U.S.

Two Numbers: Bitcoins From Heaven

12-6-13_NW0244_Bitcoin
12/06/13
In the Magazine
A pile of Bitcoins are shown here after Software engineer Mike Caldwell minted them in his shop on April 26, 2013 in Sandy, Utah. Bitcoin is an experimental digital currency used over the Internet that is gaining in popularity worldwide. (Photo by George Frey/Getty Images) George Frey/Getty Images

Bitcoin Illustration by Juxapo

Bitcoin has made a pretty penny for speculators. Since it first traded on May 21, 2010, the virtual currency has increased more than 400,000 times in value. In the past year alone it jumped from $10 to more than $1,000.

That's not a bubble; that's a Macy's Thanksgiving Day Parade float. While Bitcoin has some attractive features, like the possibility of anonymity and (for now) low transaction fees, it has no intrinsic value. It's still just high-tech monopoly money. While a stock has the future profits of a business behind it, a Bitcoin is just a piece of computer data.

A Bitcoin can be useful as a medium of exchange, digital money, but on that score, too, there are plenty of concerns. Money is not useful if its value changes rapidly. That's why policymakers spend so much time worrying about inflation, deflation and promoting a stable currency. Other than speculators, it's hard to imagine ordinary businesses buying into a newly invented currency with a history of remarkable volatility. Bitcoin inventors have done nothing to address that lack of stability.

But even for speculators, the case for buying Bitcoins is suspect. The company trades on unregulated exchanges, so there's no real way to tell whether you're seeing a fair market price or a manipulated price.

Oh, and a Bitcoin for your thoughts.

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