Bitcoin has traveled from Internet backwaters to the ocean of the mainstream. The digital currency’s value has skyrocketed as its visibility and popularity have fueled speculators. Wall Street traders, specifically hedge fund investors and other high-risk commodity managers, have begun to build up positions in the cryptocurrency. But according to economist David Yermack, Bitcoin doesn’t behave like currency at all, but rather speculative investments, ala “Internet stocks of the late 90s.”
Tell that to the growing number of Bitcoin holders who, up until recently, have used the virtual currency primarily online. Now it seems that Bitcoin is making the leap from the virtual domain to streets around the world. And just like it does online, Bitcoin transcends borders offline. Merchants in the U.S., England, Germany, Spain, Russia, and beyond now take payment in Bitcoin for everything from burgers off a street cart to luxury Tesla vehicles. One real estate brokerage in NYC is even accepting the cryptocash for premium pre-war terra firma in the Upper East Side. (One website, CoinMap, shows vendors in the real world that accept the cryptocurrency.)
The decentralized, unregulated cryptocurrency has always been a concern to law enforcement, as it is easy to make purchases through online black markets, as was the case with the recently-raided Silk Road network. But the move offline, and the expansion of currency exchanges which allow Bitcoin holders to turn the virtual stuff into real-world currencies, has drawn concern from governments around the world. The extreme volatility and susceptibility to value manipulation (via “pump and dump” schemes common to penny stocks) raise red flags.
China recently ruled Bitcoins could not be converted to local currency, a move that slashed almost a third of the currency’s value in a single day. Wider acceptance of the currency has revived some of that value, especially when Zynga announced they would begin accepting it for in-game purchases. Exchange collapse is a major concern for the European Banking Authority, who recently issued warnings about theft and the absence of chargebacks and other consumer protections.
The lack of transaction fees and rapid processing make it appealing to merchants willing to tolerate the risks. The long-term viability will depend, in part, on steps financial regulators take. While the future of Bitcoin is uncertain, its rising profile is something to watch in the year ahead.