There seems to be a prevailing idea that the price of BitCoins is somehow intrinsically linked to the overall confidence in the use of the nascent cryptocurrency. If you’ve read any of my previous articles on BitCoin you’ll know that I strongly believe that that isn’t the case and indeed a rising price is usually a signal of speculative investors gaming the market to turn a quick profit more than it being an indication of market confidence. Indeed I was most bullish on the idea of BitCoin when its price stop fluctuating which meant it was far less risky for people to use it as a wealth transfer vehicle, especially for those who are taking the risk of using them in their business.
Now I’ll be completely honest here, when I saw the first stirrings of an upward tick in BitCoin’s price I wasn’t too worried that it would lead to a speculative bubble. Sure it was dangerously close to the same ramp up just a year previous but I felt that the higher transaction volume, larger amount of wealth contained in the BitCoin network and hopefully the market’s long term memory would ensure that any growth in the price was purely organic and sustainable. Of course this discounted external actors with larger amounts of capital working to skew the market in order to turn a profit but I felt that the speculators had had their fun last year and had moved onto other, more lucrative endeavours.
Looks like I was wrong.
As you can see from the above graph the BitCoin price took a turn for the volatile side around the middle of July. Since then there’s been several spikes in trading volume most of which have coincided with a jump in the price. Whilst there appears to be islands of stability that last about a week it never lasted long before another trading bout would push the price upwards. This culminated in a peak price of about $14 late last week quickly followed by a swift downward correction in price with it stabilizing around the $10 mark. As I’ve said before this kind of price volatility is very much at odds with BitCoin being a proper currency and it’s unfortunate to see history repeating itself here again.
Interestingly though the correction in price may actually be due to dwindling confidence, but not in the BitCoin idea itself. The first lawsuit involving BitCoins and the failed wallet service Bitcoinica was lodged just days prior to the value taking a swift nose dive. This was most likely exacerbated by people attempting to cash out at the current peak as you can see the transaction volume on that day was several times higher than the average for the preceding couple of months. Bitcoinica, unfortunately, isn’t the only story of BitCoin based services that have endured failure and this could have very easily shaken the market enough to attempt to dump out early to avoid losing all their value.
The underlying cause to much of the volatility that the BitCoin market experiences is the relatively small amount of value that it captures. Whilst as a whole the BitCoin market is valued at some $97 million (total number of BitCoins in existence multiplied by current price) the total transaction volume on any given day usually only averages $800,000. That’s incredibly open to manipulation and showcases just how crazy those peak trading days, the ones where the value changing hands is on the order of 3 times the average, really are.
Now I don’t pretend to have a solution to this but a new startup called BitInstant might have the right idea when it comes to injecting more value into the market and hence (hopefully) reducing its volatility.
BitInstant is a clever little idea using prepaid MasterCard debit cards which are then backed with either real US currency or BitCoins. The cards can be recharged either by traditional means or by using a BitCoin address that’s printed on the back of the card. They make this even easier by also including a QR code on the back which would enable users to transfer BitCoins between them using things like BitCoin enabled apps on their smart phones. The details on it are still being finalized but this has the potential to take BitCoins from their current niche operations to a much larger scale and hopefully with that bring a lot more stability to the BitCoin price.
BitCoin purists will probably detest the cards since they will require some level of formal identification for them to be able to use it, thus eliminating the benefits of anonymity, but I don’t believe BitInstant’s product is aimed at them. Indeed it seems to be more of a way to make BitCoin function more like a traditional currency as currently it really is only for the technical elite or those who have a need to transfer funds in a completely untraceable manner. Giving people a physical card they can use anywhere will go a long way to making BitCoins much more palatable for the masses, something that all the current BitCoin services I feel have failed to do.
BitInstant is just one piece in the larger puzzle though and realistically its going to take many, many BitCoin enabled services to make it viable as a currency. Good news is that appears to be happening with BitInstant being just the latest contender to throw their hat into the BitCoin ring. Hopefully this means that the peaks and troughs in BitCoin’s trading price will soon be a lot more tame and then I’ll stop harping on about how BitCoin’s price is the last thing we should be thinking about if we’re serious about it being a currency.