Why a Bitcoin rally isn't good news for Bitcoin

(Source: Bitcoin Charts)

Last night Bitcoin rallied to hit a new record of $145. Great news if you're a holder of Bitcoin, but perhaps not great news for the currency. Paul Krugman explained why back in 2011:

What that means is that if you measure prices in Bitcoins, they have plunged; the Bitcoin economy has in effect experienced massive deflation.

And because of that, there has been an incentive to hoard the virtual currency rather than spending it. The actual value of transactions in Bitcoins has fallen rather than rising. In effect, real gross Bitcoin product has fallen sharply.

(The New York Times)