Bitcoin Stability

Bitcoin has been remarkably unstable of late. From highs around $250 to a sudden crash nearing $60 (Mt. Gox, the virtual currency’s biggest exchange, claimed it was due to the services being overloaded by demand), Bitcoin has had analysts and potential investors scratching their heads.

However, Bitcoin has achieved a significant resurgence and return to stability in the time since. Today it was hovering between $115 and $120, and lately it’s stayed below $140.

For most things, that’d be a rather large range. However, in light of how much fluctuation Bitcoin has gone through just a short while ago, champions of the virtual currency should be pleased.

It remains to be seen whether this current period of stability can translate into further consolidation and expansion, of course.

Bitcoin, as you probably know, is purely virtual—that makes it a particularly convenient mode of payment that can be completed online between two parties via encrypted networks.

At least one person sees this “period of shift” as a necessary evil. As I mentioned earlier, Bitcoin has gone through periods of volatility and stability in alternation. And Jered Kenna, CEO of the Tradehill Bitcoin exchange (located in San Francisco), thinks that the instability is actually a function of increasing popular interest in Bitcoin.

Here’s how his logic unfolds.

Bitcoin’s Necessary Volatility

Until recently, Bitcoin was seen as a fairly exotic experiment of sorts. People were investing in it, true, but only in limited amounts.

Gradually—and recent world events such as the banking crisis in Cyprus helped out—mass interest accumulated. That translated into greater amounts of capital pouring into Bitcoin. As more and more people invest in Bitcoin, its value keeps shooting higher.

However, nearly all currencies in the world are backed by governments. The dollar, for example, is backed by the U.S. government. But Bitcoin isn’t; there is no central regulatory agency, meaning the Bitcoin exchange market simply is unchecked for the present.

Hence why we’re seeing rampant fluctuations. Bitcoin is basically acting just like a publicly traded stock.

The way Bitcoin works is pretty interesting and is generating ever-greater amounts of interest. Prospective buyers link up their actual bank accounts to an exchange service—say, Mt. Gox—where currency can be exchanged for Bitcoin (and vice versa).

The process of “generating” Bitcoins involves a digital mining process wherein computers basically solve complex algorithms. This takes time. Right now, it takes about 3 years of real time to mine just 25 Bitcoins. That’s worth around $4,000 today.

This explains why many buyers simply end up holding onto to the Bitcoins they buy. Because they’re so scarce, buyers are justified in thinking their value will appreciate in time to come.

But if this future interest doesn’t seem to materialize, buyers may well panic, resulting in massive dumps (and corresponding crashes in pricing).

According to Kenna, therefore, such a cycle (or even cycles) of interest-accumulation and resultant buying, and bubble-bursts and resultant sell-offs, is necessary if Bitcoin is to become any more than just an asset. Once Bitcoin becomes “big” enough to hold its own as a valid means of buying and selling goods and services, it can command greater stability and move away from the cycle of bubbles.

Wider Acceptance of Bitcoin

Signs are afoot that this wider acceptance may in fact already be underway. Consider the Bitcoin ATM, for example.

Use it to scan a QR code on your cellphone, insert actual currency, and the ATM converts to Bitcoin equivalent and sends it to the account (information for which it gleaned from your cellphone).

The makers of this device, Lamassu, claim it is the first of its kind in the world. That may well be the case. Pre-orders are expected this June, and the device costs around $5,000.

Wholesalers can avail discounts. This device takes banks out of the equation, which means greater efficiency and transparency. 

If you liked this article, you may also enjoy:

• Max Keiser on Bitcoins
• Bitcoins: the Ultimate Safe Haven