flow of funds. However, we do not observe any such variance, due to the very low frictions across the major forex markets.
In contrast to the forex markets for major currencies like the US Dollar, at any given moment the bitcoin exchange rate can vary by tens or hundreds of dollars from one exchange to the next.
For example, approximately a week before bitcoin first crossed the $1,000 mark on Mt. Gox, the price of bitcoin had already reached the renminbi equivalent of $1,000 on China’s largest exchange, BTC China.
Following the recent announcement by Chinese authorities that banks would no longer be able to transact with bitcoin (which, in turn, triggered Baidu’s decision to suspend its acceptance of bitcoin), the price on 5th December as of 08:30 GMT had plummeted in China by a renminbi equivalent of approximately $177 more than prices on exchanges located outside of China ... .
Should the bitcoin market continue to grow in the months and years ahead, it would be reasonable to expect a decline in price fragmentation across the various exchanges as trading volume and liquidity increase.
For the time being, however, relatively illiquid markets alongside the barriers which have been erected around and between the various bitcoin exchanges will continue to drive price fragmentation.
Image Source: Guardian.
See all my posts on Cryptocurrencies.