Bitcoin – an Experiment hopes for its Network

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Since the Bitcoin exchange rate on Mt.Gox fell rapidly during the last days, one could observe a certain satisfaction among analysts. ‘Schadenfreude’ you would call it in German. This impression implies a relief of those observers who were as insecure about the currencies’ functionalities in detail as they were sceptical towards its future success. Particularly the technical side of Bitcoin turns out to be a challenge for thoroughly understanding its mode of operation ‒ at least it has been staged as such in several media. The wild fluctuations in its exchange rate have been argumentatively used as a confirmation that the concept of a digital currency, independent from intermediaries, is far too risky and dysfunctional. However, this assessment appears to me mainly undergirded by a discontent in digital culture ‒ which is also indicated by a recent ‘mystification’ of the virtual currency.

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To give an example, Izabella Kaminska reassures the readers of her article “When memory becomes money” casually: “Unless you are a computer geek, an MIT grad or an algorithmic genius, it’s unlikely you will ever really understand (we speak for ourselves)”. The German newspaper F.A.Z. evaluated the falling exchange rate patronisingly:  “(…) 60 Dollars. Even that is a lot for a purely virtual currency which only consists in bits and bytes and is not backed up by anything else, but its users’ trust” (quote translated). Meanwhile Spiegel online (and other media) declared Bitcoin to be a “Hacker-Currency”, and Heise-news casted “(…) doubts on the partially euphoric valuation of the virtual currency” (quote translated). There was talk of “Fool’s Gold” and Handelsblatt headlined this morning: “Popped like a soap bubble” (translated).

The considerable price fluctuations however do not come as a surprise in this phase of the currency’s proceeding establishment. They are associated with the highly speculative character of the developing Bitcoin-market. Gavin Andresen, co-developer of Bitcoin, already predicted a similar scenario in July 2010:

“Bitcoin will get mentioned someplace with lots of readers, a bunch of those readers will like the idea and try to buy Bitcoins, their price will rise which will draw even more people to ‚invest‘, which will drive the price up even more… until people decide that the price isn’t going to rise anymore and everybody rushes to sell before the price drops”.

After initial price fluctuations in between 2 and 30 USD, the price for one Bitcoin has been stable around 5 USD until June 2012. Briefly afterwards, a rise in prices started which we have witnessed until very recently. Within a few days however, from 10th to 12th of April the price for one Bitcoin decreased temporarily from 266 USD to 54 USD. The reason for this sharp fall in prices was not that the Bitcoin-traders did not expect any future price increase. Instead, technical difficulties of the Mt.Gox Bitcoin exchange were responsible. Its users came to suspect that a Distributed Denial of Service-Attack was taking place which might result in a loss of their digital money. People were simply anxious about the safety of their Bitcoin asset and what followed was a panicky mass sale of Bitcoins. Mt.Gox countered this development with a calming statement on 12th of April 2013:

“(…) we would like to reassure you but no we were not last night victim of a DDoS but instead victim of our own success! Indeed the rather astonishing amount of new account opened in the last few days added to the existing one plus the number of trade made a huge impact on the overall system that started to lag. As expected in such situation people started to panic, started to sell Bitcoin in mass (Panic Sale) resulting in an increase of trade that ultimately froze the trade engine!”

The wild fluctuations in prices are an expectable side effect of Bitcoins’ early establishing phase. They are only decisive for the long-term stability and the currency’s success insofar as they might initiate or rather reinforce a loss of trust within the current Bitcoin-network and among potential buyers/cooperation partners. As the example stated above shows, current Bitcoin-owners are already highly sensitive for any irregularities which might indicate a collapse of the market. Moreover, besides exceptional but illegal markets such as Silkroad, mainly online platforms enable a payment with Bitcoin. Merely a small avant-garde of providers of immaterial goods compensate the currency’s hip image with the financial risk that comes with current price fluctuations. Already since November 2012 wordpress functions can be paid in Bitcoin, and in February 2013 the Social News Aggregator Reddit.com enable users to purchase its internal currency ‘Reddit-Gold’ and Bitcoin.

Until now however a considerable part of Bitcoin-usage is speculative, and commercial possibilities beyond this are marginal. There is only little incentive to purchase Bitcoin in order to pay for (legal) material products. An expansion of the Bitcoin-network which assures small transaction costs and particularly an enhancement of suppliers who allow for Bitcoin payments (and therefore facilitates consumption through Bitcoin-payments) is therefore decisive for the currency’s long-term success.

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