Do you remember Bitcoin?

(Source: Bitcoin Charts)

Bitcoin was a bubble that gripped many journalist eyes at the start of the month as its rise seemed to be parabolic. Sold as an alternative to currencies controlled by politicians, that couldn't be traced and couldn't be taxed, what was described as a high-tech replacement for paper money would eventually fall within weeks.

While many suggested that the price rise was driven by trouble in Cyprus, and that people were looking for alternative currencies as political control over money looks to backfire, we noted that the rise in Bitcoin's price was closely knitted to the media and search interest in the currency. When that bubble deflated, the fall in media interest was similarly stark. Yet now the currency has bounced back somewhat.

Could the original hypothesis about Bitcoin's peak be accurate, and were some investors looking for a safe haven? Detlev Schlichter believes that gold is the natural investment for those worried about central bank manipulations of money supply, but his arguments also hold for Bitcoin (which can be seen as a replacement for gold in a digital age):

The only questions that really matter are: has the direction of global monetary policy fundamentally changed, or is it about to change? And are quantitative easing and super-low interest rates about to come to an end?

The reason I own gold is not its chart pattern, but the diagnosis that the global fiat money economy has check-mated itself. After 40 years of relentless paper money expansion, dislocations in the system are so massive that nobody dares allow market forces to do their work – to price credit and risk according to available real savings, and the potential for real income generation, rather than according to the wishes of monetary central planners.

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Central bankers are now enjoying a sweet spot, where their machinations boost equities sufficiently, but don’t yet affect inflation readings and don’t upset the bond market. This policy is not balancing the system. It is marginally adding to long-term problems. It feels good for now. But it won’t last.

(Full article)

(Source: Bitcoin Charts)

The chart above illustrates that the collapse in Bitcoin certainly hasn't been as devastating as anticipated. While the crash was steep, the cryptocurrency is still worth several multiples of what it was six months ago. It may be that Bitcoin's time hasn't yet come, a radically new currency may require other similar radical developments in other technologies. Without widely available personal computers, the internet would never have been as useful a development as it has been. While it may be too early for cryptocurrencies now, that doesn't mean that human ingenuity can not develop more useful alternative currencies in the future. Marc Sidwell writes on the implications of what such technology could achieve:

Like so many aspects of our digital economy, Bitcoin is a network that depends for its success upon scale. When only one person owns Bitcoins and is willing to exchange them for goods and services, they are useless. But every extra person who agrees to own and exchange Bitcoins adds to the value of that network.

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Bitcoin is an imperfect example. Its economy owes much to hoarding and speculation. Still it reminds us that we live in an age where the value of connection is paramount. Digital innovation is disrupting our lives, challenging even national currencies. Yet we do not stop to think about what this really means.

(Full article)