In regular financial markets the value of a country’s currency is a great marker for how well it’s doing in economic terms. The surge in value of the Australian currency over the past 2 years demonstrates how strong our economy was in comparison to the rest of the world, mostly thanks to our strong capitalization of our banks couple with some pocket change from the mining and resources boom. However there’s one particular exchange rate where the value of the currency is actually irrelevant to the strength of the underlying economy and a high trading price actually signals that there’s something going horribly wrong. The economy I’m referring to is the one of the online cryptocurrency BitCoin.
Long time readers will know that I was very skeptical about the idea at first as it harked back to the days of other online currencies that were ripe for exploitation and all of which inevitably fell down, sometimes with catastrophic consequences. My concerns were mainly centred around the immense amount of wealth that that was concentrated in the hands of the early adopters but over time it shifted to the crazy exchange rates that BitCoins were attracting which inevitably lead to the price crash that happened in the middle of last year. Since then I’ve been more bullish on the idea of BitCoins because the price has remained steady whilst transaction volumes have started to rise, showing that BitCoins can actually function as a proper currency and not a speculative investment vehicle.
However over the last month or so BitCoin’s exchange rate has been creeping up steadily and the last week alone has seen massive gains in the current trading price:
As you can see for the past 6 months or so the price of BitCoins has been relatively steady, trading at around $5 for a good length of time. However just over a month ago the value started to slowly tick upwards and the last two weeks have seen that value explode in some rapid gains, culminating in a massive jump of almost 20% in under a week. Whilst it’s nothing like the speculative bubble of last year it does raise concerns that the stability of the BitCoin currency was short lived and the speculators have come back to the market looking to derive some more short term gains from the market they successfully pillaged last year.
Increases like this remind us of the unfortunate fact that at its current size the BitCoin market is still volatile as there are strong correlations between large transaction volumes and huge swings in the exchange rate. This is not a desirable attribute for a currency and is much more amenable to speculative trading, something which has burned BitCoin users in the past. Indeed a rising BitCoin value should cause a rational actor to hold off using is as a currency as they would instead want to hold onto them for as long as possible in order to extract the maximum amount of gain out of them. Such thinking is what lead to the BitCoin price to reach such dizzying heights last year and this last bump in the price has the potential to do it all over again.
For BitCoin’s sake I hope this isn’t the case as there are many innovative companies betting their core business on the BitCoin idea and a volatile market could easily spell the end for them. It’s quite possible that these latest bumps are just blips on the radar but the steady rise over the last month or so really has me worried about a repeat of the speculative bubble that happened last year. Can the BitCoin market correct for this kind of behaviour? Will passionate BitCoiners get roped back into the idea that their BitCoins are investment and not a wealth transfer vehicle? I don’t have straight answers to these questions but the next couple months will show if the BitCoin market can learn from the mistakes of its past and hopefully overcome them to become the real virtual currency it has always strived to be.