For anyone who’s fascinated by investment fads, bitcoin has been one for the ages.
It has no intrinsic value, and yet it rose nearly 90-fold last year, inviting comparisons to Dutch tulip bulbs and dot-com stocks. Now it’s down by 50 percent after a series of blows, including last week’s failure of a major bitcoin exchange.
Yet it’s too soon to declare bitcoin a failure. Fans still claim it can catch on as a virtual currency that’s widely accepted as payment for goods and services. Even skeptics concede that it might have a place in the financial markets of the future.
“I have my doubts that it could be a good currency,” says David Andolfatto, a St. Louis Federal Reserve Bank economist who’s hosting a public discussion on bitcoin later this month, “but I can see some modest value if a growing number of merchants start accepting bitcoin.”
Of course, bitcoin could also go the way of Pets.com or Semper Augustus, the most prized tulip bulb in the 17th century. That’s why the collapse of Mt. Gox, once the largest exchange for converting bitcoin to other currencies, poses a big test. The Tokyo-based exchange filed bankruptcy last week amid reports that more than $400 million worth of bitcoins had gone missing.
The world of virtual currencies already seemed like a dark and secretive place to most people. Bitcoin was used by Silk Road, an illicit drug trading site that authorities shut down last year. Apple has banned bitcoin-related apps from its App Store, apparently out of concern over the currency’s legal status.
Now, on top of those problems, we have the disappearance of about 6 percent of all the bitcoins in the world. Could that be enough to send bitcoin’s price spiraling toward zero? Andolfatto doesn’t think so.
“It’s like a bank robber going to the Bank of America and stealing all the money in the vault,” he said. “You don’t lose faith in the U.S. dollar just because somebody stole it.”
Vance Crowe, who owns the Articulate Ventures communications firm in University City, still has faith in bitcoin. He accepted $3,000 worth from a client last November and still holds some of the virtual currency.
“The way I look at it, this is a sad but important step for bitcoin,” he said. “Maybe it will make the bitcoin system stronger.” He pointed out that bitcoin’s underlying software — a shared ledger system that keeps track of all transactions — hasn’t been implicated in the Mt. Gox failure.
Kevin LaFata, who runs software firm High Orbit in Fenton, has advertised that he’ll accept bitcoin. No one has paid him that way yet, but he thinks some foreign clients could reduce transaction costs by using the virtual currency.
LaFata isn’t deterred by the Mt. Gox collapse, either. “It’s probably a good thing if somebody who had a bad reputation is finally getting out of the game,” he says.
With the support of true believers like Crowe and LaFata, bitcoin should be able to survive. Its volatility, though, will probably consign it to the fringes of finance.
“Bitcoins are not going to be very good money because their purchasing power is going to fluctuate wildly,” Andolfatto said. “If you got paid in bitcoins and then you discovered your paycheck would buy just half as much bread as the one before, it would be really frustrating.”
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