Bitcoin is a digital currency that is available online. It is not linked to any central bank, which is a big selling point for people using the currency. Unlike traditional currencies like the USD and others, this currency is known as a cryptocurrency. As such, the creation and use of this currency is controlled by cryptography. This using of encoding allows the currency to be safer and more anonymous than using traditional currency. While bitcoins are predominantly used in the black market, a variety of legal venders have changed policies towards the currency and allow it to be used for payment.
DIGITAL CURRENCY AND THE BLACK MARKET
The rise of bitcoin as a desirable currency is coupled with the huge expansion of online sales and e-commerce. While Amazon is the company that most people associate with this change, there are also huge sectors of the online economy that deal in less legal goods.
The black market has seen an incredible opportunity with the growth in the internet, and online sales of illicit goods is a thriving industry. There are illicit websites offering all sorts of illegal goods for sale, whatever the product may be. Anabolic steroids, prescription and recreational drugs are only a click away. For the criminally-minded, credit card and bank account information is available for sale, or more direct criminal accessories like guns and weapons. Understandably, the sellers and buyers of these products aren’t interested in broadcasting their purchases to the rest of the world. This provides an excellent marketplace for these cryptocurrencies, which helps to explain their growth in popularity. However, the recent explosion in price might be the signs of a speculative bubble in the cryptocurrency market.
WHAT IS A BUBBLE?
Increased demand for a product will lead to an increase in price for that product. This is accepted as a natural variation in price due to the laws of supply and demand. However, prices can be pushed out of this equilibrium if there is speculative buying and selling. The price of the item can rise out of control, as each investor struggles to cash in on the rapidly accelerating price. Eventually, the market realizes that the price of the commodity is artificially high, and the price rapidly drops to a level more in equilibrium with the market.
Historically, there have been bubbles in many markets, ranging from rare flora to beachside real estate. The first bubble happened in the 17th century, and is known as the Tulip Mania. The price of a single tulip rose to ten times the annual salary of a worker growing these flowers. Speculators were buying and selling the contracts to the future delivery of flowers, and these contracts were bought and sold with incredible frequency, up to ten times a day. However, the market experienced a rapid drop in value, and many investors lost fortunes betting on these contracts.
WHAT ABOUT BITCOIN?
Since its introduction, bitcoin has seen an astronomical growth in price. Since the number of bitcoins is limited, the increased number of people looking to purchase bitcoins has driven up the price. Based on this application, it seems that bitcoin could indeed be a bubble. The value of a bitcoin is susceptible to huge rises and drops in the price, because the value of this digital currency is based on the viability of legitimate currencies and changes in current events. However, there are supporters of bitcoin and they believe that these digital currencies are moving towards more widespread adaptation, and that the value will continue to increase.
Bitcoin has a wide arrange of philosophical supporters, and these supporters have a wide range of interests for using the currency. For those with a practical, libertarian bend, bitcoin allows the use of money and commerce to happen outside the sphere of traditional banking. In this manner, the currency allows them to opt out of using established banks and nations. This also allows them to opt out of the taxes associated with that system! For them, this currency is an excellent way to live out their philosophies. Drug dealers and illicit online venders also love this anonymous aspect, and they aren’t interested in reporting their income to centralized banking systems. Technological folks scared of government surveillance also love the bitcoin, as the anonymous currency allows them to avoid the prying eyes of big data and big brother.
Mainstream institutions are also beginning to recognize bitcoin, and many small businesses and venders on the legal market also accept bitcoin in their cafes and coffee shops. The list of companies accepting bitcoin and digital currencies continues to grow and expand, which perhaps points to an increase in the value of bitcoin. Other currencies could pop up and compete with bitcoin, as bitcoin is not the only available cryptocurrency. However, its success and acceptance might point to some rationality behind the bubble.